So you’ve made that very difficult first step and decided it’s time to do something about your debt. Maybe you’ve reached the end of your financial rope. Perhaps you signed up for a money management program, enrolled in a debt relief plan, or maybe you’re doing it all on your own.
You’re excited about the prospect of finally getting your finances on track and starting down the path to achieve this thing called financial freedom that you’ve heard so much about. But before you take the plunge, there’s one prerequisite to getting started.
You need an emergency fund.
This probably isn’t news to you. You have likely heard an earful regarding the importance of an emergency fund from the experts. I’ve been there, and heard the same things.
However, I didn’t listen, and kept thinking that I was pretty good about rolling with whatever life throws at me. I thought I could just adjust my spending when something unexpected came up and I would be fine. I found out the hard way that approach doesn’t work very well.
Let me give you a few examples of why you must have an emergency fund before paying off debt.
A Tight Squeeze During the Holidays
It was right after Thanksgiving, and the holiday shopping season was in full swing. We were feeling pretty proud of ourselves for saving up money to buy presents for the kids and continue to make our monthly payment to our debt management program.
I strolled past the TV during commercial break of a football game into the laundry room and started the washing machine up to wash a load of clothes. Except it didn’t work. It made the most awful of sounds, the agitator refusing to move. We called a repair man who confidently assured us he knew exactly what was wrong. With parts and labor, it was going to cost us close to $200 to have it repaired.
During Christmas shopping season that’s a difficult bill to swallow, especially when you have a debt payment to make on your tight budget.
Unforseen Repairs on the Family Car
With warmer temperatures arriving during Springtime, I rolled down the car windows to get some fresh air as I ran an errand. I heard a squeaking sound coming from the front driver’s side tire that I instantly knew meant my brakes were in need of repair. We didn’t have the $300+ needed for the repair, just laying around, and it was extremely difficult to stretch our budget enough to squeeze out that kind of money all at once.
In both of these instances, we ended up having to borrow money from a family member and pay them back over time. We were already in a lot of debt, and having these two emergency expenses pop up, set us back even further.
These two examples clearly illustrate the importance of having an emergency fund before you begin paying off debt:
- You Can Avoid Crisis Mode: If you don’t have an emergency fund, it puts you into crisis mode every time you have an unexpected expense. Paying off debt is stressful enough, make it just a bit easier on yourself and have a cash reserve built up before devoting your time, energy, and funds to paying off debt.
- You Won’t Kill Your Momentum: If you temporarily divert funds away from your debt payoff efforts, you may lose any momentum you had. Doing so will also make it easier to justify the same circumstances in the future.
- You May Not Have the Money: If you’re using a money management program, or doing it on your own, you may have the funds to divert to an unexpected expense temporarily. However, if you’re enrolled in a debt relief program (like I was), that may not be an option. I had to make my payment each month, or run the risk of getting kicked out of the program by the creditors. My budget was tight, and I didn’t have an emergency fund.
Had I started with an emergency fund, it could have made my debt repayment journey much easier. I might even have been able to contribute a small amount to a savings fund each month, or rebuilding it after I had used it. I can count on one hand how many true emergencies we had during the 55 months we were paying off our credit card debt, but each of them was a full-fledged, five alarm crisis.
If you’re thinking about diving into an intense program to pay off your debt, do yourself a favor and learn from my mistake. Take the first step, open a new savings account and start building up an emergency fund before making the next steps in your debt pay off plan.
Are you in the process of paying off debt but don’t have an emergency fund? What’s your best tip for jump starting an emergency savings plan?