Emergency loans are great for taking care of surprise expenses but you should not depend on them as a way of life.
If you have become dependent on them, there are ways that you can break the cycle. Here is what you need to do.
1) Get A Working Budget
Most of us have a general idea of what we spend each month but not a detailed accounting of it. An accurate budget that works is crucial so that you know how much you can spend and on what. Without it, you simply wind up overspending and then run short a few days before you get paid.
Get started by simply writing down how much you spend each month. This should include things like rent, your car payment, electricity and allotments for things like gas, groceries and entertainment. Also add in a a set amount for savings, this is very important.
Once you have your totals, compare it to how much you are bringing in after taxes. If it is enough, great, just stick to the budget. If it is not enough, there is your problem, you need to make some cuts.
Cutting a budget is easier than you think, but it might involve some sacrifice.
The easiest place to cut is on your food budget. As far as groceries go, switch to cheap bases for your meals such as rice and pasta. Also, consider meal planning which is where you plan out all of your meals for a week and then shop. It allows you to buy just what you need with no waste.
Another area to cut on the food budget is meals out. Start taking your lunch to work and limit meals at restaurants. Doing so can save you hundreds of dollars a month.
Besides food, there are dozens of other ways to save money. Cancel the cable in favor of streaming services, shop for cheaper insurance, refinance your car, etc. Just take a good hard look at that budget and get to cutting.
2) Get An Emergency Savings
You probably noticed above that you should have some money in your budget for savings. This is incredibly important because an emergency savings account will prevent you from needing an emergency loan entirely. When you think about all of the money in fees you have paid with these loans, you could probably have a pretty killer emergency savings already.
The ideal amount of money to save is 10 percent of your gross savings. If you take home 4000 dollars, you should be saving 400 dollars of it. This might be a lot for you to swallow at first though, so start slow.
Take 50 dollars out of each check and put it into an emergency savings. Assuming that you get paid every two weeks, that would add up to 1300 dollars over the course of a year, plus interest.
Once you get the 50 dollars a month into your budget, add a few bucks a paycheck. Paycheck one you save $50, Paycheck two you save $55 and so on and so on. It is an easy way to get used to saving more and more money. Make the deposits automatic and deposit them into a remote, online savings account.
3) Work On Your Credit
Now that you have your budget and savings in line, you can turn to your credit. Having better credit will allow you to save money on everything from financing to car insurance. Should you find yourself in need of emergency money in the future, it will also allow you to get better terms.
Credit ratings seem confusing but it is simply a formula based on several factors.
The biggest factor is on time bill pay. Simply pay your bills on time and your credit will improve over time. If you have had late payments in the past, pay on time moving forward and you should start seeing some improvements at about the 6 month mark. It might take time, but it will improve.
The next biggest factor in the formula is how much credit you are using. Credit utilization is the amount of your credit that you are using. If you have 1000 dollars in credit and are using 500 dollars of it, your ratio is 50%. You want to get your ratio under 30 percent for a good rating and under 10 percent for a great one. Paying those credit cards down should be a priority and to do that, you need to pay more than the minimum and you need to stop using them.
Other factors that affect your credit score include things like credit diversity, where creditors like to see many different kinds of credit and credit age. These are things that just come with time. Focus on the top two factors and you can build a healthy credit score.
There you have it, three steps that can help you start avoiding emergency loans.
Take care and get through your current money crisis, but then double back and take the steps needed to get yourself on track. Get a budget, start a savings and improve that credit rating.