The first step on our journey, according to this Dave Ramsey character, was to save $1,000 in an emergency fund. We kind of cheated on this step, as I already had it saved from earlier efforts to be more responsible, but the importance of having it can’t be overstated. Having a thousand dollars in the bank breaks the cycle.
The main reason I ran my Discover card up so much is because every time something came up that I didn’t have money for, it just went on the card. I’d tell myself that it was a one-time thing, and that I’d pay it off in time, and that everything would be fine. But inevitably, before I could pay it off, something else would just happen to come up, raising my balance and blood pressure. The cycle had begun. Meanwhile, Old Man Interest moved in on the card, and before I knew it, my $200 payments were only chipping away $20 of the balance every month. I have a feeling that I’m not the only person that’s been in this situation. After all, don’t we all tell ourselves that credit cards are “for emergencies,” like for Starbucks when you forget to make coffee at home, or for a new pair of shoes when they’re 60% off, but only for today?
There’s a reason Dave teaches to save this money before you really start attacking at your debt, even if it means delaying that attack for a while. His plan is geared toward the psychological victories that keep us motivated, and this is a big one. Not having to use the credit card you’re trying to get rid of when the unexpected happens is a key to staying on track and making progress.
We already had this money when we officially started our Total Money Makeover, but it didn’t just magically appear. I realized when the balance quit moving on my Discover card that I needed to do something, and I knew what the main problem was. I decided I needed to have some money set aside for things that were legitimate emergencies, and so I started making room for that money to go hibernate. I ate out a little less. I picked up an extra shift at work here and there. I bought groceries that were on sale. I quit looking at the clearance Electronics section at Target. I used my tax refund to beef up my savings instead of to buy new toys. Little by little, I built up the buffer that would eventually put us past the starting line on our TMM. For most people, if they’re really focused on making this happen, Baby Step 1 takes only a few months. The line that stuck out to me when listening to Dave talk about it in Financial Peace University was, “If your children were being held for $1,000 ransom, don’t you think you could find that money really quickly? Why isn’t that the case when your financial freedom is on the line?” It’s a matter of priorities most of the time, and it’s amazing what you can do when getting out of debt becomes more important than getting out on the town.
Now that we’re going at this thing full force, that buffer has been indispensable for our sanity. We’ve had several happy little surprises this year, most of which would have ended up on a credit card under old Kyle’s financial guidance. Each time, we’ve been able to weather the storm through a combination of planning for the unexpected in our monthly budget and having that extra money in the savings account. We haven’t had to add to our credit card debt once since starting, and that alone is an accomplishment. When we do have to dip into the fund, we pause everything until it’s back to 100%, then hit the gas again. $1,000 isn’t a magic number, and it certainly won’t cover something catastrophically bad, but it will serve as a band-aid in most situations, and will motivate us to pay off this debt quickly so we can get to Baby Step 3: building up a true emergency fund of 3-6 months’ worth of expenses.