Welcome to Part Five of a 6-part series I’m doing on personal loans, credit card debt, and refinancing – the Payoff Series. If you’re new here, go back and check out Part One, Part Two, Part Three, and Part Four!
If you follow our Twitter, then you know I recently spent several hours getting some unexpected, but necessary, car repairs (boo) AND then I moved in with my boyfriend this month (yay). While it’s obviously important to maintain my car and moving in together will eventually be cheaper for me, these were two big purchases that I hadn’t planned for at the moment. This is why you need an emergency fund to handle a financial emergency.
56% of people in the United States don’t have a rainy day fund that would cover 3 months of expenses.
It’s no surprise that when life presents an emergency, it threatens your financial well-being and causes stress. If you’re living without a safety net, you’re living on the “financial” edge—hoping to get by without running into a crisis.
Being prepared with an emergency fund gives you confidence that you can tackle any of life’s unexpected events (i.e. financial emergency that tends to cost $$$) without adding money worries to your list.
Saving money isn’t always easy, but it’s likely to be less painful than the alternatives. A study found that many of the people surveyed currently or recently:
- Had unpaid medical bills: 26%.
- Overdrew their checking account: 22%.
- Took a loan from their retirement account: 14%.
- Took a hardship withdrawal from their retirement account: 10%.
- Had more than one late mortgage payment: 13%.
- Filed for bankruptcy: 3.5%.
Source: FINRA Investor Education Foundation National Financial Capability Study, 2012.
During my payoff journey, I’ve been utilizing Dave Ramsey’s 7 Baby Steps, number 1 of which is to always have $1000 on hand for emergencies. Now, you eventually go on to save for a full emergency fund after you’ve paid off your debt, but during the gazelle-intense portion – you atleast have this $1k barrier.
Because of the baby emergency fund, I was able to pay for all of my car’s maintenance without even thinking about it, AND I didn’t have to put anything on the credit card – you know, the thing I’m paying off. It was a huge relief already having the funds to fix my car, especially since that money came out of my savings account and didn’t effect my budget at all.
The setback comes from having to refill my baby emergency fund now that I all but depleted it. Because of this, I’m postponing making two extra credit card payments (which moves my ultimate payoff date back two months). As much as I’d like to pay off the debt earlier, I’m happier knowing that I’ll have my emergency fund back soon…ready for the next unexpected cost.
This brings me to this month! After apartment hunting for a few weeks, my SO and I decided on an apartment and put in an application. Unfortunately, this means we’re both paying double rent for a few weeks (due to overlapping leases). Since I’d depleted most of my emergency fund, this expense took a little budget wizardry, but I was still able to cover the cost without using the credit card. Again, I attribute the emergency fund and wiggle room I’ve built into my budget for being able to do this. The fund really is a lifesaver.
Having an adequate emergency fund is as important as building your house on solid ground. By maintaining such a fund, a financial emergency can be quickly absorbed without compounding the problem by adding debt to the equation. Creating an emergency fund is one of the biggest components to having financial peace of mind and increasing your chances of reaching your long-term financial goals. Now, I’m off to go rebuild my emergency fund before I start paying off the credit card again!
Have you experienced a financial emergency or setback that postponed your debt repayment plans?
In Part Six, I’ll be talking about what it’s like to spend two years paying off debt. That’s right, Part Six will be my final post about this credit card payoff journey!