Stop the Spiral of Debt – Part 2

by Ryan Yates

How-To get out of Debt, Stop Spending – Part 2

Welcome to part 2 of How-To get out of Debt, Stop Spending. In part 1 we discussed that you need to stop using credit cards and you need to spend less than you earn. These are two common sense approaches that will have you living without credit in no time. Today we need to talk about the MOST important part of getting off of your credit addiction, establishing an Emergency Fund.

I’m sure that if you’ve read any personal finance blog, personal finance book, or just talked with Grandpa about money then you’ve heard about the emergency fund (aka Rainy Day Fund). If you haven’t, don’t worry because here’s my definition of it. An emergency fund is a stash of money that you use to prevent yourself from using a credit card.

We all have events that “sneak” up on us from time to time. If you are not prepared to handle these situations with cash, you will resort back to using a credit card. Remember, the whole point of this two part series is to help you break the binds that “The Bank of The Broke” have to your wallet.

The Emergency Fund

There are two different types of emergency funds. The first one is called a starter emergency fund, and usually contains $1,000 to $2,000. It provides a source of money that can be used in situations that require money outside of the typical budget. As the names implies, those situations are EMERGENCIES. Needing a new pair of shoes is NOT an emergency. Paying for a trip to be at a relative’s funeral, IS and emergency.

The second type of emergency fund holds a much larger amount of money. Usually 6 months of your household expenses. This fund is used to protect your family from any number of catastrophic events that may happen during life. If you are in debt, only focus on the starter emergency fund.

These are two great articles about Dave Ramsey’s approach to emergency funds.

Baby Emergency Fund – Do It Your Way

Dave Ramsey’s 7 Baby Steps: Step 1 – $1000 To Start An Emergency Fund

Dave Ramsey’s Baby Step 1: Baby Emergency Fund

Where to keep the $

The point of a starter emergency fund is to have money accessible when you need it. Having the money tied up in a CD that will charge you for an early withdrawal is not a good plan. I recommend either keeping it in a checking or savings account. Both provide an easy way to withdrawal/transfer the money when needed. NOTE: a credit card is NOT an emergency fund.

Where Should I Keep My Emergency Fund

How to save for it

It took me two weeks to save for my starter emergency fund. I used a garage sale and money from my pizza delivery job to fund the account. There are countless ways to save; I’m including a few links below to other great websites that provide many ideas. If you are struggling to find a way to fund your EF, please take a look at these.

Ten Tips For Funding Your Emergency Fund

50 Tips to Help Establish Your Emergency Fund

Just Do It

I know that stopping the perpetual credit train is a difficult task. Change is never an easy undertaking, but if you are sick and tired of debt. If you are sick and tired of paying over 20% interest to the credit card companies. If you want a less stressful and more enjoyable life, then you need to start somewhere. After you’ve cut up those credit cards, start an emergency fund. You need one. If you learn nothing else from this blog or any other for that matter, learn to use an emergency fund.

In order to begin the journey toward debt freedom you have to stop going deeper into debt, and have a plan to handle money emergencies. By following part 1 and part 2 you will be well on your way to provide a base to begin your debt repayment plan. We’ll call it your foundation, of which all other money decisions will start at.

Good luck my friends. You are not alone in the journey, I’m willing to bet that half the people you work with are “strapped” and looking to bet debt. You can do it!!

Moneycrush also wrote a quick post on How to build an emergency fund in six easy steps

{ 10 comments }

James May 5, 2010 at

If you set your goal to save say $2500 in an emergency fund you can find an account similar to ING where you can earn interest which will help you toward your goal.

This way you can get your money to “work” for you so you can reach your goal that much faster.

Once you start to see that you have earned say $20 in interest in any given month you start to really understand through visualization that your money can in-fact “work” for you.

Jeffrey Kosola May 7, 2010 at

Thanks for the tip James, over the course of the year I will be increasing my starter emergency fund to $2,000. At the $2,000 level their aren’t many emergency a family can’t handle. Getting your money to work for you is what everyone should focus on.

Beth May 5, 2010 at

I really look forward to reading your blog. This page is timely for me. I just moved and I want a fresh start. Like no more credit card use. That sounds like a good place to start.
Beth

Jeffrey Kosola May 6, 2010 at

@Beth, A fresh start sounds great. The only way to starts is to stop, using credit that is 🙂 Good luck in your journey and feel free to send any quesitons my way.

Lisa May 6, 2010 at

From your article i know the type of Emergency fund and also how keep emergency fund such as Hold a garage sale,Bank your grocery savings,Suspending your contributions to your retirement accounts will allow you to funnel more money towards you emergency fund. Don’t forget, though, to resume your contributions as soon as you are able.

odysseustoday May 6, 2010 at

Great article. My wife and I cheat a bit on our emergency fund. We have saved up $14,000 in case reserves but we then tied it up short term in the market (5-7 month plays). We use our credit card ($5,000 limit) for the temporary fund and would then liquidate some of our stocks to pay that off that month if needed. So far it has not been needed.

We are also considering our emergency fund the start of our down payment for a house. So all the cash reserves will someday be depleted to a large extent to hit that 20% to ensure no additional interest is taxed on us.

I have also struggled with our checking which could be seen as an emergency fund. I cannot let our checking account get under $2,000 ever. If it does I get anxious. So our checking fluctuates around $2k minimum and has been as high at 7k at times (though I quickly distribute it to our stocks or debt if it gets close to 7k) often hovering around the 4-5K marks.

Great article!
.-= odysseustoday´s last blog ..Purgatory of Student Loans – The Grace Period =-.

Jeffrey Kosola May 7, 2010 at

@Odysseus Today Since personal finance is completely personal, there are many ways to have an emergency fund. You probably should not use your emergency fund as a start for your down payment. Move the amount required to a seperate account. Mixing funds in the same account can really cause problems later. I notice that on your blog you have student loans and your lastest post was about student loans. Why not use that extra cash every month to blast away that debt?

Anthony May 6, 2010 at

I agree that a credit card should not be your emergency fund. However, I do devoutly believe that a credit card can be a part of your emergency PLAN. My e-fund is in an online savings, which is not IMMEDIATELY accessible, it takes about 2 to 3 days to get my money out if I need it. However, if I wisely use credit cards, I have immediate access to money and can pay off the credit cards through my online savings e-fund.

Also, I have about half of my e-fund in a CD ladder, 12-month CDs that mature every month. The rates are terrible, but I’m still getting just under 2% on them, which is better than the best online savings. But also, it limits me from pulling all of my e-fund at once and is ideally set up for income replacement.

Jeffrey Kosola May 7, 2010 at

@Anthony Yes a credit card can be part of an emergency fund. As long as you never pay it late, and never pay the credit card company a dime I can work. I’m just not a fan of using other people’s money anymore. Your plan sounds solid, so keep it up my friend.

Forest May 8, 2010 at

Great post Jeff… I pay rent next week for two months and will sort my emergency fund in the next 4 weeks after that….. Then it’s onto bigger and better emergency funds!
.-= Forest´s last blog ..Haven’t Bought A Mother’s Day Gift Yet? Don’t Get One!! =-.

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