Level 2

Debt management

Hi Renada89 - An emergency fund should not be used for anything... except an emergency. 


But what is considered an emergency you ask?  Your hot water tank suddenly quits working one morning and you need to buy a new one and replace it, or your child becomes ill late at night and you have to make an emergency trip to the hospital or a stand alone 24 hour Emergent Care facility, or your tire catches a nail and you need to buy a brand new tire because fix-a-flat won't work.  These are emergencies. 


The urgent need to pay off debt may feel like an emergency, but is isn't. If you want to pay off your debt as quickly as possible, 

  1. create a zero-based budget where income - expenses = zero
  2. as quick as you can save $1000 if married or $500 if single for a starter emergency fund
  3. list your debts, least to greatest without regard for interest rate
  4. throw all available money at the smallest debt while making minimum payments on the others
  5. as soon as the smallest debt is paid off, take all that money and throw it at the next debt to pay it off as quickly as possible while continuing to make minimum payments on the others and so on. This is called a snowball effect. As debt begins to get paid off, momentum will pick up with downward speed like a snowball. 

At it's core, getting rid of debt and staying out of debt is mostly about behavior.