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Cash Tip 4 from Cam: Walk before You Run

February 8, 2007

After all this talk about budgeting and debt, one might ask what the first step would be to get out of debt.  While the obvious answer would be to start paying off your debt immediately by putting as much extra towards it as possible/available, there is a step that should be considered before throwing extra funds on debt.

It is what I will call “Creating a quick emergency fund.”  The idea here is to set up a quick net of reserves to help keep you from turning to debt when some emergency hits.  (Emergency is defined as something bad that happens that you could not have foreseen.)  The amount you should save is $1000 and it should be kept away from the rest of your finances and liquid (so don’t invest it and try to make money from it).

What this does is let you attack your debt with more confidence than if you were to not have a small net to fall back on.  It also will help you keep from taking on new debt to pay for the emergencies that will come.

So what happens when an emergency strikes and you have to dip into this fund?  Use it to pay for the emergency and place a hold on paying extra to debt until you have the fund back to $1000.

I don’t really have any stories from my life to illustrate this.  I had approx $1000 in an “emergency fund” that I had set up for myself before even becoming acquainted with this process.  I guess it just helped me jumpstart into the debt-payment step (which is step 2) right away, and not have to worry about the quick e-fund saving step 1.

Do any of my readers have comments on this idea?  Do you think it is good? Am I totally off base with my suggestions? Post your thoughts.

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