Getting your finances in order and making a plan can sometimes seem like a daunting task. Many people choose not to tackle their finances because they don’t know where to start. Looking at credit card, loan and mortgage statements can be overwhelming. Or perhaps you choose to look at small pieces of your financial situation and base your financial well-being on only that. Many finance experts preach to begin with an emergency fund, and with good reason. Although managing my household finances is nothing new, I only recently discovered the true benefit of starting an emergency fund.
In the past, I had the attitude of “why in the world would I start SAVING money when there are other debts that are accruing interest? That just sounds stupid! Sure, let me put this money in a savings account that earns 0.01% interest while I am paying 10-19% interest on a debt!” Mathematically, that does not make any sense what so ever. But this has nothing to do with math and everything to do with habit.
Each payday, you get your check, make your plan of attack and schedule your bills. Many of us do this and never think about the “what ifs”. You have your money for groceries, rent/mortgage, utilities, debt payments and the rest of your day to day needs. Then by the end of the 2 weeks, your checking account is running on nearly empty. But not to worry, payday is tomorrow and the cycle will continue.
Now what if a few days before payday, you go out in the morning to your car and it doesn’t start? Well, it needs to be fixed so that you can get to work to make the money to get through the next 2 weeks after payday. Without having an emergency fund, you pull out that convenient piece of plastic and say to yourself “I need my car now, I’ll worry about the payments later”. Everything is now fixed, you can get to work safely, but when you get that credit card statement in the mail, the balance is double what is was last month. All that hard work to get it paid down and now YOU have been defeated. This is a vicious cycle and it will continue because of the habit of using a credit card when something comes up.
Although this exact situation may have never happen to you, there are situations like this that happen all the time. Now what if you had an emergency fund? You would be able to go to the bank (you may need to walk at this point), withdrawal the cash and pay for your car repairs without having to add to your debt. Sure, the cost of the repair is the same whether you use cash or credit, but this is not about the cost. It’s about no longer needing to rely on credit cards. How do you expect to pay down credit card debt successfully if you keep adding to it? Your credit card should never be your emergency fund.
So how do you start an emergency fund when you don’t have the extra to put toward it? Pay yourself first! For a month or two, pay the minimums on your debts and apply any money you can toward your fund. Sell some things around the house that you no longer need and put the money toward your fund. A couple weekends per month, drive for Uber or Lift and get some cash to put toward your fund. There are tons of options out there. You may need to be creative. Once you get $1,000 saved for an emergency fund, put it in its own separate savings account. Preferably put it in an account with a different bank from your everyday checking. This way you are not tempted to steal from it.
Once you have the account setup and deposit that $1,000, leave it alone! This is for a true emergency (and going out to a club, sporting event or restaurant with friends is NOT an emergency). Now, when the inevitable happens, you can confidently pay cash without the worry or guilt of increasing your debt.
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