This is a guest post by FWP. FWP from the Financial Wellness Project shares her stories, lessons, and progress reports as she attempts to get a handle on her finances and make sense of money while still living a ‘rich’, enjoyable life. Please consider visiting and subscribing to the Financial Wellness Project and share in her endeavors. She writes several times a week from the San Francisco bay area, in California.
This article is part of her ‘Friday Cures.. for a lean purse!’ series.
I have been reading Dave Ramsey’s famous book, The Total Money Makeover. Being part of the personal finance blogging community, it is difficult to not have been exposed to the famed debt snowball concept. The idea piqued my interest, thereby prompting me to go out and borrow a copy of his book from the local public library.
In the book, Ramsey discusses his ‘baby steps‘, where he lists 7 steps for achieving freedom from debt. Over the course of this series, let’s visit each step and evaluate how it pertains to our lives . I hope that you too might find this exercise enlightening and useful.
Today, we visit step #1:
Huzzah! I currently have about $1300 in my emergency fund, an FNBO Direct online savings account opened this past summer. (I am actually in the process of moving this money along with a few hundred dollars to a new EverBank account, due to a higher interest rate there.)
Why Should I do Such a Thing?
Before I began, I was skeptical and a bit confused. I had several thousands of dollars in consumer debt, about $7000 at the time. Interest was accruing on whatever was still sitting around at a high 16%. Could I really afford to NOT be putting in as much ‘spare change’ as possible towards my debt payments, rather than hoarding a bit aside (for very little interest rate anyway) ? Did this really make any sense?
Online, a fellow PF blogger had put aside $1000 to put his mind at ease. Apparently he had learned the lesson the hard way. He initially had not, and then suddenly encountered car problems and as a result, immense car expenses. He did not have the funds for this, and so went further into debt, borrowing money for those new expenses. This reaction disrupted his debt-paying rhythm, and troubled him tremendously. In retrospect, he decided that he should have put aside some emergency money, and that he would set aside at least $1000 to avoid such a setback in the future.
This scenario pretty much reflects Ramsey’s reasoning. He mentions also that some become discouraged from moving forward with their ‘total money makeover’ from encountering such a potentially stressful situation.
What About if I Don’t Have $1000?
Put aside as much as you can today, even if it’s $500. It is imperative that you make building your emergency fund a top financial priority.
Where Could I Store This Emergency Fund?
Ramsey recommends opening up a regular savings account for this purpose. Do not set up an account that will impose a penalty for dipping into the fund, such as a certificate of deposit (CD). We want to be able to access that money when we need to.
Furthermore, he suggests that we put it aside in an account that is NOT linked up to any of our checking accounts. It would make it too easy and tempting for us to falter and transfer funds for supposed ‘emergencies’ from the savings account to the checking.
Pros & Cons
I can see the advantages of this ‘baby step’:
- I feel better knowing that i have some money — no matter how seemingly small — set aside that is liquid/easy to access, available to me in case of emergencies.
- I would not incur any fees/penalty with the right set up (i.e. not putting funds in a CD) in case of needing to withdraw those emergency funds.
- As long as an emergency didn’t cost me greater than $1000, I may be able to continue to make at least my minimum monthly debt payments without too much disruption, while slowly rebuilding the depleted funds.
Basically, I would feel a little more secure, knowing that I have some sort of backup just in case.
The main disadvantage, of course, is that that $1000 could be helping me to lower my future debt payments, by lowering the balance that the interest is applied to monthly. Using the money in this case instead would help me get closer to reaching $0 in debt.
However, I need to choose one set up or the other. After rationalizing and also consulting my emotions, the cost of not using the funds for a chunk of debt payment may well be worth the price of not having subconscious anxieties about a lack of backup resources.
- You can learn more about building a savings account
- Check out the latest great interest rates on savings accounts in your area
- A savings calculator to determine when you might reach a particular goal
- Learn about paying yourself first
- Learn how to watch your expenditures in order to save
How about you? Have you been putting aside money for an emergency fund of your own? If so, how have you been doing? If not, why not? What are your thoughts on this baby step?
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.