My next five posts will be a five step process for getting and staying out of debt. I am trying to follow this process right now, and I am currently still in involved in steps 2,3, and 4. Here are the five steps to getting out of debt and staying out of debt.
1. Save $1,000 for a small emergency fund
2. List your Debts Smallest to Largest and attack one debt at a time.
3. Get on a written budget.
4. Find creative ways to boost your income.
5. Create an emergency fund of 3 to 6 months worth of expenses.
The first step is saving up a $1,000 as fast as you can. Once you have done this, you are ready to start attacking your debt. The reason for saving a $1,000 before you start reducing your debt is because of Murphy’s Law. If the worst can happen, it usually will happen. It is impossible to get the ball rolling with reducing your debt if you keep having to use your credit cards to pay for car repairs and other emergencies. No, buying new clothes is not an emergency! You may have to save $2,000 if you have kids or large bills. The point is that you need to have some cash in the bank to pay for emergencies so that you are breaking the cycle of paying for unexpected expenses with debt. If you have to dip into the emergency fund, then stop your debt reduction plan, and rebuild your emergency fund.
Next Step: The Debt Elimination Plan