Back in Part 4, we started building an emergency fund. This was your temporary emergency fund - $1000 in the bank - to help keep you from going into more debt as you began your debt snowball. Now that you're out of debt except the mortgage, it's time to complete that emergency fund. What is a complete emergency fund? This fund provides you a buffer for major life events, such as a loss of work due to layoff, illness or injury, major medical expenses, major car accident, fill in the blank. It can also cover you for smaller emergencies, such as a hot water tank going out or replacing the timing belt on your car.
How much cash should you have in your emergency fund? This is something that you'll have to evaluate for yourself. Most experts would advise that you have 3 to 6 months of living expenses set aside in some sort of fairly liquid savings account. Take an objective look at your financial situation. For dual income families, or people with relatively strong job security, three months may be sufficient. On the other hand, if you're the sole bread winner, or if you work on a commission basis, six months is probably a whole lot more realistic!
Where should you put your money? We talked about this on Monday - because you want this money available to you on short notice, you need to keep it fairly liquid. For this reason, your standard checking and savings accounts, money market accounts, or even a money market fund (brokerage account) are usually good options. Just be sure you keep it separate from the rest of your money (ie - in a separate account) to avoid spending it inadvertently.
Reaching this milestone is often one of the more difficult, because now that you're completely out of debt except your mortgage, you're beginning to taste a bit of freedom. The temptation is not to save, but to spend on all those things you've felt deprived of all this time you've been working so hard to get out of debt. The temptation is to loosen up the purse strings and start enjoying life a little! Sometimes you've been on this road so long that you're really getting sick of the journey! You're like a little kid in the back seat of the car saying, "Daddy, are we there yet?" I want to encourage you to stick with it! You're almost there! If you take the whole amount you've been throwing at debt and start putting it towards your emergency fund, it shouldn't take long before you've reached this milestone.
Keep at it, you can do it! And join us next week as we look at the Road to Financial Freedom Part 7 - Saving and Investing.
