When we first began our journey out of debt, we had no clue how to get started. So we decided to read every book, magazine, and website that we could find on subject, looking for common threads. The more knowledge that we consumed, the more that we started to see a pattern emerge. According to the financial experts, the very first thing that should be done is the creation of your emergency funds.
We had never even heard of the concept before, likely believing (as many folks do) that our credit cards themselves can serve as an “emergency fund” of sorts. Looking back, I think that this was the single most important change that we made. I would even say that it may be impossible to get out of debt without creating emergency funds.
Emergency funds are nothing more than savings accounts that can only be touched in the event of an emergency. Of course, you can create a savings account anywhere, but I would recommend using an online bank for your emergency fund. This will create a situation where you need a few days to transfer money over from your account, thus helping to make sure that it is a true emergency.
It seems a bit counter-intuitive that the first thing that you should do when trying to get out of debt is to start *saving* money. After all, those huge credit card balances that you are carrying are going to continue to rack up interest, and they certainly aren’t going to pay themselves off.
But the truth is that even if you make some minor gains in paying down debt, you will eventually have another “emergency” that will force you to pile that money right back on the top. When you are paying down debt, your goal HAS to be to avoid using credit cards FOR ANY REASON. Without emergency funds in place, this just won’t happen.
When I first heard financial experts talk about emergency funds, she mentioned needing several MONTHS worth of salary to cover you in case you lose your job. While that would certainly a good reason to set some money aside (especially in this economy), you need to start much, much smaller.
My advice is to aim for $1000 in this account to start. Once you pay off your credit card debt, you can (and should) bump up this total. $1000 is enough to cover most car repairs, most home repairs, most medical co-pays, etc. While it is certainly possible that you could have emergencies crop up that cost far more than this (and we have), your goal here is to build a basic safety net.
The definition of emergency will vary from family to family, but you are going to have to keep it real. Try to use a little bit of common sense. The local department store having a huge sale on purses is NOT an emergency. Your favorite band coming to town, but charging $100/ticket is NOT an emergency. However, if a waterspout breaks off your house and requires an emergency repair in order to keep water from flooding your basement, you might need to pull some money out to cover the repairs. If you come up a little bit short one month and can’t afford to put food on the table, then yes, that should be considered an emergency as well.
If you have to pull money out of your emergency fund, your next priority needs to be re-stocking the account back to its original $1000 level as soon as possible. You should go back to paying the minimums on all credit cards until you get there, and only THEN can you jump back into debt reduction mode.
Prior to having an emergency fund, it felt like things were always happening that pushed us beyond our paycheck-to-paycheck lifestyle, and forced us to take on debt. The dentist told us that my wife needed her wisdom teeth out immediately: $750. A tree fell down in your front yard (blocking our driveway) that needed to be cut, hauled away, and replaced: $1000. Our primary vehicle wouldn’t pass inspection without a new set of tires: $600. It is so easy to see, now that we have been through it. If we would have had a properly funded emergency account when these things had occurred, we wouldn’t have needed to use our credit cards to pay for them, and they wouldn’t have contributed to making our debt problems worse.
We paid off over $20,000 in credit card debt, and there is no way that we could have done it without the use of an emergency fund. We still maintain an emergency fund today, and are in the process of bumping up the account to handle even bigger emergencies. The important thing is that no matter what happens, our credit cards are off-limits.
As time goes on, we have gradually shifted our emergency fund from a normal savings account to an online money market account. You can get a still get the same benefits of hosting your emergency fund in a savings account, but can earn a much higher interest rate. Deacon Hayes over at Well Kept Wallet recently posted an Everbank Review that outlined the major reasons why money market accounts are appealing.
The authors featured on this site are not financial experts, but are instead normal folks just figuring out how to make ends meet. The opinions and advice featured on See Debt Run have worked well for our families, but may not work for yours. If you choose to incorporate any ideas included on this site into your own financial planning, you do so at your own risk. We do NOT take any responsibility for the decisions you may make, even if they were based on something you read on this site.
Articles may contain affiliate links | Site Designed by Nuts and Bolts Media | © 2017 See Debt Run
I can imagine it’s difficult to start saving for an emergency fund when you’re still in debt, but you make a great point that charging those emergencies to the credit card just creates more debt and more interest to pay off.
Yep.. You are just piling trouble on top of trouble if you end up pulling those cards back out.
I hear ya about the importance of an emergency fund! We are currently trying to replenish ours, as it really took a hit this past summer.
We have certainly been there.. I feel very fortunate that ours is in the “expanding” phase at the moment.
I’m in the process of replenishing mine too. Since I’m self-employed my magic number is 15k. Anyone full time employed probably doesn’t need that much.
That sure would be great to have that amount in savings..
Emergency funds bore me to tears (compared to debt payoff, which feels like I’m getting something done) but they are so necessary! Unfortunately, mine is currently depleted because my car was towed and I had to fly home for a funeral in the span of 2 weeks. Gotta build it back up!
