I know I have talked and written a lot about how important it is to get out of debt, and stay out. But you know what’s just as important? Having an emergency fund. Everyone needs an emergency fund. If you don’t already have one, starting one should come before any significant debt reduction. That’s right, BEFORE, debt reduction.
Like it or not, when it comes to money the unexpected happens. Car repairs, medical bills, the loss of a job, appliance repairs or replacements.. you name it.. Having an emergency fund in place is essential for anyone who doesn’t want to derail their finances and go further into debt. It’s essential in helping you to avoid the stress you’d otherwise get hit with if you don’t have the money.
If you’re already in debt this is even more important, as you’ll otherwise just keep adding to your debt for every single thing that comes up that you didn’t plan for.
Once you have your fund, do not touch that money unless you get hit by something and, trust me, you probably will. When something happens, and you’re forced to use some or all of that money, be sure to make it priority #1 to build it right back up again.
As to how big your fund should be, start with no less than $1,000 before paying a penny toward debt beyond minimum monthly payments. Surprisingly, even as little as $1,000 will cover the majority of the unexpected events likely to happen. After you’ve got your $1,000, begin paying down begin to pay down any debts with half of your budgeted free money and continue to grow the emergency fund with the other half. A good target for the emergency fund is three to four month’s living expenses for a double income family and five to six months for a single income family. Once you’ve done this, all available money can then be directed toward debt elimination.
The bottom line? Expect the unexpected. Simple as it may sound, having an emergency fund is one of the smartest things anyone can do.