Having an emergency fund is quite useful especially when you are in the midst of a debt relief program. Some people put their savings in the backseat because of their debt payments. While there is nothing wrong with prioritizing your debts, you will benefit from having funds that can specifically get you through unexpected situations.
According to a survey, 58% of respondents admitted that they only have less than $1,000 saved for emergency situations. The same publication revealed that a lot of people are living from paycheck to paycheck. When you find yourself in this situation and you are also paying for your debts, one emergency situation can quickly pull your financial position down.
Reasons why you need an emergency fund during debt relief
If you really want to be successful in your debt relief efforts, you need to save up for an emergency fund. There are three specific reasons why this is important.
It keeps you from borrowing more money
This fund can keep you from adding more to your debt. When you are paying off your debts, chances are you hardly have any extra money left after all your bills are paid. This can be very dangerous because one trip to the emergency room or a busted transmission can force you to borrow money. There are certain situations that you cannot ignore and you need to prioritize. Sometimes, your option is to either borrow money or compromise your debt payments. If you do not want to pay late penalty charges, you will opt to just borrow money so you can pay for the emergency situation. But if you have an emergency fund to begin with, you do not have to worry about adding to your debts or compromising your debt payments.
It makes you feel confident to make bolder choices
Another benefit from having an emergency fund is it will give you a sense of security. We all know how life can bring a lot of uncertainty. One moment you are okay and the next, you are rushing to the hospital to have yourself or a loved one treated. If you have a fund saved up for these events, you do not have to worry about where you will get money.
This security will give you the confidence that you need to make choices about your debts. You can opt to maximize your debt payments to achieve debt freedom faster. You know you do not need the extra cash in case something happens because your emergency fund can cover it.
It lowers your stress level
Finally, having enough savings to finance an emergency will help lower your stress level. Believe or not, even the most simple debt solution, like debt consolidation will do more than just combine your debts under one account. It will help restructure your payments so it will not feel like too much of a burden. Because of that, you will feel less stress in your life. That means your financial situation will not harm your relationships or make things tensed at home. It will also leave you with a clear mind that can make smart decisions about life in general.
How to save for an emergency fund while paying off debt
While understanding the reasons why you need an emergency fund while paying off your debts is great, saving up for it is another matter. In fact, some people are not bothered that they do not have a reserve fund for emergencies. Well, you may not be bothered by it right now but you will be when something bad happens in your life.
Just keep yourself from a future headache and heartache and save some emergency money. Here are some tips that will help you accomplish this feat without affecting your debt payments.
Set an emergency fund target
Start by setting an emergency fund target. How much do you think you need for an emergency? Ideally, it should be around 6 months worth of expenses. If you spend $3,000 a month, you need to save $18,000 in your emergency fund. Obviously, this will be hard to accomplish if you are in the midst of a debt relief program. Find a compromise. Opt for a month’s worth of emergency funds – like $3,000. Focus on that emergency fund target for now.
Start small but be consistent
When you know your saving target, you need to create a plan that will help you reach it. Do not feel discouraged if you can only afford to set aside a small amount. It does not matter. What is more important is that you can do this consistently. Even if it is small, it will eventually grow. If you can only afford to set aside $10 every day, you will end up with $300 a month. In a year, that can grow to become $3,600 a year. Every time you get extra money, add more to your fund. Soon you will find yourself nearing your target emergency fund amount.
Lower your spending temporarily
While you are saving up for this fund, you might want to lower your expenses. Opt to brown bag your lunch for a month to save more money. If you eat out every week, lower that to once a month for now. You might be able to add more savings to reach your target amount faster. Opt to make a few sacrifices for a couple of months until you have enough emergency fund to help sustain your finances as you pay off your debts.