It’s a good thing you had one in the first place, Erin!! But yes, we have been in that “refresh e-fund” phase on multiple occasions
Emergency funds are super important. If we didn’t fully build ours up, I most likely wouldn’t have made the switch to self-employment so quickly. It makes us more comfortable in case anything does happen.
oh.. great point, Michelle. i see that you wrote about e-Funds today as well 🙂
yes, they take on an even more important role when you are self-employed.
I think you’re right to suggest not immediately taking on the standard 6-months-of-income advice for an emergency fund. For someone in debt and starting from zero with respect to saving, that amount feels so daunting that some people will just abandon straight away the idea of an emergency fund. Like most ambitious long-term goals, break it up into smaller goals first, as you suggest. $1,000 is a lot better than $0 and a good initial goal.
Well said, Kurt. Starting off someone’s debt repayment plan with “You must save 10 grand”, is just going to scare them off. You have to take small steps, especially at first.
I’m trying to save up at least 6 months worth of income to place in in my emergency fund because I know that it is the time that it would take me to start generating income again on a consistent basis.
This is an admirable goal, Donny.. Especially if you have a non traditional income setup.
Thank you for this post. In beginning my journey of getting my finances under control, I also read about needing an emergency fund of 3 months worth of salary. That seemed outrageous to me and unfortunately impossible to achieve. I like your idea of setting aside just $1,000 because you’re right, that would mostly cover whatever “emergencies” might strike. I haven’t had to deplete mine yet but it has given me much reassurance in case some thing were to come up. I also cut up all my credit cards so my only option for an emergency will be the fund. Makes the temptation to use the credit cards go away!
Carolyn, thank you for your comment. It is notes like these that remind me why it is so important to share our story, in order to help others who are facing the same thing.
It’s always good to have a buffer to cover emergencies. Now that I own a home I really think this is crucial. I already had a couple of emergencies and having that efund was a relief.
So true.. “Emergencies” are a part of home ownership. There is no way around it..
I hadn’t heard this (have an emergency fund BEFORE you start paying off debt) before we began our journey to eliminate our credit card debt, but over the last few years I’ve LIVED why it is true. Being able to handle those unexpected expenses. Not having to live in fear of the water heater breaking down, or the brakes going out on your car. It’s simply the first baby step towards financial freedom…!
It sounds like we were in the same boat, Travis. This one piece of advice (e-Fund) is something that I make sure to tell all friends and family about, because it has made such a difference.
An emergency fund is especially crucial if you have a child or a car. You never know what can come up but when I lived in an area where everyone walked I was far less worried about needing 1K at a moment’s notice than I am now that I own a car and understand how pricey (and necessary) a repair can be.
That is a great point about the “child” part of it. My kids always seem like they are needing money for their schools or activities, and while these may not be true emergencies (in the normal sense), if you don’t have the cash to cover it– you may have to use the e-Fund.
Great advice. I would suggest to those deep in debt like we are that even putting 1 or 2% of your paycheck away each payday will help build an e-fund without it seeming like a hard hit to your pocketbook and debt-slaying efforts. Those little bits add up quickly!
we do something similar now.. to build up our eFund, we transfer a small chunk of change each month before we even see it.
Life will throw a lot of stuff your way REGARDLESS if you’re prepared or not. The bad thing, when in debt and with no EF is that any ‘shake’ will get you even deeper in debt. With an emergency fund, when something bad happens (again), you just handle it, while being able to keep on paying off debt and MORE IMPORTANTLY not getting any new debt.
well said, dojo.
the important thing is to keep that debt total on the downward slope.
I think the thing I love most about our emergency fund is the way it takes panic moments and turns them into minor nuisances. Not long after my wife and I collected our first $1,000 emergency fund, I found out my car needed a minor, but necessary $200 sensor replaced the day before I was supposed to take a business trip. I started worrying over where I was going to find an extra $200 on short notice, and was actually getting pretty stressed about it, until my wife quietly reminded me that we had put together an emergency fund exactly for that purpose. An hour and a half later, my car was fixed and I was ready to go.
Today, we’ve grown our emergency fund to an amount that would last us six months if we totally lost our income today.
A six month emergency fund is nothing to sneeze at, and one of my financial goals for 2014 is to get our e-Fund up to a similar level. We may end up keeping the e-Fund fairly small (~$2500), and investing the rest in somewhere fairly liquid to be accessed in the event of an emergency.
The e-fund is certainly something that cannot be overemphasized…its just key to any prudent financial plan given the cushion it gives our lives and ensures our financial goals aren’t derailed by the curveballs life is certain to throw our way.
Size and semantics shouldn’t matter so much as long as one feels they have an e-fund big enough for their needs.
Those curveballs WILL come.. it is only a matter of WHEN.
I’m always confused by the ‘save 6 months of expenses’ or ‘3 months of income’ or whatever the guideline is. Do they mean save 6x or 3x where x = your gross income? Or x = the net amount? (Sorry for the nerdy algebra.)
I guess it depends on whether you’re saving for one-time emergencies like the car that goes kaput or longer-term nightmares like losing your job.
The saving-for-unemployment goal is even murkier. You can eliminate the amount of income taxes you’d otherwise be paying. You might think you can eliminate the amount in your budget for commuting expenses — but you might need to spend even more to travel to job interviews.
