For those who are trying to get out of debt, paying down credit cards, mortgages and student loans often starts with making the maximum payment possible every month, in hopes hacking down remaining balances to zero.
Dave Ramsey, however, believes in doing the opposite; instead of upping payments to creditors from the onset, followers of his “Baby Steps” are encouraged to reduce debt by saving money toward an emergency fund first and foremost.
Skipping Out on an Emergency Fund Backfires
Last year, I admittedly tried to take the fast-track approach to Dave Ramsey’s debt plan by skipping straight to step two, because — hello — my problem is paying down my debt, not saving money.
At the time, I had about $900 in extra funds each month after paying bills (hooray for no mortgage payments!) and only had about $100 in my savings account. I was on a mission to cross off $5,000 in credit card debt from my name, and I succeeded after about seven months of devoting all of my discretionary funds to get to zero.
Two months later, however, I regretted it. My 16-year-old car, which I heavily relied on for my daily commute of 66 mile s, gave out on me. I still only had a $100 emergency savings fund instead of the $1,000 I could have easily had if I just stuck with step one of Dave Ramsey’s debt management plan.
Why the Lack of Emergency Savings Lead Me into Deeper Debt
The panic induced by my unexpected financial emergency caused me to make hasty decisions. Did I eliminate my credit card debt? Yes. Did I free up the extra $900 per month I had? Technically, yes, but a nagging voice in my mind kept reminding me that I had other debts to pay down, and I couldn’t find it in me to stop paying off debts when I was doing so well.
The anxiety over having no emergency savings fund pressured me into feeling like the only solution to my car situation was the fastest one available — financing a new one.
Ramsey explains that no matter what you may believe, unforeseen and urgent circumstances arise all the time. As he says, “It’s not a matter of if these events will happen; it’s simply a matter of when they will happen.”
5 Foolproof Ways to Save $1,000
Establishing an emergency fund is critical to breaking the habit of viewing credit as the “only solution” when surprise expenses come around, and isn’t optional.
So what can you do to save up $1,000? Here are a handful of ways to grow an emergency fund:
- Cut Cable: Ditch your cable subscription, and especially your subscriptions to premium channels that suck your wallet dry. There are plenty of entertaining TV series on basic TV networks, and the wonders of the internet allow viewers to stream their favorite shows for free. (Estimated savings: $50/month)
- Brown Bag It: Failing to bring a home-packed lunch to work daily is a product of sheer laziness. I’ve fallen into this habit many times in the past, but cutting this cost is really a money-saver. (Estimated savings: $8/day x 20 workdays= $160/month)
- Drop the Gym Membership: Staying healthy is definitely important, but there are plenty of other free ways to get a workout: Run on the track at your local community college, or buy a resistance band and a set of pre-owned weights on Craigslist or eBay. Sure you’ll spend an initial $20, but this one-time purchase will save you more month over month. (Estimated savings: $50/month)
- Limit Eating Out: Spending weekends out on the town with friends is undoubtedly a stress-reliever from a long work week, but your finances shouldn’t have to suffer for it. Going out every Saturday night can easily cost $30 or more, so cut down weekend events by at least half. (Estimated savings: $30/Saturday x 2 Saturdays= $60/month)
- Sell Stuff: If you don’t necessarily want to sacrifice one of the aforementioned items, here’s your chance at making it up to your emergency fund. Dig through your closet, in the attic, in the garage, in your storage unit (which, by the way, is the biggest waste of money ever) to find items to sell online or at a yard sale. You’ll reduce the clutter in your life, while making a lot of extra cash. (Conservative estimated savings: $100/month)
Using the estimates above, it’ll only take about 3-4 months to see results — that’s if you remain consistent in saving money and commit to doing these five things every month until you hit the $1,000 mark.
For most people, it won’t happen in just one month, it may take three months or it may take one year. Once you’ve saved an initial $1,000 emergency fund, the challenge lies in determining when emergency savings should be used.
When to Use an Emergency Savings Fund
Individual behaviors and habits have a lot to do with why we get consumed with debt. While everyone categorizes their priorities differently, and similarly, have different understandings of what an emergency means, not every shortage of cash is, indeed, an emergency.
Initially, I knew that if I didn’t figure out when it was okay to use my emergency funds, I’d start treating my savings as a secondary checking account.
For example, buying buying Christmas gifts is an urgent expense — it’s something that has a timed deadline associated with it — but it’s not necessarily important to my long-term financial goals.
Prioritize Using Four Quadrants
Now how does all this relate to my emergency savings fund? Well, I took a step back from Dave Ramsey’s Baby Step program for a moment, and remembered Covey’s Time Management Matrix.
Stephen Covey is the author of The Seven Habits of Highly Effective People and is known for popularizing the four quadrants of importance. The system is primarily designed to help prioritize tasks, but I was easily able to adapt it to my expenses in order to determine which purchases should be considered an “emergency.”
Covey’s Quadrants are broken down by importance and urgency.
Quadrant 1: This is the quadrant encompasses all expenses that are both important and urgent. This is what emergency savings should be used toward.
Quadrant 2: The second quadrant is where Covey says we should eventually spend most of our efforts, as expenditures in this area of the matrix are considered important, but not urgent. It includes the expenses that go toward long-term planning, such as saving money toward a retirement fund.
Quadrant 3: Considered the most deceptive category, as it consists of urgent expenses that are really not important in the greater scheme of things.
Quadrant 4: Quadrant four is where you waste the most money. Eliminating this department rids you of lost money going to things that are neither urgent, nor important. Many of the items I recommended you cut to grow your emergency fund stem from this quadrant.
Currently, I’ve saved about $700 toward my emergency savings fund. All the money I’ve saved by cutting costs are automatically deposited each month into my savings account, and I expect to reach my $1,000 emergency fund very soon.
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