So, you’ve made the choice to stop being a slave to a bank or creditor. You’ve decided to get out of debt, and you’re ready to get the past behind you, pull out the scissors and cut up those cards. You’ve planned a zero-sum family budget, and now you’re ready.
The only thing left to do is some saving.
What?! You read that right, you need to start your emergency fund before you start paying off the debt. No, you don’t need a full emergency fund– $1,000 will do.
The reason behind this is based on the way the brain and your emotions work. If you stop using your cards and put them away, and something big comes along, what are you going to do? You’re going to bite the bullet, pull out the cards (or get a new one) to pay. That’s going to wreck your momentum and discourage you.
If you save an emergency fund (and it must be an emergency), then you won’t need to go back to the cards if your alternator goes out on your only family car! You’ll be able to hit the emergency fund and keep moving in the right direction– without debt.
No, the emergency fund should not be stored in a CD, the stock market or anything with a penalty for withdrawal. Dave Ramsey notes that one person used $100 notes in a picture frame in her closet marked “If Emergency, Break Glass.” We personally use a high interest Internet savings account with HSBC. Currently, money deposited there earns 6.00% for a few months before dropping back to 5.05 which is very competitive. It has bank to bank transfers, online banking (integrates into Quicken) and has a $1 minimum deposit and no transfer charges or minimum balance!
In any case, before doing your debt reduction, build the emergency fund. The interest can help you get your debt down, and you’ll need a place to store a real size emergency fund when you get to that step.