06 August 2014

Building Your Emergency Fund Part 2: Being Prepared is Always More Pleasant Than Being Caught Short


Paying down debt is important. Building your emergency fund is more important.

Now before you roll your eyes and think I don't know what I'm talking about stop. Read the rest of today's post and remember: I've been there. I've been broke. I've conquered debt. I do know what I'm talking about. Then you can decide whether you want to tackle your debt the way I did or find another way that will suit you better.

When you put all your spare cash into a debt payment push you have no buffer, no safety net, for when things go wrong. And go wrong they will.

For example if you are putting everything into paying off debt and the fridge blows up, that's not so bad. Sure, you'll need to resort to credit to repair or replace the fridge, but that's only a relatively small amount of money. You can use your credit card or get a loan. You'll have increased your debt load, and put that emergency fund back a couple of years, and you'll be paying interest on the loan, but you'll have your fridge.

Think though, about what would happen if you have all your money going towards paying off debt and Disaster Strikes. You have debts, including a mortgage, that you have been paying down quickly.  Then you lose your job. Your spouse or partner loses their job. The house is half-torn down so you can renovate. You already have a couple of kids. And then you find out you're expecting a third. And you have no money in the bank, no savings to fall back on, because you've been paying extra on those debts.

You are always wiser to focus on building even a small emergency fund, even if it is just one month's living expenses, because that scenario isn't fictitious, it's real. It happened to us. And it is a horrible place to be.

Without your emergency fund you won't be able to pay those debts, and they'll still need to be paid; even if you are ahead you will still have minimum monthly repayments to make. You won't be able to pay the mortgage or the rent. You won't be able to buy food, pay the electricity bill, keep your mobile phone or even buy medicines for your sick baby.

You will be forced to go into even more debt, which will cost you more in interest and keep you on the debt cycle even longer.

Always build your emergency fund, while working on your debt payment push. When your emergency fund is fully funded you can then add the money you have been putting towards building it to your debt payment push and watch those debts disappear fast.



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1 comment:

  1. Great advice. I saved for a big trip using all your tips and am now packing up a house using our emergency fund and was considering doubling my debt pay off just to be free of it. I will now re build up our emergency fund up first.

    ReplyDelete

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