Budgeting Tips to Get out of Debt and Build Wealth

When you get the fever for paying off debts, it can be hard to slow down and make yourself sock away some money in savings.  Is it really important, you may wonder, to have savings when I am racking up interest every day?

Financial gurus agree, it is crucial to have an emergency savings account.  In particular if you are trying to get out of debt, you need to have the emergency fund available so you can avoid going into more debt when the “expected shocker” (as author Pam Young of The GOOD Book calls such emergencies) happens.

How to Start an Emergency Fund:

Open a savings or money market account. You might consider a high-yield savings account (not that any savings account truly is “high” yield these days but some are better than others).  For instance, online banks ING and Ally have savings and money market accounts that are a percentage point or so more than your traditional banks or credit unions.  We have our at Ally, and the savings and money market interest rates are 1.49% as of this writing.  Compare that to the .25% that our credit union offers.  The only thing to remember when starting your emergency fund online, is that you still need to have quick access to the cash in case of emergency.  Make sure the account you set up allows you access via ATM with a debit card, as well as paper checks.  That was included with the account we opened.

Start by saving up $1000-$2000. Most of us ought to have enough saved up to cover a major car repair, or a major appliance suddenly needing replacement.  Hopefully that will be the worst emergency we face.  Also, if you don’t have a flexible spending account for medical expenses (which could be considered part of your emergency fund) you may want to make sure you have enough saved to cover your insurance deductible.

Save any which way you can. This is the beginning of your rolling cash together to get out of debt.  Form the habit now of putting every red cent you can get your hands on to work getting your finances stabilized.  At first, that means putting it in your emergency fund.  Once you have that initial amount of $1000-$2000 saved, you can start throwing the snowball at your debts.  So whether its “found money” like a tax refund or selling something on eBay, or just putting a portion of your monthly budget toward the emergency fund, just keep building it as fast as you can.

Replenish as needed, otherwise forget about it for a while.  Once you have that initial amount, forget about it until or if you need it.  Concentrate on paying off your debts.

Save  3-6 months expenses in the emergency fund. Once you’ve paid off everything except your mortgage, you should return to building the emergency fund.  By this point you will have a pretty large amount of cash flow you can direct into your savings or money market account.   Now you will have the luxury of keeping on hand enough money to support you and your family should your income suddenly take a major hit (like, if you lose your job).

That’s how you start (and maintain) an emergency fund.  Once you have wrapped your mind around the fact that it is critical have one, set your goal and take steps to reach it.  You will find that having the emergency fund in place will bring great peace of mind.

Posted By: How to Start an Emergency Fund, Saving and Investing by Darcy