Saturday, April 11, 2009

Beginner Emergency Fund- Baby Step #1

How many times have your found yourself with an expense that you did not foresee? Even worse, what if you haven't budgeted for it? What if you don't have the money for it? Often times people have to turn to the old stand-by of credit cards to help them through these "emergencies".

We have been counseled to get out of debt. Hopefully everyone reading this is either
  • completely debt free
  • working extremely hard to get out of debt or
  • looking for help to get started.
Using a credit card, even for emergencies, can totally be avoided.

The way that my family squashed all consumer debt was by following Dave Ramsey's plan. For those who have not read "The Total Money Makeover", I highly, highly recommend it! I will post on each of Dave's "baby steps" to complete financial freedom. The first baby step to debt elimination (I believe that the pre-walking phase is to make sure you are paying a full tithe) is to obtain a beginner emergency fund. This fund should be $1,000.

Baby Step #1: Make minimum payments on all your bills. Squeeze your budget until you've accumulated $1,000 cash. This is your beginner Emergency Fund.

You'll never make headway in your quest to get out of debt if you don't have at least a little something to fall back on. That "little something" is called an Emergency Fund, and that's what this first $1,000 is for (or $500, if you make less than $20,000 per year). Put everything else on hold. Make only minimum payments on all your debts; take on a second job if necessary; squeeze that budget! Forego retirement-plan contributions (temporarily) if you can. Get your emergency fund together first. Get it together fast. Most people can realistically get that in 1-2 months. We had a yard sale to get ours. Amazingly, we made $900! By cutting out restaurants and movies etc for a few weeks, we were able to save the remainder.

If you already have more than $1,000 in savings, and in anything other than a retirement account, withdraw everything except the $1,000. Use these proceeds for Baby Step #2, which will be posted soon.

Once you have accumulated the $1,000 (or $500), keep it someplace where you cannot easily get at it.

It must be available, but not easily available.

It must be spendable, but not easily spendable.

Why? Because if you are like most, if the money's right there in front of you, you're going to find a way to spend it. And that's not what we want. $1000, fast.

"Sometimes," Ramsey instructs, "you have to protect yourself from you."

What is considered an emergency? Christmas is NOT an emergency. A great sale is NOT an emergency. Before spending ANY money out of the emergency fund, discuss it with your spouse, and agree that it truly is an emergency. Then, quickly replace the funds spent. You always want the full $1000 in the beginner fund.

So, grab a paper. List all the ways you can earn (or save) some extra money. Congratulations! You are on your way.

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