Getting out of Debt: Setting up an Emergency Fund
In a previous article, I stressed the importance of using a cash budget to help you get out of debt. In it, I suggested using a credit card initially for emergencies. As you implement it though, it’s important to setup an actual emergency fund relative to your budget. One major event (fixing the car, unexpected flight, doctor bill, temporarily disabled, etc) can destroy your cash budget and any progress you’ve made. Creating a safety net will help covers life’s little unpredictabilities. Some advisers suggest having an emergency fun of three months saved income. But if your deep in debt, start where you can.
Creating a Solid Emergency Fund
Make it Accessible - An emergency fund should be just that: accessible in an emergency. If you are stranded on the side of the road, the emergency money hiding under your mattress won’t help you much. Keep it in a checking or savings account where you can debit it immediately. Or keep a portion of it with you if you like.
Set it Up Now - Don’t wait. Set this up as early as possible. Have at least $500-$1000 in savings before tackling any major debt (only pay the with minimum payments). Deposit whatever you can right now, even if its just $50.00.
Determine your Goals - What is an emergency to you? When are you allowed to pull from this account? It’s important to determine this now. Write down a list of items this fund will cover. Also, how much are you aiming for? $1,000? $10,000? Determine your safety-net amount.
Make Consistent Deposits - Be consistent about making regular deposits. Once you’ve reached your safety net amount, you can use that momentum snow ball to make small deposits toward your debt.
Let your Money make you Money - Your emergency money doesn’t have to sit in some savings account. You can put it in a money market account and have it make money for you. I have my emergency money in a PayPal account where it currently receives 2.88% annually and pays out each month.
You can also request a PayPal debit card for your account to quickly withdraw the money when you need it. If your money is going to sit there, you may as well profit from it. PayPal has some of the best security and fraud protection available and is completely FREE.
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