Lets take a look at saving it first. When I first started to make budgets I wanted to have a very big savings account, and I expressed this to my friend that was helping me. Well he told me that I needed to think of a few things. First if you owe people money and have enough in the bank then why not pay it off. You will end up paying more in interest to that credit card over time by paying the minimum monthly payment. I thought well if I do have that money and I spend it, then I wont have any money in the bank for emergencies. Well what he said would open my eyes and scare me to death. In the past whenever I did have money saved (which didn't happen much, and didn't last) I got really scared that if i had an emergency I wouldn't know what to do. He asked me a question, when was the last emergency were you needed to spend more than $1000? Well I thought about it and I couldn't answer it. I haven't ever had an emergency that cost me that much, but I always thought that maybe I had just been lucky and haven't had one yet. He told me, for him, he only keeps $1000 in an emergency savings account for a car repair or hospital bill.
The emergency savings account number is going to be different for everyone. I talked to my wife and we came up with a number of $2000, just to be safe. Whatever number you come up with should be a comfortable number were you don't lose sleep over it. I'm sure your thinking what if I lose my job and now I only have $1000 in an emergency account. Well I want you to know that when you pay off your debt the goal will be to save enough money to pay your bills for at least 6 months, but we will cover that later.
If you don't have a emergency savings account I would start with making that first with left over money. Once you have this or if you have more in there than you need its time to start paying off that debt.
The first thing to do is to make a list of bills that can be payed off and put them in order from owing the least amount on the top and the most on the bottom. Take for example, if the lowest one is a credit card with a balance of $500 and a minimum payment of $40 and you have $350 left over, then take the $350 and put it toward that credit card. You will end up paying $390 for the month because the payment of $40 should already be in your budget for monthly payments. In the next month use the left over money to pay off the rest of that credit card. And congratulations you have payed off your first debt.
Now lets not stop there, if you take that $40 from the first credit card and add that to the next one in line you will change the minimum payment of that bill, adding the left over money for the month on top of that. This is called the snowball effect. You will keep doing this until you are all debt free. If you owe a lot of people money when you get toward the end you will realize that you will be paying over $1000 to one bill because all of those minimum payments added up. It can be exciting to think that when you pay off all of your debt that you will be able to save all of that money.
Keep in mind that you need to stick to the budget you make for yourself and if you need things to budget for it. If you have to buy stuff for birthdays, anniversary's, Christmas, ETC, then you need to budget for it or save a little every month.
In the next blog I will go over owning your own vehicles and how paying off your debt will raise your credit score.
If you have any questions or want more in depth explanations please email me at Thetightdollar@gmail.com I will answer everyone questions.
The emergency fund was the single most important change that we made when we were paying off debt. We hadn't even heard of the concept until we started reading PF blogs!
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