To get out of this cycle, you need to have another way to cope with emergency expenses. I won't parrot all the experts who say you need to keep six months' salary in a separate emergency savings account; those so-called "experts" are out of touch with mainstream America in my opinion. You do need to keep some cash reserved for emergencies though. The money should be in a separate account so it doesn't get mixed in with and used up in your regular monthly budget. Many will say it should be in cash in your local bank so you can get it on a moment's notice. I strongly disagree. It should be difficult to get at this money so that it is only used in true emergency situations, and not just when you are a few bucks short for groceries.

Instead keep your emergency fund in a place where it takes a little effort to get your money, but where you can have it within 3-5 days or so if needed. There are, for example, a number of reputable online discount stock brokerages that have very low initial deposits and no ongoing minimum balances. Look for one that allows you to write checks against the balance if needed. That way you can get the funds easily and quickly for true emergencies. However, be aware that depending upon how your funds are invested at the time you need them, taking out the cash means selling any securities or investments even if they are currently worth less than when you acquired them.

Try to use an automatic payment plan to build this account over time. Have $25 a week taken from your checking account if you can afford it, if not then $10 a week, $25 a month, or whatever you can afford a regular basis. The money in this account should be invested VERY conservatively. Interest bearing accounts or stable money market funds are generally good choices. The last thing you want is for this safety fund to lose value in risky investments. Don't buy and sell often, with small dollar amounts, the transaction fees will eat up your money quickly. Put the money aside in this account and leave it alone. Remember, though, this account is taxable and any gains or losses must be declared on your income tax statements.

The goal is not to use this emergency fund except in the direst of emergencies. Let it build up over time with regular deposits, and if it ever reaches a comfortable level of perhaps $5000, then take any excess and the amount you had been depositing and send it in as extra payments on any outstanding credit card balances. Start the fund as soon as possible, even if you only have one or two hundred to get started. With regular deposits, you can build it up over time. Do not ever use your credit card to fund any investment, even an emergency fund. Your goal is to retire your credit card debt once and for all. It takes discipline and perseverance, but you can do it.

Author: Brad Sylvester