Have you got a clear idea of how much money you would need if you lost your job tomorrow to keep the debt collectors at bay?

Are you the sort of person that lives from pay check to pay check? Is your bank balance constantly down to zero by the time your next payday comes around? I’d be willing to bet that you’re not too worried about it, after all you are coping ok, and hey, all of your friends live exactly the same way, right? After all, if things get desperate, there’s always a friend there to buy you a drink, or your credit card to get you by until your next pay.

But think about this for a minute. What would happen if you lost your job, and you found it difficult to find another job right away? Could you survive for 3 or 6 months without any money coming in? Or, what would happen if your car blew up and needed a costly engine rebuild? Would you be able to afford $1,000 in repairs? There are hundreds of other financial disasters that could easily crop up at any time.

To help avoid hitting the wall if something does happen, you need to start putting some money aside from each pay into an ‘emergency fund’. I would recommend about 10%, and to put it into a term deposit, or invest it into a managed fund or shares. If you organize your employer to automatically deduct the amount for you, you probably won’t even miss it!

Ideally you want to build up at least 2 months salary in savings, but 3 - 6 months is better still. Taking action now could save you having to manage debt down the track, or having to repay a massive credit card debt.

Finally, before you start putting the plan into action, take a look at what debts you are currently have and do what you can to reduce debts by switching to products with lower interest rate. Any extra cash you free up should also be put aside, at least until you’ve built up your buffer account.

Always try to use your savings rather than using your credit card. There’s no point on earning interest on money in a savings account if you end up paying interest on your credit card. Credit card interest rate will always be higher than any savings account or even term deposit. This is especially true if you find it hard to even make the minimum repayment each month.

If you simply prefer the convenience of having a credit card, consider getting a debit card instead which can be linked to your existing savings account. Most major banks now offer VISA debit cards as part of there product range. Also, be wary of rewards programs, and consider the actual cost of the item in dollar terms before signing up with them. For instance, if you need 10,000 points for a flight and the flight can otherwise be purchased for $100 cash then you know that each point is only worth 1 cent. Also, calculate how much you have to spend to earn these 10,000 points. If you only get 1 point for every 2 dollars, then your rewards program is only giving you back 0.5% of what you have spent. If there is an annual fee for the rewards program, it almost certainly isn’t worth joining.

Check the interest rate you are paying on your card. If you have trouble paying the entire amount off by the due date (not just the minimum), you are probably better off with a low-interest rate card instead of one that offers interest-free days. Often the percentage rate difference between these cards is 5 - 9%. In the long term this sort of saving can make a real difference to you.

It is true that credit cards are convenient, and can indeed make things easy for you if used correctly and paid off by the due date. If however, you end up paying interest on some or all of your credit card balance each month, then you would certainly be better off without one.

If your debts have spiraled out of control, or are heading that way, the very worst thing you can do is nothing. If debt recovery agencies get involved, or you get a court order against you, things can go from bad to unbearable.

To help avoid things getting much, much worse you should immediately contact all financial creditors and let them know the state of things for you at the moment. Make sure you outline all your other debts to them so they clearly understand your situation.

Make no mistake, no financial institution wants to end up with a bad debt that can’t be repaid, and most (if not all) will be willing to work with you to help you pay back your debt over time. Talk to them about what you feel you can afford to repay from each pay. If you can repay any amount upfront as a lump sum, this will go a long way to demonstrating to them that you mean business.

Working together like this can also help protect your credit rating as they may not file against you as you are not ignoring the situation. A word of warning though, do not under any circumstances miss any payment you have agreed upon. If your situation changes again, make sure you communicate with your creditors ASAP.

Remember, effective communication is the key to getting things under control. Most financial institutions would rather get $5 per month for the next 10 years that end up with a bad debt that can’t be repaid.