Traditional financial experts tell us that we should have between 3 and 6 months of living expenses as an emergency fund. But building an emergency fund while carrying debt is expensive, and one might actually feel deterred from setting up an emergency stash altogether. The solution: do both. Here’s how.
1. Get a better understanding of your expenses. One needs to work on this from the ground up. Put all of your expenses for one month down on paper. The best way to do this? Brainstorm with a pen and scratch paper for 10 minutes. Identify which basic expenses are needed for survival, i.e. groceries, housing, and transportation to and from work. Everything else is arguably fluff.
2. Know your sources of cash.
3. Know your sources of credit.
4. Like the Rough, Quick Budget, set up a Rough, Quick Disaster Plan. Given your pressing debt for paydown, make sure to neither under or over-fund your emergency account. Determine your emergency fund based on the bare-bones cost of living with no frills, and making sure to be able to get to and from work — your crucial source of cash flow during these tight times.
5. If a couple of months are needed to build the emergency fund, in the meantime make sure to be meeting at least the minimum payments on your credit cards. Once the fund is complete, prioritize the debt amounts and start aggressively paying down those accounts. Make sure to keep the credit card with the lowest interest on hand in case of an extreme emergency — one in which you still can’t make finances work temporarily even after eliminating all discretionary costs from your budget. Stop using all of the other credit cards in the paydown process: cut them up, lock them in a box and bury it, or burn them in a pile. A quick side note on extreme emergencies: if you’re in this position the recurring costs of basic living expenses will need to be lowered: look for alternative, cheaper housing; find a way to trim your food bill further; find a cheaper way to get to and from work if possible.
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
Tags: budgeting with debt, disaster planning with debt, emergency budgets with debt, emergency expenses with debt
