Let’s think about this for a moment. Building and maintaining an emergency fund is one of the most important decisions you will make in your adult life. But some feel your emergency fund should be a credit card. This may sound good in theory, but the last thing you want to do when you’re struggling financially is add more debt to your existing problems.
The best thing to do is to use cash. That is why I and many other financial advisors teach having three to six months of your income or your expenses saved, whichever is greater. Having this fund in cash frees you from paying it back later and keeps you from going “deeper into debt when you have an emergency” Once you pay for an emergency, you’ve fixed your problem. Using a credit card only moves the form of the problem and prolongs paying for the problem.
Using cash for emergencies is a smart choice because it prevents you from accruing debt and interest charges. Additionally, it helps avoid overspending since you are limited to the cash you have on hand. Having a dedicated bank account for emergencies can help you avoid financial stress and improve your overall financial health. This fund is a great way to ensure you are financially prepared for unexpected situations. For instance, it can help cover medical bills, car repairs, or job loss without relying on credit cards or loans.
Here is an example. Cars break! And they don’t break on schedule. It is always an unexpected event and usually needs immediate attention. This is what happened. I typically do not drive with my windows open. If it is hot, I turn the air conditioner on. But, while on Active Duty, I’d have to roll my window down to show the guard my identification. On this particular day, when I rolled the window down, I heard a crunching sound, and the window did not move. The more I pressed the window down, the more the crunching worsened. I had no idea what happened. It turned the motor died and cracked the bottom of the window. Since it was not an accident, the insurance did not cover it. The cost to fix it was about $990. At this point in our lives, I was still paying off debt and only had my beginner emergency fund in my account. Besides the initial worry and shock about the car breaking, I paid for the repair. If I had paid for the repair with a credit card, the car would have been fixed, but I’d still have to pay the card bill when it arrived.
Having a credit card as your emergency fund is not a reliable option. They come with high-interest rates that can quickly accumulate, especially if you cannot pay back the balance in full. Relying on a credit card can lead to a false sense of security, causing you to neglect saving for emergencies. Having a separate account designated for emergencies is essential, so you can have peace of mind knowing that you have a financial cushion to fall back on.
Building and maintaining an emergency fund should be a top priority for everyone. While credit cards may seem like a quick and easy solution, there are more options to pay for emergencies. It is better to be prepared and have a dedicated emergency fund to ensure financial stability during tough times.
5 Tips to Start Building Your Emergency Fund
Set a goal. Determine how much you want to save for emergencies and set a timeline to reach your goal.
Create a budget. Identify areas where you can cut back on expenses and redirect those funds toward your emergency fund.
Automate your savings. Set up automatic transfers from your checking account to your emergency fund to make saving easier and more consistent.
Start small. It is recommended that you save $1000 as a starter emergency fund, especially while you are getting out of debt. If that seems too heavy, start with $500. The point is to start saving. Saving a small amount each month can add up over time and help you build your emergency fund.
Avoid temptation. Keep your emergency fund separate from your regular checking and savings accounts to prevent the temptation to dip into it for non-emergency expenses.
I have heard it said that debt can be a helpful tool for reaching your financial goals, but if you are not careful, it can also be a trap that can ruin your finances. So if you are going to use debt, the key is to use debt wisely and avoid taking on more debt than you can afford.
While I do not advise its use, here is a story from someone who has experienced the dangers of debt firsthand:
I was living well beyond my means. Making ends meet by supplementing my Income with credit cards. My paycheck was only enough to satisfy some of my basic needs. But our wants were way out of reach. I called around, trying to see if I could find someone or some way to help my situation. But to my dismay, there was nothing to assist. I’d gotten the credit card because there’d been a couple of errors in my paycheck, and II needed to be able to feed my family and pay my bills. But eventually, I was in over my head. I finally got a few of my creditors on the phone, who were more than happy to help me. “We will just put your payment on hold for this month and increase your credit limit, Mr. Stokes. We’ll take care of you.” Unfortunately, my paycheck was not entirely fixed as time passed, and I was again at their mercy. Their desire to take care of me had wavered the more I maxed out my debt usage. I had managed to dig a hole so deep that I saw no way out of it.”
I’m pretty sure that this story is not one-of-a-kind; if you listen to Dave Ramsey’s, Suze Orman’s, or any of the many other Money shows, you’ve heard countless phone calls from people struggling with debt. But isn’t debt supposed to be a helpful tool to use? While it helped me in the short term, by the time my paycheck issues were corrected, I didn’t see that helpfulness translated in the billing statement. I still had to pay it all back.
