Get Out of Debt with an Emergency Fund
It’s pretty much common knowledge now that everyone should have an emergency fund of 3-6 months (some experts say even more) of expenses in liquid savings (money that’s easily accessible). But unfortunately, common knowledge isn’t necessarily common practice and many people just don’t have anything in savings. The key to getting out of debt is to have some sort of emergency savings that acts as a cushion against life’s hurdles. Without this cushion, you will be forced to use your credit card or payday loans and go deeper in debt.
If you’re struggling with debt, you absolutely need to have an emergency fund. It is extremely important. Here’s a great plan to get out of debt from Dave Ramsey:
Step 1: Stop borrowing. Simple enough.
Step 2: Save $1000 and put it in the bank. This is the beginning of your emergency fund. You want to do this before you start attacking your debt because this will act as a cushion to protect you for emergencies.
Step 3: Start attacking your debt using the “debt snowball”. We’re going to pay off all your debts except your mortgage. List your debts on a sheet from smallest to largest (in amount, not interest rate). Then start attacking the smallest debt and pay minimum payments on the rest. Once that’s paid off, take that payment and add it to your next debt and so on until all your debts are paid off.
Step 4: Fully fund your emergency fund which is 3-6 months of expenses. You can download an emergency fund worksheet from Bankrate. It’s a PDF that you can view or print. To get the 6 month emergency fund, you just need to multiply each line by 6 instead of 3.
Step 5: Then start investing and grow your net worth.
This is not my plan. This is from Dave Ramsey who is a great Christian finance guy. I’m going to do a review on one of his books so stay tuned for that.
A great place to put your emergency fund is a high yield online savings account. I’ll have another post on some of the savings accounts that I use.