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Build an Emergency Fund and Avoid Borrowing More Money

By Debt.ca on September 9, 2012 No Comments

If you’ve decided that you’ve had enough of debt and it’s time to get out, you have to make an important first step:

Draw a line in the sand

In the case of getting out of debt, that line is: NO MORE DEBT.

Some people seem to think that they can get out of debt by borrowing more money. You don’t fill in a hole by continuing to dig – you first say ‘no more digging’.

If you’re in a debt spiral and can’t see any way out, committing to not borrowing more money might seem impossible.

The one solution that we’ve seen work time and time again is to create a small emergency fund for yourself.

An emergency fund can start off small. $1,000 is perfect, but even $500 is okay. The idea is that the next time something happens that you haven’t budgeted for, you draw from your emergency fund instead of relying on credit cards, lines of credit, or even payday loans.

Once you’ve done that, you should now focus on refilling the emergency fund for your next emergency.

What’s my emergency fund for?

This is not a ‘cause I feel like it’ fund. An emergency fund is for emergencies. So you’re not using this for the new iPhone, and you’re not using it to buy a birthday present for your wife – you had 12 months to prepare since the last one.

An emergency fund might be for car repairs where if you don’t have a working car you’ll lose your job. If you can take the bus instead, take the bus until you can afford to fix it. It can be for a plumbing emergency or a medical expense. You know, an EMERGENCY.

Why is having an emergency fund so important?

Your emergency fund is your first step to getting out of debt. How great would it feel to actually have money the next time an emergency hits, and not have to worry about interest rates and debt collectors?

It’s empowering to have at least one account that’s always in the black, even if your others are red.

Mostly though, it forces you to change your thinking. No more borrowing means that every single dollar you use to pay off your debt is a dollar closer to being debt-free. It’s not a case of lowering your credit card balance this month, only to have it balloon up again next month.

An emergency fund won’t get you out of debt on its own, but it’s a powerful first step.

Emergency Funds – Advanced Edition

As you progress through paying off debts, you should also focus on increasing your emergency fund. Ideally you want to have 3-6 months’ expenses saved up. That way, if you lose your job, you’ll have a buffer to find a new one.

We’ll cover more on this part of your emergency fund in a later article.

What if I can’t save $500?

Sometimes you’re so far in debt and have so little income that even $500 can look like $1,000,000. If you’re truly at your wits end and believe there’s no way you can scrimp and save even that much, you might need professional help.

While you might seriously be considering bankruptcy, it’s best to explore all your other options first. A debt relief plan can help you organize your debts and come up with a viable plan to paying them off. It’s amazing how great it feels to have a plan and be able to see a light at the end of the tunnel.

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