'I'm robbing Peter to pay Paul': Pittsburgh man making $94K/year can’t save $1K for emergencies and relies on cash advances. Ramsey Show weighs in

His $131,000 worth of student loans, car loans, and credit card debt is making it hard for him to save even $1,000 as a beginner emergency fund — leaving him at risk if he loses his job or has to deal with a surprise bill.

Here’s what’s keeping the caller stuck in this situation, as well as some advice for people in a similar situation.

Cash advance loops are designed to keep you in debt

The caller says that, while he’s able to pay all his bills each month, he’s been relying on cash advances to make ends meet.

Cash advances are a form of short-term loans. They let you borrow a small amount of money (usually less than $1,000) ahead of your paycheck. Generally, you’re expected to pay the loan back within a couple of weeks or a month.

You can get a cash advance from your bank, your credit card, or a third-party app or lender. If you borrow a cash advance against your credit card, you’ll likely have to pay additional fees and interest on top of whatever APR with which your card already comes. You’ll start accruing interest as soon as you make the withdrawal.

If you borrow from your bank or a third-party app, you may or may not have to pay fees or worry about interest accruing. But many apps will charge you a rush fee to get your cash now — something you likely need if you’re considering a cash advance in the first place.

If you think these sound like payday loans, you’d be right — the setup is very similar, and both forms of short-term loan generally allow people with very bad or no credit to take out a loan.

Payday loans are generally a worse deal, with average yearly APRs of almost 400%. But neither loan is a good option. Because of how quickly you need to pay the loan back, it’s common for people to get stuck in a loop, continually taking out new cash advances or payday loans to pay off the old one.

Over time, the fees associated with doing that stack up, leaving you in an ever-worsening financial situation that’s hard to get out of. If you become unable to pay off your cash advance in full, it can also wreck your credit.

How to take care of your debt and start saving without the use of a third-party service

The caller ended up working with a debt settlement company to try and get his debt taken care of without having to pay it all off. Ironically, that process is turning out to be expensive for him.

“They take $300 out of every paycheck,” he told the Ramsey Show. “Most of that is going towards their fees.”

Debt relief programs offer to negotiate down your debts in exchange for a fee. As part of that process, you generally stop paying off your debts, sending them the money instead.

But their negotiations might not be successful — leaving you with debt that has grown since you started the process, credit that’s been wrecked by a number of missed payments, and money lost to fees that didn’t do much for you.