5 Simple Steps to Making Your “Get Out Of Debt” Resolution Stick - Part 5
January 14, 2009
Welcome back to the final step in my 5-step process for making your New Year’s resolution to get out of debt successful. Hopefully you’ve been taking action on each step as you’ve been following along. If you haven’t, or you’re joining us in the middle of the series, I will include links to all the other parts at the end of this post.
In this final step, we’re going to look at how you can stop unexpected expenses from messing up your plan for getting out of debt. Let’s get started…
What is that old saying?
“The best-laid plans of mice and men often go awry.”
In other words, no matter how well you plan something, things will happen that mess up your plan. This is no different with your get-out-of-debt plan. In fact, you’re almost guaranteed to hit some bumps in the road on the way to being debt free.
You have your monthly budget worked out, you know how much you can put towards your debt and you’re on your way to paying it all off. Then suddenly your car needs service, your dishwasher breaks down or you have a medical emergency you have to pay for.
Suddenly all your effort seems to be wasted, and you’re moving backwards again.
Unexpected expenses are bound to come up during your debt plan, so what do you do to keep from getting off track?
You need an emergency fund. Money that you have saved up for these expenses, so you don’t have to stop repaying your debt - or worse, add more debt to cover the costs.
How much of an emergency fund you should have depends on several factors:
- How much you can save, how quickly
- What kind of expenses you could be faced with
- How much you already have saved
There are two schools of thought on emergency funds.
- Save a set amount just for unexpected expenses, say $1000
- Save 3 to 6 months living expenses, in case you find yourself suddenly unemployed
Saving several months worth of living expenses is the ideal emergency fund, but for most people that’s just not possible in a reasonable time-frame. I recommend setting a goal of $1000-$1500 which is enough to cover most expenses that could pop up.
This will give you a buffer so when something does come up, you’re not going to be faced with having to charge it, running your debt back up again.
Should you save this money before you start putting your get-out-of-debt plan into action? It’s a good idea, so you know you have a safety net if something comes up.
But if you have a reasonable amount to put toward your debt every month, say $500 or more, you could split that between your emergency fund savings and paying off debt. The key is to get your emergency fund up to the $1000 mark as quickly as possible.
This is the end of the 5-step process. Let’s just quickly review the 5 steps (the first four are linked to the original posts if you want the full details):
- Create a get-out-of-debt plan
- Take inventory of your debt
- Eliminate expenses to free up money for debt repayment
- Prioritize and start paying off your debt
- Set up an emergency fund
If you put these 5 steps into action, I guarantee you’ll have your debt paid off faster than if you just randomly attack it with no specific plan.
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