When I realized I was in trouble, I could not stop the fallout. I wouldn’t necessarily say that I hit rock bottom. But I was struggling to focus at work. I had no time for my family because I’d taken on multiple jobs, and my marriage was in trouble. Realizing my situation helped me seek the help I needed to climb out of my hole. But, I feel it was a lesson that I needed to learn. I learned that the less debt I had, the more opportunities I had.
“Here are a few things that I learned from my experience with debt:
Debt can be a trap that can ruin your financial opportunities.
If the debt can be avoided, Avoid it. It’s important to use debt wisely and move forward with a plan of action to pay it off as soon as possible.
If you’re struggling with debt, don’t hesitate to seek help from a qualified financial professional.”
So now, I had two conflicting conversations going on in my head. One tells me that debt is an excellent tool to get ahead because you need money to make money; yet another conversation says to avoid debt. “Debt is Good!” “Debt is bad!” “Good Debt, “Bad Debt,” the advice is frustrating, confusing, and honestly, all seems like a bunch of noise! Amidst the noise, however, there is a voice that you should listen to to help you get your financial house in order. Yours!
I read one book that said debt is necessary to create a nest egg for retirement. The author argued that leveraged debt is the only way to accrue enough of a nest egg. But I also read another book where the expert said to steer clear from debt at all costs. Here is the truth of it. You determine your own financial journey. Your level of debt, how much money you have or choose to invest, is all a matter of the goals you set for yourself, the risk you are willing to take, and your current financial situation. Based on that, you determine which “expert” is worth your time and attention.
The debate over debt has been raging for years. Some people believe that debt is a necessary evil or a means to an end, while others believe that it is a trap that can ruin any future opportunity you may have. The truth is, debt just is. It can have good and bad uses, but those uses depend on you.
Good Debt
Some experts say some types of debt can actually be beneficial. For example, a mortgage can help you build equity in your home, and student loans can help you get an education that will lead to a higher-paying job. In these cases, the debt is an investment in your future and can help you save money in the long run.
Bad Debt
Bad debt, on the other hand, is a type of debt that is best avoided. For example, credit card debt can be costly and quickly spiral out of control if you’re not careful. Similarly, payday loans and other high-interest loans can trap you in a cycle of debt that can be difficult to escape.
How to Decide
Let me first say you can definitely operate in life without the use of debt. You can purchase a car and not have a car note. You can pay cash for a house and need a credit card! Paying with cash or a debit card for these things is 100% possible. It simply requires patience, time, and a plan. But how do you decide whether or not a debt is right for you? It depends on several factors, including your financial goals, risk tolerance, and current financial situation. If you are like me, you may decide the less debt, the better!
If you’re saving for a major purchase, such as a house or a car (even though you can purchase with cash), debt may be a necessary evil. However, it’s crucial to ensure that the monthly payments can easily fit into your budget and that you plan to pay them off quickly. If you have a plan before taking out debt, managing it becomes easier. Just do not deviate from your plan.
If you’re taking out debt to pay for everyday expenses, such as food or gas, it’s probably a sign that you’re living beyond your means. In this case, it’s best to cut back on your expenses and save up for these items before buying them. (Call me, and I’ll help you devise a plan!)
Who to Listen To
The advice out there varies, as do the professionals giving it. When it comes to debt, it’s essential to get advice from someone that will help you assess your financial situation and guide you toward making a decision that will keep you on track to reaching your financial goals.
It’s also important to remember that there is no one-size-fits-all answer. This is why your goals, budget, and lifestyle are the sole factors that must be addressed when deciding. What works for one person may not work for another and may not be the best fit for you. How you choose to use (or handle), debt depends on the goals you have for your finances and the lifestyle that you are trying to achieve.
If you are struggling with debt, going further into debt is a decision you must consider very carefully or, if possible, avoid. You may want to put some things on hold while you get control of your finances. However, not doing so could place you in a situation that will be difficult to turn around. And that can cost you years of financial investment opportunities while you repair the financial damage.
All of the advisers agree that debt is something you don’t want to keep around for too long. It needs to be managed efficiently and effectively. Even though its use can be a helpful tool for reaching some of your financial goals, it can also be a trap that can negatively impact your finances. It is a double-edged sword. The key is to be smart. Don’t use debt frivolously, and avoid taking on more debt than you can manage. If it can be avoided altogether, that’s okay too.
If you’re considering taking on debt, be sure that you fully understand the terms of its use. Make sure you can afford the monthly payments and that you’ll be able to pay off the debt in a reasonable amount of time. It may be beneficial to put some time between you and the decision to take out the debt. I use a three-day window for sitting on any big purchase decision. And if you’re already struggling with debt, don’t hesitate to seek help from a qualified financial professional to help get you back on track. With some planning and effort, you can build an economic future and determine whether debt is good or bad.
