No Credit Needed Debt Reduction Guide
Section Three: Preparing For Freedom
Build A Substantial Emergency Fund
After getting out of debt, you next goal will be to stay out of debt. To that end, consider creating and funding a substantial emergency fund. The exact amount that you will want to keep in your emergency fund will vary, according to the number of people in your family, but a good rule of thumb is to try to maintain an account with enough money to cover three to six months of expenses.
- Open an account – online or at your local bank – for you emergency fund. Personally, I prefer an online savings account, but you could choose a money market account through your local bank or just a simple interest bearing checking account. The primary purpose for this account is to ‘hold’ your money, in a safe place, until it is needed. Money inside your emergency fund should be set aside for emergencies and should not be invested in stocks or mutual funds.
- Use the same techniques that you used for debt reduction, only use them to pay yourself. Send as many payments as you can, as soon as you can send them, to your savings account and rapidly build your emergency fund. Use online transfers to automate the process.
Fund Various Retirement Accounts
There are so many different types of retirement accounts. Most employers offer 401k plans or 403b plans, many government employees are eligible for pension plans, and most wage earners are eligible to invest in Roth IRAs or Traditional IRAs. Research is your friend. Find out which types of accounts are available to you and your spouse and then begin to fund them. The suggestions for what percentage of income to invest in retirement vary. Personally, I invest maximum amounts in my 403b, Roth IRA, and SEP-IRA. My wife invests maximum amounts in her pension plan and a Roth IRA. Our contributions amount to a substantial portion of our gross incomes, but our long-term goal is to live debt free and without borrowing money.
Thank you for reading the No Credit Needed Debt Reduction Guide.
You have been reading Section Three: Preparing For Freedom.
Please bookmark this page or subscribe to the No Credit Needed RSS Feed to insure that you receive all sections:
Section Two: Moving Beyond The Basics
Section Three: Preparing For Freedom
I can’t wait until we’re on this step! I can only imagine the peace that comes with a solid financial footing. Since my husband is self-employed and I am as well, we will build a six month fund.
If I have a few hundred in savings, but over $10,000 in debt, should I completely wipe out the savings and put that money toward the debt? Or leave it alone and just keep chipping away at the debt? This is where I always get stumped …
@Lillian – Most would advise that you maintain an emergency fund of between 500 and 2000 dollars, depending on the size of you family. That’s what I did while getting out of debt, so that I would have enough to cover small emergencies w/out borrowing money..
NCN