Setting up the emergency fund...

When you are making a plan to start getting out of debt and making better choices with your money, it is hard to know where to start. I remember when John and I were at our lowest point we were taking back bottles and cans, selling used books, putting things on Craigslist, and taking whatever odd jobs we could get to make ends meet. Luckily, we weren't using much credit during our relationship, but the overwhelming burden of our past debt, my student loan payments, and just day-to-day expenses was just too much to handle. I didn't want to keep living like we were, but I didn't see any way to get ahead. If we were barely able to make our minimum payments and survive, how would we ever get out of debt, let alone move ahead and buy a home and be financially secure?!?

Dave Ramsey calls each step in his plan, "Baby Steps", and his first baby step is to establish a $1000 emergency fund. Immediately. Like within a month. While that may seem overwhelming to some people (i9t was for me!) it is totally doable. Let me start by explaining why this first step is crucial to beginning the process...

1) By establishing an emergency fund that is substantial enough to cover most emergencies, you are eliminating your need to use your credit cards to bail you out. Most people have at least one credit card for an "emergency" like car repairs, medical expenses, dealing with an unforeseen event, or whatever "Murphy" throws at you. Dave has a simple solution to that: prepare for something to happen!! Have the money in a savings account just waiting for that emergency! I explained in a previous post that John and i were able to use our emergency fund to take care of replacing my car when it died, and what would have been a HUGE financial crisis for us turned into an inconvenience when we had to drain our account that we worked so hard to build. But the important thing is that the money was there.

2) By building the emergency fund quickly, you are forced to work overtime (literally and figuratively) to get the money together. You will figure out where you can scrape together a few dollars here, where you can save a few dollars there, and how you can earn some extra money at work or by getting a part-time job. At the end of the month, you will stand back and look at all that you accomplished financially and say, "hey, that wasn't so hard after all!" It's forcing you to dive headfirst into the financial peace journey. This new mentality and focus will help you get started on the second baby step...your debt snowball!

3) The process of building this safety net, and the peace it brings you and your spouse, pays off exponentially in your marriage. All of the sudden you are both focused on the same clear goal, and you begin to talk openly about what may have been a touchy subject to discuss. No longer are you arguing (or not talking about) which bill to pay first, what to spend the bonus on, when to save and when to splurge; finally you are both on the same page and aiming toward something positive that is proven to work! Let Dave be the mediator :) Once John and I started this baby step, our great relationship got even greater, and the stress that we were both feeling about our finances started to slip away. This is when we knew that we were on the right path, and things were looking up...we could do this!

So there are three very important reasons why this is the right first step in the journey. So how did John and I do it on a very limited income?

1) Well, the first step was to look in our cupboards and realize that we had enough food in there to eat on for quite some time. We are total foodies so we were really kidding ourselves by how much we were spending on groceries! (I will have a great post about how to save on groceries in the future, I promise!) We got creative and were able to make do on what we had, which was a lot of pasta, chicken, and sandwiches! Remember, it's only a month!

2) Second, we only paid the minimum on our debts that month, because the priority this month is to build that emergency fund.

3) Gulp, we also toned down some of our spending. The cable TV? Gotta go...Entertainment subscriptions...also gotta go. Turn off or cancel whatever you can to eliminate or reduce your monthly payments. Again, remember its only for a month. These things can be revisited after the month is over during the budgeting step!

4) Figure out a way to make some extra cash...that might mean getting a part-time job, having a garage sale, selling a few things on Craigslist, or just doing some odd jobs for a neighbor or working overtime at work. Anything to bring in a few extra dollars. Dave says, "Sell so much that the kids think they are next!!" You would be surprised about how much money is lying around in unused stuff that could be sold or how much your time is worth making money from a hobby or with some extra hours at work.

5) I'm not sure if Dave addressed this, but I liked having all of that money I was saving that first month in cash on my dresser! It was a visual of how much we were saving and how hard we were working. It motivated me to go to work a little early and stay a little late. I was suddenly seeing every piece of furniture and every article of clothing with a dollar sign on it!! I wanted to sell everything because it was so freeing emotionally and so rewarding to see the cold hard cash piling up.

So if the first step has been holding you back, I dare you to try this. Even if this is the only step you take toward financial freedom. But I can give you my guarantee, that after this month, after you will have seen just how disciplined you can be, you will be motivated to take the next step. So join me in my next post about setting up a household budget!!

Sarah