When you get out of debt it is an absolutely liberating feeling. The idea that you get to actually keep more of your money! So, what should you do with that money that is now sitting in your account?
Maybe go on a shopping frenzy? Maybe go on that luxury vacation? Nope! If you do not yet have a fully funded emergency plan, you need to make sure you do that before you do much more.
WHAT IS AN EMERGENCY FUND?
Let’s get back to basics first. What exactly is an emergency fund? It is money that you have saved for, well, an emergency. Some examples could include the furnace going out, your refrigerator needing repair, the car breaking down. Things that it does not include are e a flat screen TV marked way down, new soccer cleats for your child or a vacation to Mexico. Those items are wants and you should save for them separately.
Of course, you do need to save for the fun things in knowledge.too – that is important. The simple way to make sure you have money set aside for emergencies which is separate from regular savings is to set up two different savings accounts.
Once you have that done, you will designate one for your regular savings for things such as taxes, birthdays, this year’s vacation, etc. The other should be your emergency fund. It should have money going in and only coming back out for emergency situations.
The reason I recommend two accounts is just to make it easier to track your savings. It also helps you make sure you truly have an emergency fund at your disposal. For many, it is easier to monitor if the accounts are separate.
Above I mentioned some reasons you might need to access your emergency fund. However, the most important reason to have your account established is in the instance of a job loss. As we have seen in past years, it is taking Americans longer to find new employment.
HOW MUCH DO YOU NEED?
The biggest question many people have is “How much do I need to save?” Years ago, prior to the recession, experts advised that 3 – 6 months of income was sufficient. With the changing times, it is now recommended to have a minimum of 6 months as a single person and as much as 9 months for a skill. I know, that seems like a lot of money, and it will take time, but it is possible.
When determining how much you need to save in the instance you lose your job, you need to first look at your monthly budget. Take a look at those items you could do without should you suffer a job loss. Next, add in the additional cost of health insurance, as this will be out of your pocket during the time you are unemployed. Take the total you need to cover your expenses times the number of months worth of savings you need (see above).
HOW DO YOU INCREASE YOUR SAVINGS?
Now that you have no debts, it is important to take the monthly “debt” payment and just pay yourself. Even if it is only $200 a month, look at what you will have saved in 6 months time — $1,200! Sure, it might take you a year or two to get that money saved up – but it might also go more quickly than you think. Windfalls, bonuses, tax returns – these are all things you can use to contribute towards your savings to help you achieve your financial goal.
Just when you think your debt free journey is over, you will find that there is another one stepping in to take it’s place. It is not a race to the finish line. In the case of financial freedom, slow and steady always wins the race.
(I am not a financial advisor and the information listed within these Debt Challenge posts is not to be construed a financial advice. This is knowledge we gained through our own personal experiences and information as outlined in Dave Ramsey’s Financial Makeover — and is being shared as such. Participants are not required to follow any steps listed if they do not wish to do so. Financial concerns/issues should be addressed with a professional in order to receive advice and assistance.)