I know I have talked and written a lot about the importance of debt reduction. It is exceptionally important, but you know what is equally important? An emergency fund. The number one thing every person should have is an emergency fund. If you don’t, starting one should come before any significant debt reduction. That’s right, BEFORE, debt reduction.
Like it or not, the unexpected will and often does happen. Car repairs, medical bills, the loss of a job, appliance repairs or replacements are often unpleasant surprises. Having an emergency fund in place is essential for anyone who doesn’t want to derail their finances and go further into debt. It will protect against these unexpected expenses, large and small, that invariably happen at some point.
So how do you start your emergency fund and how big should it be? Begin by saving emergency money equivalent to one month’s living expenses, before paying a penny toward debt beyond minimum monthly payments. Just one month’s money will usually cover the majority of unexpected events. After this initial emergency fund money is accumulated, THEN you can begin to pay down debts with half of your budgeted free money and continue to grow the emergency fund with the other half. A good target for the emergency fund is three to four month’s living expenses for a double income family and five to six months for a single income family. Once this is established, all available money can be directed toward debt elimination.
Expect the unexpected. Saving for an emergency fund is one of the smartest things anyone can do.
