Most financial experts have similar plans but maybe slightly different ways to get there. One thing they seem to have in common is to establish an emergency fund.
Experts usually want you to have your emergency fund in place before you tackle your debt, whether it takes you 3 months, 6 months, or even 12 months to get that fund saved. But how do you know how much you should have in a fund like that? Where do you keep this money?
Emergency fund money should be kept in an FDIC financial institution in a savings account or an interest paying checking account that is only used for emergencies. Initially, one thousand dollars seems to be an agreed upon amount if you have a secure job and good credit.
One thousand dollars would cover car repairs, a small medical or dental emergency, a furnace repair, plumbing repair, or a new hot water heater. This fund would be used for emergency expenses, those expenses that were unplanned and required a service or purchase. This fund allows you to pay for this emergency without using a credit card.
An emergency fund is not for new clothes or entertainment, groceries or a side trip. Those expenses should be out of your household budget. An emergency fund is just that, money to use when an unexpected problem arises and needs immediate repair.
Experts also pretty much agree that after you have a thousand dollar emergency fund established, it is time to do two things. Tackle your debt and establish another savings account to cover 3-6 months of living expenses.
Tackling the debt will free up money in the long term. Establishing another savings account with 3-6 months of living expenses will protect your family in the case of a lost job or an illness or injury that prevents you from working.
Understand that it may take a year or even two depending on your situation before you have your emergency fund secured and another savings account started. Be patient but be diligent. As you pay down some of your debt, it will be easier to put more into that second account.
Let me know your thoughts on how much is a realistic amount for you.
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