Monday, August 23, 2010

Start an Emergency Fund

"Gradually build a financial reserve, and use it for emergencies only.
If you save a little money regularly,
you will be surprised how much accumulates over time."

(All is Safely Gathered in: Family Finances booklet)

What was the last unexpected expense you had? Was it big? Was it little? Did it stress you out? Or did it roll off your back?

We women can become so anxious to pay off debt that we often jump the gun and start throwing all extra money to creditors. But what happens when there is an unexpected emergency? The car breaks down? The kids get sick and need to see the doctor? One of the kids jumps on the trampoline and accidentally embeds his teeth into his knee cap making his gums swell faster than Violet Beauregarde? (Told you not to jump on the trampoline during General Conference, little brother.)

When an unexpected expense comes up, some people resort to credit cards. And if this happens when you are in the middle of paying down debt, it is disheartening. Wheels are spinning, but you aren't getting anywhere.

But what if you had a financial reserve stashed somewhere for emergencies? The kids get sick, and you've got the money for the doctor visit. Debt avoided! The car tire blows, and you've got money for a new tire. Debt avoided!

An emergency fund is the second most important step in creating a financially peaceful future. It is your armor against accruing new debt which makes it easier to pay off debt. How's that for peace?

President Gordon B. Hinckley taught: “Set your houses in order. If you have paid your debts, if you have a reserve, even though it be small, then should storms howl about your head, you will have shelter for your wives and children and peace in your hearts.” ("To the Boys and to the Men," Ensign, Nov. 1998, 54)

How much you should you put aside? We're going to start a beginner emergency fund of $1000. If you make $20K or less, aim for $500. After you accrue your beginner emergency fund, you will then (and only then) throw your extra money toward debt pay off. Until then, you will be paying the minimum payments. Remember when I mentioned that in the budgeting series?

"Yes, and I still think you're crazy."

Well, yes, but that's neither here nor there.

"How the heck do I come across $1000??"
I'll tell you on Wednesday.

"Why so much toward savings?"
To cover for most of the little bumps that come along. So, you will not put the unexpected on loans or on credit and end up paying the price plus interest. Who the heck wants to pay $68 for a $60 tire? That's what putting it on credit is like.

"Why so little?"
I want you to create a little padding between you and the unexpected but not have you spend so much time on this step that you never get to the accelerated debt-reduction step.

"I had $1,000 saved up, I was paying off debt, and then my lawnmower sent a rock flying through my living room window*. It cost $250 to replace it! What now??"
HOORAY! Isn't it nice to not have the stress of a broken window plus the stress of how to pay for it? Isn't it great that you didn't have to put it on a credit card? HOORAY again! Go back to paying minimum payments on your debts and throw any monthly extra money into your savings account until it again hits the $1,000-mark. Once you get there, go back to throwing your extra money toward your smallest debt. (*"Car windshield" was changed to "living room window" to protect my husband's identity.)

"I already have $1,000 in savings."
Awesome! Then, you can commence with your debt paydown! (At this point, when I mention debt, I am referring to debt NOT including the mortgage.)

"I have more than $1,000 in an emergency savings."
If you have debt, take the excess over $1,000 and use it to pay off your smallest debt.

If you have no debt, go ahead and keep growing your emergency savings until you have the equivalent of 3-6 months' of expenses.

L. Tom Perry suggested, "One of the better ways to simplify our lives is to follow the counsel we have so often received to live within our income, stay out of debt, and save for a rainy day." (“Let Him Do It with Simplicity,” Liahona, Nov 2008, 7–10)

Your mission, should you choose to accept it, is to have your beginning savings completed in 1-3 months.

"WHAT?? $1,000 (or $500) is a LOT of money!"

Yes, it is.

See you Wednesday!

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