Baby Step 1: The Starter Emergency Fund

Why do I need this?

This was the first major money mind-shift we had to make when we started our Journey in December 2012. We had always thought that when you are in debt, you have to throw everything at the debt and delay savings until later.

This logic is flawed – life happens, and if you have not yet made the decision to SAY NO TO DEBT, you will likely keep on borrowing money for emergencies. The line we used was “let’s just get through this month” and then proceed to take a short term loan or extend the overdraft a little more, or borrow on a new credit card… This dynamic caused our “get out of debt” process to become a cha-cha… two steps forward, three steps back – up to the point that our debt was R40k more than when we started the process.

This may seem really silly to you, and yes, this is a very simple principle, but it has changed our entire outlook on money. It connected our brains to the realisation that debt is our enemy, and that practically all debt is destructive to us. We had to make the choice to never borrow another cent again, no matter what. The starter emergency fund has proved to be A KEY TO REAL PROGRESS for us in this process.

Before you start paying off any more on debt, first have a starter emergency fund of $1000 {R5000 – R10 000, depending on your circumstances} so that you can handle the stuff life throws at you without juggling credit and risking a greater debt exposure.

It is critical to decide what qualifies as an emergency, and what does not. If you knew about it before it came up, for example Christmas presents or quarterly school fees, then it is not an emergency. For this fund to really work, it should be the absolute last resort and guarded with care.

What is it for?

“The starter emergency fund is for those unexpected events in life that you can’t plan for: the loss of a job, an unexpected pregnancy, a faulty car transmission, and the list goes on and on. It’s not a matter of if these events will happen; it’s simply a matter of when they will happen.

This beginning emergency fund will keep life’s little Murphies from turning into new debt while you work off the old debt. If a real emergency happens, you can handle it with your emergency fund. No more borrowing. It’s time to break the cycle of debt!” – Excerpt from the Dave Ramsey Website.

Where should I keep it?

Keep it in a separate savings account where you have quick access to it – This is not a large investment so getting the best interest rate is not the highest priority.

How much should it be?

$1000 {R5000 – R10 000, depending on your circumstances.}

Read this article for some ideas on how to free up the cash to help you get this amount together as quickly as possible.

This is not a full emergency fund yet, Dave Ramsey recommends a full emergency fund {Step 3} to be enough to pay 3 – 6 months of expenses, but after getting this Starter Emergency Fund in place {Step 1}, you will be in a better position to make a real dent in your debt {Step 2}.