Save For A Rainy Day?

When I first started my debt free journey (and I mean really started), lots of things made me nervous. How was I going to reduce my spending if I didn't really think I spent that much? Will I really be able to stick with the program for the long haul? Can I really rely on used cars since I can barely change a tire, let alone fix up a broken car? Is it worth it to sell off my stuff just to pay down debt (especially if it feels like it's not even making a dent into the overall debt)? How would I handle emergencies that require immediate payment? Of all the excuses I just rattled off, it's that last question which really prevented me from diving into the debt free journey at first. It's also the same concern that prevents many people from cutting up all of their credit cards. I think we've all been conditioned to think that credit card debt is bad but that it's sometimes a necessary evil in the event of an emergency. This is the lesson I was taught way back when; "Don't use your credit card unless it's an emergency!"

So, I did what I was taught. I carried a credit card for emergencies. But like most people, my emergencies weren't true emergencies. Couple that with the fact I wasn't following a budget...and what you get is crazy debt. It's funny to think back on what I used to think were "needs" and "emergencies". It's amazing how easy it is to talk yourself into buying something you don't really need. Have you ever said, "I really need to take this trip because it's a once in a lifetime experience?" Or how about "I need to get this really high quality but very expensive (fill in the blank with clothing item, furniture piece, electronic thingy, etc...) because I'll cherish it for a long time. And my all-time favorite, "I need to go out and have a nice dinner and drinks with family and friends sometimes. I need to go out and to live life and that forces me to spend money sometimes." Now, don't get me wrong...I'm not saying that you shouldn't travel and enjoy special events. I'm also not saying that it's bad to purchase high quality things. And I'm wholeheartedly not saying that you should lock yourself in your home and never do anything fun. But what I am saying is that you need to realize that those things are truly "wants", not "needs". And more importantly, you should only be doing these things when you can truly afford them (i.e. GETTING INTO DEBT FOR THESE THINGS IS TOTALLY NOT WORTH IT).

OK, so now that we've defined what's NOT an emergency, what is? Well, what do we really need to live? I'm sure there are a lot of definitions out there but the one that my family has adopted is "SHELTER, FOOD, TRANSPORTATION, CLOTHING". These are the buckets we've identified in which we will focus on in time of need. That means that if something unfortunate were to happen to our financial situation (i.e. layoff, firing, major illness, etc..), our family knows to focus on the 4 categories for survival. That's right, cell phones, cable, entertainment, etc....just didn't make the survival list. Although, I was at one point trying to convince myself that internet should make the list...I mean, how am I going to post to my blog? :) So, after you define your survival needs, you need to figure out how much it would cost to buy that stuff a month. That's your true living expenses. And I'm sure most everyone has heard that "experts" recommend that you save about 3-6 months of living expenses as an emergency fund. This is the dollar amount you should target to stash away for rainy days. This is the money you will be able to use instead of credit cards and debt...when real needs come your way.

One last point on the emergency fund....if you're like me, you're probably wondering what to put your money towards first during your debt free journey. My family has adopted Dave Ramsey's model in which we saved up a mini-emergency fund then put every other penny towards paying down debt. This has worked out great for us because the mini-emergency fund has taken care of true emergencies as we continue to aggressively pay down our debt. Once we are completely debt free, we will focus on completing the 6 month emergency fund. We chose 6 months as it gave us more piece of mind to have a bigger emergency fund. But there's nothing wrong with just keeping a 3 month fund. And I've even read/heard of others that go in the opposite direction and want the piece of mind of a 9-12 month emergency fund. I guess whatever tickles your fancy....the most important thing is just to HAVE an emergency fund. This will allow you to be prepared for any rainy day!