What’s an Emergency Fund?
An emergency fund is a rainy day fund, or an umbrella. It is for those unexpected events in life: a job loss, an unexpected pregnancy, a car transmission going out, and so on. This is not an investment or a Bahamas fund! Before saving $1,000 as a beginners emergency fund, make certain that you are current on ALL of your bills. A fully funded emergency fund is 10–12 months of your monthly living expenses set aside in a savings or money market account. Once you have paid off your debt completely, re-start building your emergency fund.
Why do I begin attacking the smallest balance first?
Becoming debt free, is like losing weight. It is an emotional decision you must make and follow through on. Once you reach your boiling point and do not want to live your entire life paycheck to paycheck, is when you will begin the process of eliminating your debt. If it takes your longer than a month to lose a pound of fat, will you stay with that exercise program? Hopefully, absolutely not. Paying off the lowest balance first allows you to get a positive result—and encourages you to keep going. Once you have achieved paying off your debts, your mentality towards your finances will be forever changed.
Where do I begin to manage my finances?
Establish yourself a written game plan. Get your income and expenditure statements together. Check that all of your monthly reoccurring bills are current. While maintaining your bills as current, begin to build your Emergency Fund of $1,000 if your annual income is more than $25,000. If it is less, than just save $500 to start off.
Separate your debt from the lowest balance to the highest balance. Do not pay attention to the interest rate. With the minimal amount due accounted for on all of the bills except the lowest, account for that as your bill payment category in your monthly budget. This falls after your rent/mortgage, transportation, food, and necessary clothing expenditures. Allocate the remaining income to attack the bill with the lowest amount due.
Once you have knocked out the first bill, closed the account and shredded the credit card (if lowest amount is on a credit card); roll that amount over to the next highest bill plus its monthly minimum payment and knock that one out. Keep this pattern up until you have tackled all of your debt.
In the meantime, you should be tracking your money, penny for penny by using a budget. Learn more about budgeting your money.
Saving and Investing:
How is saving different from investing?
Saving is the excess of income over consumption expenditures. It helps stabilize your money. It's money you plan to use in the near future and doesn’t need to be subjected to risk; it needs to be safe. That way, it’s still there when you want it. There is no financial risk upon saving your money for example, in a savings and/or money market account.
For instance, if you are saving for a car, use a money market account with a mutual fund company. Don't put money into a mutual fund unless you're going to leave it alone for at least five years. Your savings is not intended to gain any interest, it is not an investment.
Do not even think about investing any of your income until you have fully paid off your debt and established a fully funded emergency fund. Then you are ready to invest at most, 15% of your income. When investing, do not follow any advice just because it is the hot thing to do at the moment. Investing is a financial marathon and not a financial sprint. Get all of the facts by performing due diligence in your research and speaking with a professional licensed advisor that demonstrates they have the heart of a teacher and your well being in mind.
Should I stop investing, while paying off my debt?
At this time it is wise to stop investing focus on just paying off your debt minus your mortgage payment (if applicable). Do not withdraw or take any money from your retirement plans if you have them. Just allow for your retirement accounts to remain idle while you attack your debt. Resume contributing to your retirement plan(s) once you have completed paying off your debt and building a fully funded emergency fund.