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Did I get ahead of myself?
I just realized that I may have gotten a bit ahead of myself with mentioning snowballing your debt before I explained that you should have an emergency fund.An emergency fund is one of the important tools that keeps you from having to use credit cards.
So before you apply that $5 I talked about here- you need to answer this question-
Do I have an emergency fund of at least $1,000 set aside?
If your answer is no, then that $5 extra you have every month needs to go towards building your emergency fund. Do NOT apply the $5 towards snowballing your debt until you’ve established your $1,000 emergency fund.
This is extremely important because emergencies do pop up and you need to be prepared.
Why a $1,000? Because we often have more than one emergency come along . . . . You know, the car needs a $500 repair the same weekend that your water heater bites the dust. Dave Ramsey advocates at least $1,000 for a starting emergency fund and I agree. Mr. Steady and I have had a $1,000 emergency fund for years (with the exception of 2007 when it was taken from us- we have yet to be able to recoup and resave the entire $1,000- but we are working on it!) and it has been a life saver many times. Your emergency fund supersedes paying back your debt- you won’t’ be able to pay off your debts if you have to keep going into more debt due to emergencies.
And just what constitutes an emergency? Well, I can tell you what doesn’t! Car insurance or property taxes are not emergencies and should not be taken from you “e-fund”. Any amount/bill that occurs regularly (even if it’s only yearly) can and should be calculated into your budget. Your “e-fund” if for those moments when life whammies you upside the head. An unexpected doctors bill or dental bill (like when my nephew had a tooth catch on the basketball net when he was slam dunkin’ and rip out- ouch!)- notice I used the word unexpected. Regular doctor and dentist visits are not unexpected. Major car or home repairs would constitute dipping into the “e-fund”. A bit of honesty- I once had to dip into our e-fund to pay a speeding ticket. Yes, it was unexpected!
Now what happens after you’ve had to dip into your e-fund? You must replenish what you took out. For awhile you will need to stop your debt snowballing and apply the “extra” to your e-fund until it is up to $1,000 again.
Gradually, when you’ve snowballed all your debt, you will want to create an emergency fund that is equal to at least one month’s take home pay. Then increase it until it is equal to 3 months take home pay. This is your cushion- your Plan B.
Something else to think about:
Think about starting a medical e-fund that is equal to your yearly deductable. I know of a family that has a $1,000 e-fund and a $1,500 medical e-fund. This makes a lot of sense to me. We are not at the place yet but it is something Mr. Steady and I have filed away for a future hope.
Jumpstarting an e-fund: Yes, it will take a long, long time to create a $1,000 e-fund if you are only socking away $5 a week. Do not let this discourage you- that’s $5 more towards an emergency than you had last week! But really- you may need to kick it in gear- look around your home and see if there is anything you can sell. Have a yard sale with the express purpose of creating an e-fund. Take gently used clothes and toys to a local resale/consignment store. Work at your friend’s pizza place one nite a week for a few months (Mr. Steady and I did that in the past!). Put your tax rebate towards it- right now we’re all hopeful of receiving a tidy little check from the government- there’s a “quick” way to create your emergency fund. (Allow me to add though- this isn’t a done deal so keep socking away that $5 every week until you’ve truly got $1,000 stuck in your mattress.) Simply look around you for ways you can make this $1,000 happen for you- maybe your budget is balanced but you could knock out direct TV for a few months to help you add more quickly to that e-fund.
Be creative.
Create that fund!
Stay tuned for more Financial Bliss . . . .
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