So you’ve figured out your motivation behind wanting to get your finances in order, you’ve created your first monthly budget, and you’re ready to kick your debt to the curb. Great! I’m so glad you’ve decided to take this journey. It’s going to change your life forever. Are you ready to find out what your next step is? Well, it might sound strange, but the next thing I want you to do (while continuing to pay the minimums on all your debts) is put $1,000 in a savings account. This will be called your emergency fund. You might be wondering why this is necessary and how it’s going to help you pay down your debt. I’m not just going to tell you how, I’m going to show you.
No Savings
Let’s say Natalie is ready to finally take control of her finances and get rid of her debt. She wants to pay it down as fast as possible and doesn’t see any reason to put money into savings. She thinks it’s silly to save money when she could use it to pay down her debt faster. So she skips this step and instead focuses on reducing that debt. Now let’s say in a couple of months she’s driving to work and gets a flat tire. She needs to buy a new one but doesn’t have the money. So she has no choice but to charge it to her credit card. You know, the one she’s been trying so hard to pay off?
Savings
Let’s say Sara is also planning to pay down her debt. But before starting she decides to take a month or two to build up a $1,000 emergency savings account first. It’s tempting to jump into paying off her debt but she knows having some savings will eventually come in handy. A few months into her debt payoff her dog gets sick and she has to take him to the vet. She hates that an unexpected expense came up, but Benji really needed some care. At least she has money in her emergency fund to pay the vet bill. Now she’ll just have to take a short break from paying down her debt in order to build her savings back up to $1,000. Then she can get back on track!
Once you make the decision to get out of debt, the last thing you want to do is go into even more debt! Click To TweetThe difference might not seem that significant, but it is. Once you decide to get out of debt, the last thing you want is to go into even more debt! Because even if the numbers won’t matter in the grand scheme of things, your motivation and momentum will. A big part of this journey is staying motivated and keeping your behavior patterns consistent. If you don’t have money in an emergency savings account and an unexpected expense gives you no choice but to go into more debt, you will get discouraged and perhaps even consider giving up.
Be prepared
Imagine starting out on a 3 day hike with no water or supplies. You might get a half day in before you need food or at least water. So what do you do? Perhaps you’re one of those extremely ambitious people who would say “I’ve made it this far, I’m not turning back now.” And you would suffer through your thirst, hunger, and exhaustion until you completed the hike. Or maybe you would turn back around to get supplies, but by then a whole day would be gone. You would probably decide to go home and call it quits. Or possibly you are one of those rare types who would turn back around to get supplies and then start your hike all over again, proudly making it to the end. Sure, you lost a day in the process, but you did it!
No matter which of these three options you identify with the most, I think we can agree that being prepared and beginning the hike with supplies in the first place would have been the best option. This $1,000 emergency fund represents your supplies. It’s what’s going to set you up for success on your financial journey. Please don’t begin your hike without it!
$1,000 not enough?
If $1,000 seems like too little for you and you’d feel more comfortable with a larger amount that’s okay. Anywhere between $1,000 and $3,000 is reasonable, but beyond that you’ll just be saving money while letting more interest on your debt accrue. It would be counter productive. You also want to make sure you put this emergency savings in a separate account from your checking so that you aren’t tempted to spend it. Also, if you happen to already have more than $1,000-$3,000 in a savings account, I suggest that you pull all but your emergency fund money out and apply it toward your debt. Any interest you’re currently making on that savings is significantly less than the interest you’re paying on your debt.
The life changing part is you’ll find that when you have money in an emergency savings account eventually the emergencies will stop coming. It’s like they know you’re prepared for them and it takes the fun out of it so they leave you alone. But even if they don’t, won’t it give you such peace to know that you can handle whatever comes your way without adding to your debt?
How to save $1,000 fast
Your next logical question might be “How am I going to find a way to save $1,000?” I can definitely help you with that! I understand that for some the thought of saving that much money might seem more daunting than going on that 3 day hike I mentioned earlier. The truth is, it will be tough, but you can do it! Right now I am offering a free master list called How to Save $1,000 Fast! It’s jam packed full of ideas to make more money and cut some expenses so that you can get your thousand dollars saved and be on your way to paying off debt. All you have to do is sign up here and you will receive this free list in your inbox.
Happy saving!