For many, credit-card debt tops savings. Here’s how to build an emergency fund.

He’s far from alone: More than one-third of U.S. households (36%) say they are carrying more credit-card debt month to month than they have in emergency savings funds, according to a new survey by Bankrate. That’s the highest percentage since polling began in 2011. 

That was more likely to be the case for Gen X and millennial consumers, the survey found. Meanwhile, baby boomers were more likely to say their emergency savings exceeds their credit-card debt.

“The 60% of U.S. households living paycheck to paycheck are really feeling it, and necessities rather than discretionary items are increasingly being put on credit cards,” Greg McBride, chief financial analyst at Bankrate, told MarketWatch. Because credit-card interest rates have climbed to 20% or higher, the fact that more consumers are using them to finance purchases “is a clear sign of financial strain,” he added.

While the U.S. economy has continued to grow in spite of this stress on consumers, looking ahead, “it may not grow as quickly, or at least not with the aid of this huge stockpile of household savings” that people had during the pandemic, when the government was providing emergency stimulus and COVID-related restrictions were limiting people’s opportunities to spend money, said Scott Baker, professor of finance at the Kellogg School of Management. “A lot of households that had been fueling consumer spending are no longer able to do so. I think it’s definitely a negative trend.”

The cost of ‘getting by’ is rising faster than income

“Credit-card balances are rising and so are delinquencies. This indicates elevated financial stress on consumers,” said Amy Crews Cutts, senior economist for financial services company Primerica
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Like McBride, she also blames “the high cost of just getting by” rather than overspending. 

Just 3% of middle-income households (incomes between $30,000 and $130,000) surveyed by Primerica said their incomes have gone up faster than the cost of living, despite slowing inflation and rising incomes. The firm estimates that over the two and a half years from May 2021 to October 2023, middle-income households on average spent $2,445 more than the rise in incomes on necessity items alone (food, gas, utilities and healthcare, excluding insurance). 

“I’m making more money than I ever have, and [my wife is] making her highest hourly wage ever. Yet with the current financial situation in this country, we find it incredibly taxing simply to live,” Whistler said. He works full time as an operations manager earning about $50,000 and his wife works part-time as a barista making $20 an hour in Orlando, Fla. They have no childcare expenses yet, but basic costs have added up. 

Grocery prices in the U.S. are 25% higher than they were four years ago, and median rent for listed two-bedroom apartments increased by 19% during that time, according to data by Apartmentlist. As home prices and interest rates increased over the past two years, the median monthly mortgage payment jumped by 83% to $2,268 in 2023 from $1,242 in 2019, according to Bankrate. 

The result: one in three surveyed consumers told Bankrate they have less emergency savings now compared to a year ago (compared to 30% who said they have more now).

How to build savings while paying down credit-card debt

About 36% of those surveyed by Bankrate want to tackle their debt and savings simultaneously (the highest percentage in seven years); 28% are prioritizing boosting emergency savings; and 25% are prioritizing paying down debt.

It can be difficult to save money while paying down high-interest credit-card debt, but it’s necessary. “If folks aren’t prioritizing saving it’ll lead to significant pain later on,” said Catie Hogan, head of curriculum at the financial education firm Parthean.

Pick an approach to dealing with your credit-card debt

Hogan recommends the “avalanche method,” which means arranging debts by highest interest to lowest, then paying as much as you possibly can on that top debt and minimum payments to all of the others. During that time, people should pay their expenses by cash or debit, rather than continually adding to their credit-card balances. 

The other widely used approach is called the “snowball method,” in which people pay off the lowest balances first. “This can give you some quick wins in terms of completely paying off some cards faster to help you build momentum,” said Rob Williams, managing director of financial planning at Schwab
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“The downside is that it may take you longer to pay off your total debt and cost more in interest.”

Create a spending plan

Williams encourages people to create a spending plan. “Start by taking a realistic look at where your money’s going. Try a spending tracker to help you keep on top of what you’re spending and why. Then decide what tradeoffs you need to make. Having a spending plan is freeing because it puts you in control.”

Bankrate’s McBride said, “Assess what else you can do — even temporarily — to generate cash to go toward the credit-card debt: identify expenses that can be cut or eliminated such as subscriptions; sell unneeded items online or in a yard sale; do freelance or contract work, or pick up an additional part-time job just until the debt is completely paid off.” 

Automate your savings

In the meantime, people should also automate having a portion of their paycheck deposited directly into a savings account, McBride said. Some high-yield savings accounts have been paying account holders more than 5% in interest, which will help it grow without any additional effort. The goal is to eventually have an emergency fund that can cover three to six months of living expenses. 

“Be reflective about how you got into credit-card debt. This can mean evaluating your relationship with money and examining your personal beliefs and habits around money,” said Hogan. “If you have an issue with overspending, it’s important to make small sustainable changes.”

When your credit-card debts are paid off, make a commitment to pay off the monthly balance whenever possible so the cycle doesn’t start again.

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