Debt Elimination Step #2 - Next, you have to be able to establish an emergency fund.
The step of establishing an emergency fund is going to take as many as several months longer, but it is well worth it when you see how far your savings have come in the process. Saving money is actually more important than paying off your debt. Because if you do not save first, then you will never be able to cope with expenses that you weren't expecting when they do finally come up. You cannot keep a credit card on hand for emergencies, because having a credit card at this point is a really bad idea. All of your credit cards should be destroyed and out of the picture and instead you should be saving cash or saving in a savings account for the purpose of dealing with emergencies.
So how much money should you be saving? Ideally, you should be aiming to save around $1,000 dollars to start, though some people, such as college students for example, can probably get by with as little as $500 dollars. This money is to be saved for emergency purposes only, so don't think it's for any other rainy day expenditures. You cannot use this money to buy video games, to redecorate your bedroom or to go on a vacation. This money is for use in repairing a broken down car, or emergency services when you get sick or hurt. This money is for paying bills when you get sick and miss work, or lose your job unexpectedly. That's it.
This money should be kept in a liquid form but not an immediately accessible form. You should not tie your emergency savings fund to your normal debt card account for example. You should not be sabotaging your savings efforts by making it all too easy for you to spend this money on items that are non essential. You may want to open a savings account in an online bank such as ING. When an emergency does happen to come up, it should be relatively easy for you to transfer this money right into your typical checking account. This way, you can have access to the money when you need it, but you cannot simply spend it spontaneously without at least a little forethought.
Establishing an emergency fund is one of the best things that you can do for yourself. It may put your debt repayment schedule on the back burner for a period of time, but when an emergency does come up that is going to wipe out your finances, having an emergency fund is going to come quite in handy. Once you have established $1000 to start, or $500 if you are a college student, then you can start focusing on paying debt off while simultaneously continuing to save more money.
Photo Credits: amfdesigner
Originally posted 2009-09-01 03:34:10. Republished by Blog Post Promoter
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2 comments ↓
Good advice! I especially like keeping money in a liquid form, but not being immediately accessible.
Excellent advice. I like at least a $2000 emergency fund after the debt is repaid. Saving is so important a habit that we do our kids a huge favor in teaching it to them.
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