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Eliminating Debt: An Emergency Fund Helps
By Molly's Brother | January 16, 2007
This is the third post in my series of debt elimination. In my first two posts, I wrote about the importance of keeping a spending log and facing the entirety of your debt head-on. Inherent in any serious attempt at eliminating your debt is making sure that you have some sort of emergency fund. This fund will provide much needed cash-on-hand in your next moment of crisis.
WHAT IS AN EMERGENCY FUND?
The term Emergency Fund is well-known throughout the personal finance community. Everyone from bloggers to financial professionals to The Gurus knows the virtue of a well-funded emergency reserve.
The logic behind an emergency fund is this: If you don’t have cash stocked away when you’re in a bit of a financial pinch, you’re very likely to pull out your plastic and charge the expense away. Therefore, you keep yourself in the endless cycle of credit card debt. Additionally, by establishing an emergency fund, many people develop the skills needed to plan and save for other issues in their lives, as well.
HOW MUCH MONEY SHOULD I HAVE IN MY EMERGENCY FUND?
A basic rule of thumb is that you should have 3 to 6 months of living expenses put away. You should strive for this goal if your credit card debt is manageable.
In terms of working on debt reduction, however, different financial advisors develop different plans for their clients. Dave Ramsey suggests that your first step on debt elimination rests with creating–what he calls–a Baby Emergency Fund filled with $1000.
WHAT CONSTITUTES AN EMERGENCY?
If you are serious about paying off your credit card debt, then you have to be serious about creating a definition for the term “emergency.” What constitutes an emergency, exactly? A busted water pipe in your home, a broken heater in the dead of winter, a major car repair for the family’s only car all constitute true emergencies.
However, wanting to go out to dinner on Friday and being short on cash until payday is not an emergency.
THE PROCESS OF DEBT ELIMINATION
The very nature of this blog only allows me to facilitate a conversation about debt elimination. If you are serious about eliminating credit card debt and getting your finances in order, there are so many wonderful books written. To get a blow-by-blow plan for debt elimination, I strongly suggest that you pick up Dave Ramsey’s Total Money Makeover. It was his book that introduced me to the world of personal finance. I find Dave’s writing to be too religious for me, but that didn’t get in the way of wonderful advice.
However, Jean Chatzky and David Bach–both who were a part of Oprah’s Debt Diet–have helpful books on the topic, as well.
Topics: Emergency Fund |
January 17th, 2007 at 1:21 pm
Not to mention the peace of mind that comes with having (what I like to call) an F.U. Fund! =X
January 17th, 2007 at 9:10 pm
Hysterical! I laughed out loud. I may beging calling it that, too.