As you start your debt free journey, you will want to set up an emergency fund prior to paying off any debt. You’ll need an emergency fund because you will no longer be using your credit card for emergencies! The entire purpose of paying off debt is so that you won’t owe anyone money any longer. So get rid of those credit cards, cut them up, or lock them away. During your debt free journey, something is going to happen that is considered an emergency. It’s inevitable, especially if you will be paying off debt longer than 1 year. In our 4.5 year debt free journey we paused our debt snowball to pay for 2 children to be born, 2 surgeries, 1 new car transmission, and 1 dog’s leg amputation. Our emergency fund was our best friend during these times.
How Much Should Be In An Emergency Fund?
Dave Ramsey recommends you put $1,000 into an emergency fund while you spend time paying off debt. Our family knew that we would be spending YEARS paying off debt, so our emergency fund had $3,000 in it. We figured that having two young children and mediocre health insurance meant that we should have more than $1,000 in a small emergency fund. Looking back, I’m so happy that we had more than what Dave Ramsey recommends. During our journey to becoming debt free, my youngest son needed 2 unexpected surgeries. The second cost us about $5,000 so we saved up $2,000 and depleted our emergency fund to pay for the surgery outright. My husband’s car also needed a new transmission which cost us $2,700. If we didn’t have $3,000 in our family’s emergency fund, we would have been up a creek without a paddle. If you’re in the same situation as we were and you’ll be paying off debt for more than 2 years, then I recommend that your small emergency fund be at least $3,000. However, if you plan to be debt free soon, or you are on a single income, then a $1,000 emergency fund should suffice.
Where Should Your Emergency Fund Be?
Keep your emergency fund in an easy to reach savings account. Ours is currently kept in the savings account that is connected straight to our checking account. If something were to happen and we needed to tap into our emergency fund, we could simply transfer money over with the touch of a button! Don’t put your emergency fund in a place that is not easily accessible.
What Qualifies As An Emergency?
New school clothes and Christmas gifts are not considered an emergency! If you need help budgeting for Christmas, read HERE. Basically, an emergency is just as it sounds. It’s something unexpected that happens and must be paid for right away. A broken arm, hospital visit, or car breakdown is an emergency. An emergency is not a new Halloween costume, a birthday gift, a party, or a vacation. If you can wait to pay for it, it’s not an emergency. Be strict when it comes to emergencies. You don’t want to start spending your emergency fund on situations that are not necessary.
Fill Your Emergency Fund Fast
You’re going to want to fill your emergency fund as fast as possible. First, make a budget and figure out how much you can put towards your emergency fund this month. Need help making a budget? Start HERE. Once you have identified how much money you can put towards your emergency fund, it’s time to determine what you can sell! Selling items around your home that you don’t use anymore is an easy way to help fund your emergency fund. Go through your closets, attic, basement, and kitchen. If you haven’t used it in a year then do you really need it? List items on Craigslist, Letgo, and Facebook. You’ll be surprised what other people will pay for! You will also be shocked by how quickly small amounts of money add up! If you still need more money, ask your employer for extra hours. Do whatever it takes to complete your emergency fund as soon as possible! Once your emergency fund is complete, you can begin your debt snowball.
Stop Using Credit Cards
If you have credit card debt, then this is your wakeup call! You’re in debt and the only way to get out of it is to stop using your credit cards to buy new things or bail you out of difficult financial situations. Your credit card is not your friend! Cut it up, lock it up, or put it in a place where you won’t use it anymore. Once you have your emergency fund, you’ll have no use for your credit cards any longer. If you can’t afford to pay for it with cash, then you can’t afford to buy it!
When Your Emergency Fund Isn’t Enough
There is always the possibility that you have an emergency that costs more than what you currently have in savings. This only happened one time during our debt free journey. Our youngest son needed surgery and we didn’t have enough to pay for it. We asked the doctor if the surgery could wait 3 more months. It could, so we skimped and saved as much as possible until the surgery date. When the day came, we had enough to cover the cost even though we had to deplete our emergency fund completely. I taught summer school to help replenish our savings account and we had a very frugal summer. If you find yourself in the situation where your small emergency fund cannot cover your situation, then ask if there is an option for a payment plan. For medical emergencies, hospitals are usually pretty good at working with you to set up a plan that works for you. If all else fails, you may have to take out a small loan from a bank. Hopefully that won’t be necessary though!
I Have My Emergency Fund, Now What?
Once your emergency fund is funded, you’re ready to start your debt snowball! Your ultimate goal is to payoff your debts from smallest to largest. To learn more about how to work your debt snowball and download a FREE debt snowball spreadsheet, head HERE. Just remember as you’re working on paying off debt to focus on the end goal. Keep a positive mindset and you’ll be there before you know it!