**Are you looking for someone to talk to about debt reduction… Talk to me
Here are some free tips on How to get your financial house in order:
Make a budget and stick to it.
Pay off your debt from smallest to largest.
Cut back on your expenses.
Increase your income.
Get help from a financial advisor.
“Getting out of debt takes time and effort, but it’s possible. With a little planning and discipline, you can achieve your financial goals and build a secure financial future”.
When it comes to budgeting, you often hear me say, “A budget is you telling your money what you want it to do.” It is a plan for how you will spend your money each month. It can help you track your income and expenses, save money, and reach your financial goals. It is a dictator of the movement for your money.
While there are many different ways to create a budget, the simplest way is generally the one that works best. The most important thing is to find a method that works for you and can stick to it. I like a good spreadsheet; that is how I create and maneuver through my budget. However, as Helaine Olen and Harold Pollack say in their book “The Index Card: Why personal finance doesn’t Have to be Complicated,” if your budget is longer than a 3×5 index card, it is too complicated.
To start, take out a sheet of paper (or an index card), and write a list of your bills, debts, expenses, total balances, and minimum payments. When that’s accomplished, write down your take-home income at the very top of your page.
Here is where the spreadsheet comes in handy, go down the list subtracting the payment amount from your income until you have no income left. If you have income and nothing else to pay, congratulations, you have a surplus. However, if there are more bills and no more money, someone doesn’t get paid!
Now, if you are in the latter category, there is an order to pay for things. So there is no need to worry about how to prioritize.
First, take care of your four walls. Your four walls include Rent/mortgage, transportation, utilities, and food. As long as you pay these, you have room to breathe!
Second, list your debts in order of total balance from smallest to largest. Then go down the list, paying the minimum balance on everything.
Third, do you have any bills left? Pay them. Do you have money left? Put it all on your smallest debt.
Rinse and repeat. Every month!
Give yourself a couple of months to see where you need to make adjustments. Here are some tips for moving forward:
Put aside $500-$1000 as soon as possible. If you have a surplus, put some space between you and a bad day. If your goal is to get and stay out of debt, having this baby emergency fund is the key to handling the little things that pop up unexpectedly.
Some would argue this suggestion, stating you should have a credit card for this purpose, but trust me, as part of your budget, you want to set aside $500-$1000 in cash for the unexpected. The last thing you want when you are going through a difficult time is to increase your stress with debt.
2. Be patient with yourself. You will not get it right the first time! It doesn’t matter if you are new to budgeting or if you are a pro at it. Don’t expect to get it right immediately. Take note of what didn’t work, fix it, and try again next month.
2. Do not overspend. When unexpected things come up, you cannot spend money you do not have. At the end of the day, money in must equal money out. If something comes up and you do not have your “baby emergency” fund in place, you must take mine from another category on your list. Do not use your credit card as a surplus income!
3. Set a budget goal. This could be saving for a down payment on a house, retirement, or vacation. Or paying off a particular debt. Once you achieve your goal, reward yourself before moving to the next goal. This will keep you focused and moving forward.
4. Stick to the plan. One of the biggest complaints about budgeting is that they are difficult to stick with. Do not give yourself the option. Ask yourself what is not working and work toward finding a solution rather than giving up.
5. Review your budget regularly. This will help you make sure you are on track to reach your goal.
6. Automate your budget! Once you get your budget to a point where it is working, automate it and take yourself out of the equation. You are the biggest hindrance to your financial success. If you remove that roadblock, nothing is standing in your way of success.
Creating a budget can seem daunting, but it’s worth it. It is the basic building block to help you reach your financial goals.
As a financial advisor, I can help you create a plan and help you chart a course toward your financial future.
If you’re ready to take control of your finances, contact me today for a free consultation. I’ll help you create a personalized financial plan that will help you reach your goals.
Schedule your personalized coaching session today.
Set realistic goals. Don’t try to cut back on all of your expenses at once. Start with small changes and gradually work your way up to bigger ones.
Automate Everything! If you don’t have to think about it, the chances are better that it will get done. Make the decision, automate it, and walk away! You can do this with paying bills, savings, and more. You can set up automatic transfers from your checking account or set up an automatic bill payment for each expense.
Avoid impulse purchases. Before you make a purchase, sleep on it. Ask yourself if you really need it? If you can wait 24-72 hours before making the purchase, you’ll be less likely to buy impulsively.
Reward yourself. When you reach a financial goal, give yourself a small reward. This will help you stay motivated and on track. An example of this would be taking a break from your plan to save and pay cash for a vacation. Then, pick it back up when you return.
Creating the budget is the hard part. Once it’s written, sticking to it is what can be challenging, but it’s worth it. A budget can help you take control of your finances and reach your financial goals.
Corey Stokes 
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