In the end, I agree with you that a small goal is a great place to start.
I’ve always understood it to be after tax dollars (as long normally your income has tax deducted at source) since that is what you are currently using to pay your bills. The idea is that you can continue to pay your bills for x months even without income. Also, x months of expenses isn’t necessarily the same as x months of income. Hopefully you aren’t using every cent of your income just to cover basic living – but for some that’s the case.
To determine an appropriate amount determine what absolutely would have to be paid if you lost your income tomorrow. Some expenses can be cut the second you get the news you’ve been laid off (ie. you no longer have an entertainment line in your budget) Some things can be reduced a bit or maybe even dramatically for the short term (think groceries). Most grocery budgets could stand to be cut at least a little for the short term – live on what’s in your house already even if it results in some unusual meals. Cash in any rewards points you have to save on gas/groceries or any other basic necessities. Unless someone is going to go barefoot in the snow, all clothing spending is suspended until further notice. Unless you have an interview and are not presentable, hair cuts are cancelled, and so on. Your emergency fund needs to be able to cover the bare minimum expenses that cannot be avoided for as many months as you need to feel comfortable. If you have a specialize skill not in great demand in your area you may be out of work longer so plan for that. It’s also worth reviewing all the other expenses you have that take time to get out of (cell phone contracts, relocating to less expensive accomodation). You aren’t going to sell your house or your car the day after a layoff, but continuing to make the basic required payments is. At some point thought if a layoff or illness drags on or becomes a permanent situation it does become necessary to consider major life changes.
Great tips, Valerie. We will definitely keep those in mind when we start diving big-time into long-term savings next year. The six month salary amount may indeed end up smaller than we were expecting.
Well said. When we were getting out of consumer debt, we had a $1,000 emergency fund and it came in handy many times. Flat tire, Hot water heater, you name it. If we didn’t have it, we would have been running to our credit cards and that would have gotten us further into debt.
Without a doubt, Deacon. I don’t know anyone who NEVER has to go to their e-Fund. That is why it is there!
Without a doubt, Deacon. I don’t know anyone who NEVER has to go to their e-Fund. That is why it is there!
Great article and definitely a push to figure out how much of a fund you need for your particular situation.
I’m going to play devils advocate for a minute – nothing personal, I’ve been guilty of calling something an emergency when in fact it was a failure to plan.
1. I’m no dentist but I’m not sure how “suddenly” wisdom teeth could need to come out. There was no prior discussion about this eventuallity at annual checkups in the past?
2. If a perfectly healthy tree is blown down in a storm then yes, it’s an unforseable emergency. If on the other hand it was old, diseased, leaning etc then it’s removal should have been anticipated and dealt with before it fell (and could have taken out a car or a person in the process).
3. A new(ish)tire that blows and is not repairable is an unforseable emergency. On the other hand, if your tires were so worn that they would not pass an inspection then replacing them shouldn’t have come as a surprise.
I guess for me the difference comes down to, could this situation have been predicted or anticipated and planned for? Don’t get me wrong, we’ve forgotten to plan for things that were inevitable and then had to scramble to cover them. Even with the best planning it can happen.
I set up our spending plan a year at a time and lay out all the known, planned and expected spending. Most things happen like clockwork every week or month, but some things happen only occasionally so I keep a separate list to remind me to include those (annual vet visit every spring, car plate renewals every two years, winter and summer tires every three years for both vehicles, and so on. When any unplanned expense comes up I decide if it’s truly a one time event or if it needs to be added to the list for inclusion in future years so I’m not caught off guard again. The fewer surprises you allow in your life, the less likely you’ll need to dip into the emergency fund.
Thanks for stopping by, JMK.
Your points are valid about whether or not all of the items listed are true emergencies. There will always be some “eye of the beholder” in making that determination. I would say that the wisdom teeth were calling migraines, and thus deemed an emergency. The fallen tree came down in a single storm and was blocking our driveway, and thus had to go. But yes, we should have noticed the tire wear and planned appropriately.
I think both sides are valid. You should definitely try to budget for untimely, but foreseeable expenses as much as possible. That said, with a busy life, it’s easy for something to slip under the radar. Should you be planning months ahead to replace your tires? Sure. But it’s the sort of thing that is easy to overlook, and your emergency fund ensures you aren’t stuck in a bind when it comes up.
Very good points. When you delegate your money properly, it’s smart to be prepared. I just wonder if we should consider funding ourselves in the event of a zombie apocalypse as well…
I like the part about saving for an emergency fund even if you have debt. I had a hard time with this because it made more sense to just put every penny I had towards that revolving debt. But, knowing that life will present its own challenges and obstacles, it is smart to have a side fund just for these kind of circumstances.
Having an emergency fund sounds like a wonderful idea but we are in debt up to our nose it seems like there’s just no way to save anything. The salary is gone every month before it hits the account yet the debts seem to be increasing. We will try our best to start something. It’s not funny to be in debt at all
I would say, its easy to give money to someone you really trust such as your family and let them hold it for you as an emergency fund. In a true emergency you need to have immediate access to it. Having that other party involved does remove some of the risk of you actually spending that money instead of using it when necessary.