OK, so you’ve got your Zero-based budget worked out, filled up all of your budget envelopes for the month, and made sure that the four walls are covered, it’s time to start getting your beginner emergency fund in place. I know what you’re thinking–I cannot save for an emergency fund! I’m broke! I have tons of payments due! I need to get cracking on my debt repayment!
No. While all of these things may be true, you cannot get started until you have a small cushion of money in place reserved for emergencies. Why? Because as soon as you start aggressively paying off your debt, guess what will happen? Your car will need a new transmission. Or your roof will leak. Or your kid will need tubes in his ears. Or whatever. Something will happen, and you won’t have any way to pay for it. And then you will be tempted to use a credit card. And that will start the whole stupid cycle again. So, no. First, we are going to save for an emergency fund.
Before you do anything about your debt, you need to save a baby emergency fund of approximately one and one-half months’ rent/mortgage. You may adjust based upon your income and the cost of living in your neck of the woods, but the amount you save for this fund should be between $1,000 and $3,000.
OK, so here’s the thing, Dave Ramsey, from whom I borrow heavily when I’m talking about personal finance, advises amassing a beginner emergency fund of $1,000.00 before you do any of the rest of his “baby steps” for debt reduction. I think he is a genius to come up with the concept of a small emergency fund before beginning debt repayment. That said, he lives in Tennessee, where I *think* the cost of living is lower than, say, New York City (I have not done research, so who knows–just a guess). And when he got out of debt, that was like twenty years ago. Or something. And things are more expensive now–hell, things are more expensive just in the past few months. So I am not sure that $1,000 is going to cut it for everyone. When I had an emergency fund it was for $1,200 and this was OK for a single woman in Los Angeles. Now, for my family, I would want it to be larger.
Only you know what things cost where you live. So you need to do your best to estimate what a good sized fund would be for you. I am going to go out on a limb and say that, regardless of where you live, it should be between $1,000 and $3,000, though. Any less than that and you are going to run into trouble, and any more than that and you are going to put off your debt repayment for way too long.
OK, so while we are saving for our emergency fund, we only pay minimum payments on credit cards. That’s right. That’s why we need to do this fast. Take any extra money you were putting on ANYTHING, and put it towards the emergency fund. Dave Ramsey talks about getting “gazelle intense” for this step, which means that you need to start getting inventive to get this fund filled as quickly as possible. Sell stuff. Stop getting your hair done as much, quit your gym, get rid of a cell phone, netflix, do some babysitting, take an extra job–do WHATEVER YOU HAVE TO to get this filled ASAP. The sooner you get it filled, the sooner we can start repairing the rest of your financial picture.
Now, if you’re ahead of the game, and you already have enough saved to help you through a minor crisis, then congrats! You can relax and breathe easy until tomorrow, when I will introduce you to the Debt Snowball.
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{ 3 comments… read them below or add one }
Gazelle-intense is SUPER intense. And I am grateful for my husband’s emergency fund which will allow us to live an unchanged lifestyle for 6 months even if he doesn’t find employment.
We are not, however, going to live an unchanged lifestyle, because we’d rather live a spartan lifestyle for 9 months, than a nice lifestyle for 6 & then run out of money in case he doesn’t have a job.
Am loving the site. And have a technical question – how do you post to separate pages on your blog? I am able to create separate pages, but have not been able to do individual posts on those pages. Am I stupid? Is it my layout? (It’s probably that I’m stupid.)
That’s awesome that your husband already had an emergency fund in place! Makes things so much easier.
Re: separate posts, this is technically a separate blog–it’s a separate install of wordpress in a subdirectory of abdpbt.com, so it all points to the same site, but it has a separate dashboard. The only other way I know to do it is if you use wordpress mu, or if you actually know what you’re doing and can program the site yourself, which I cannot.
ahhh – I was beginning to wonder if the separate install would be necessary. Thank you! I now have a weekend project