Building Emergency Savings While Eliminating Debt
For those of you that are in the process of eliminating your debt or even for those that have yet to take that first step towards being debt free, do you have any level of emergency savings? Too often the answer to that question is no.
The standard rule of thumb is to have emergency savings that are the equivalent of 6 months of living expenses.
However, many people feel 6 months may not even be enough given the uncertainty in the economy and job markets and feel more comfortable with 9-12 months of living expenses safely stashed away.
Does that mean that you should stop everything and build up the emergency savings before attacking the debt? Or do you throw caution to the wind and sink all of your money into debt reduction and hope for the best?
One solution that seems to work well for many people is to build a mini-emergency savings fund as soon as possible and then focus your efforts on the debt. For some people, the mini-emergency savings may be as little as $500. Others may feel more comfortable with $2000 or more before they turn their full attention back to the debt. Given that each scenario is different, you will need to determine your own personal comfort level for this initial amount of emergency savings.
Depending on how much you need to save to reach this first goal and how much you have to set aside per month, you may find it easier to spend a couple of months depositing all surplus money into the savings. Another option is to split the surplus funds 50/50 between savings and debt reduction. Again, the specific solution will be unique to your own situation.
Once this initial goal of emergency savings has been satisfied, you will have enough of a cushion to cover most small emergencies without having to resort back to the credit cards. One of the largest pitfalls in people successfully eliminating their debt is the fact that people often continue charging expenses to the cards that they are trying to eliminate. By taking the time to build this mini-emergency savings, you will have cash available if needed and then you will begin to see more progress on reducing your overall debt.
Stay tuned for more discussion on recommendations for savings vehicles that will give you the most return on your emergency fund. In the meantime:
- Determine what level of savings you will feel comfortable with for your mini-emergency savings fund.
- Determine how long it will take you to fund an account to this level.
- Share your thoughts and questions below.