Hotline, by Eflon at Flickr
Starting an Emergency Fund, personal finance bloggers say, is one of the essential parts of taking control of one’s finances and crawl one’s way out of debt. Here’s what it entails:
Definition of an Emergency Fund: Some amount of money - $1,000, $5,000, maybe more - that is set aside to pay for true emergencies if/when they arise. This money should be difficult to access, i.e. in a bank account for which you do not have a debit card, and used only when absolutely necessary. Job losses, car accidents, health problems and the like would count as Emergency Fund situations. Wanting a new pair of shoes or a weekend in Philly would not.
Emergency Funds provide financial freedom. With cash set aside for emergencies, I won’t have to use credit to finance my life should something bad happen. This makes so much sense, and I wish I had learned about the concept long ago.
Lucky for me, I already have an Emergency Fund of sorts, or at least I have a savings account at an Internet bank (E*Trade) - an account I draw from rarely and invest in biweekly - $36 every payday.
But to make it a true Emergency Fund, I must first do two things:
- Change my mindset about the money in the account.
- Stop using credit cards to buy things. Period.
I’ll elaborate. First, my mindset. Since I started investing in the E*Trade account a few months ago, I’ve gone back and forth about how I should use it. Mostly I’ve rotated between “Long-Term Savings” and “Vacation Fund.”
Neither makes much sense. With my megalithic debt and sad, meager income, I should not focus on investing extra income for the long term. Paying down my debt should be a bigger priority.
As for Vacation Fund, I should not go on vacation until I can afford to go on vacation. It kills me to say it, but I have to accept that I cannot afford vacation right now. If I am saving $36 every other week (that’s 5 percent of my take-home pay, mind you), I should not blow it on vacation.
So yes. That money, as of today, is for emergencies only. Nothing but emergencies.
Now about credit cards. Oh yipe, this is hard. But especially after reading this post at Get Rich Slowly, I’m convinced I should cut mine up and throw them away. Even though I’ve already stopped using them for most expenses. Even though, since starting my job in January, I have not gotten any deeper in debt.
Right now I use credit cards for three types of purchases:
- Stuff I cannot afford right now but will be able to pay for once I get my next paycheck
- Stuff my parents are buying for me but will have to pay me back for after they get their next paycheck (their situation is precarious, too, but for completely different reasons)
- Stuff I cannot afford at all but really really want
No. 3 happens rarely, but that it’s on the list at all is bothersome and unjustifiable. If I can’t afford something, I should not buy it. End of story. No excuses.
No. 2 may be a legitimate reason to keep one credit card on hand, and I will think about that one before cutting all my credit cards into a bazillion pieces.
As for No. 1, I feel like it’s a trap. Rather than buying something a week or two before I can afford it and risk buying too many things and being unable to afford them, why not just wait those few extra days? I can think of few truly good reasons to have purchased on credit the items I have recently purchased on credit. (Examples include: a skirt, a pair of shoes, sticky mats to put under my rugs so they don’t slide around on the floor, a few plants, a couple of dinners.) Credit cards create a vicious cycle - one I want to break.
Further, the only stuff I could truly, truly justify using a credit card to buy is stuff for which I could justify a dip into my Emergency Fund. Meaning I do not need a credit card, or at least I won’t once I have some dough in my Emergency Fund.
Oh sweet Jesus, I may have to cut up my credit cards.
But first let’s skip to Experiment No. 2: Establish an Emergency Fund. It’ll be slow going, but my goal is to put $1,200 in it by the end of the year. At my current rate, I’ll have about $900. That means in the next few weeks or months I’ll have to find some more ways to save.
