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Debt Elimination Step 5: The Importance of the Emergency Fund

By Erik Folgate

This is the last step to eliminating your debt.  If you have followed the first four steps, then you are already debt free.  But how can you STAY debt free?  The same concept of losing weight and KEEPING the weight off applies to getting and staying debt free.  You must change your habits.  It does you no good to lose 50lbs if you are going to stop working out and eating right as soon as you lose the pounds.  The pounds will be back sooner than you lost them! 

In the same way, your debt will be back faster than it was paid off if you do not change the way you shop, think, and handle money.  The best way to stop the cycle of going into debt every time something goes wrong is by starting an emergency fund.  The emergency fund should be 3 to 6 months worth of expenses.  So if you can live off of $2,000 per month, then I would put 8,000 – 10,000 away in the bank. 

If you do this, then you will never freak out if you lose your job, your car breaks down, or you have an unexpected medical expense.  One of the most common financial statements that flies around our society is that everyone should have a credit card for emergenices.  How about having a money market account with a debit card?  Why is that so weird?  You don’t need a credit card for emergencies.  In fact, swimming in credit card debt is more of an emergency then your car breaking down. 

 

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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