In the beginning of our debt-free journey, my wife and I stuck to the Dave Ramsey Baby Step Number One of having $1,000 emergency fund before we started paying off any of our debts. As Dave would say, this is where we are Dave-“ish” because we believe there are many ways to achieve the same goal. The ideas are the same, but the changes are subtle.
We found that many of the possibilities, and actual things that came up, during starting out nearly, if not entirely, wiped out our small $1,000 emergency fund. Now we are talking emergencies here, like losing your job which happened. So we modified our plan to include one month of expenses in our emergency fund. for us, this came out to be about $4,000.
So How Do I Establish My Emergency Fund?
Wow, am I glad you asked that. Well, getting the initial fund in place is the most difficult part. The key to this is developing a detailed monthly budget. This involves figuring out how much money you have coming in every month and how much your total expenses are every month, including your minimum payments on your debts. Whatever money you have leftover, no matter how little it is, put it into a separate bank account. Do not intermingle it with your checking or savings accounts. You will just end up using it for other things. Once this account reaches one month of expenses, you are ready to go.
After this, you will use this account to pay your bills every month.
How Do I Maintain My Emergency Fund?
Another great question! Let’s say you, for the sake of calculation, that you get two paychecks per month. With our emergency fund requirement of $4,000, we would divide $4,000 by 2 (our number of paychecks per month) and come up with $2,000. So we would have to take $2,000 out of each check and put it into our emergency fund every month. The cycle then continues on and on and on. Keep it going!
Always Stay One Month Ahead!
The idea here is to always stay one month ahead. We are trying to break the cycle of living paycheck to paycheck where you get paid in the beginning of the month, pay some of your bills and then struggle until your next paycheck. We all know how much this lifestyle stinks. When you have a cushion, you have a little more air in your lungs and Murphy (from Murphy’s Law) can move over.
Keep It Fluid!
Budgeting is an art. Some months it is consistent and some months it is drastically different. You will need to anticipate things that are coming up and know that things will change. The more you do it, the better you will get at it. Don’t worry if you get frustrated with budgeting in the beginning, it is one of the most difficult things you will have to do. Keep at it and stick to your budget, but make it realistic!
– You can do it, we believe in you!