Thursday, February 22, 2024

Building An Emergency Fund While Paying Off Debt

By Tim Gamble

The top two financial goals for most folks should be setting aside an emergency fund, and paying off high-interest debt items such as most credit cards and car loans. Between the two, I would actually prioritize the emergency fund until you have at least $1,500 set aside. Dave Ramsey says $1,000, but his advice is from before the high inflation of the last few years. Other money experts suggest having an emergency fund of at least 3 to 6 months of expenses, but that is a large number and a daunting challenge for many. The $1,500 goal is more realistic. You can always add to it later. 

Don't stop making your minimum payments, of course, since late fees and penalty interest rates add up extremely fast. But put any extra money into the savings for now. Once you have that emergency fund of $1,500, then you can tackle your debt with extra payments. 

Eliminating Debt and Building Savings Is Preparedness
Bad economic times are a part of most collapse scenarios that worry most preppers. And even if a full collapse never happens, can be certain of economic downturns and recessions in the future. Bad economic times are especially difficult for folks who live paycheck to paycheck (which is most of the middle class in America today), are in debt up to their eyeballs, and have little or no savings.  Debt – whether personal, business or government – is bad for many reasons (I'll talk about those reasons below). So, my personal advice to you (and to me) is to make paying of debt and building your savings a major part of your prepper activities.

In your personal life, work quickly towards eliminating consumer debt – credit cards, car loans, payday loans, personal loans, and installment plans. This will mean you have to put yourself on a budget and stick with it. It will mean putting off major purchases, avoiding impulse purchases, and **gasp** denying yourself luxury items. It may mean taking bag lunches to work. Or selling your car to get out of the loan, buying an older model with cash, or perhaps making do with only one. Consider having a major yard sale to raise some money, or try to find a second job. It will take time and sacrifice to eliminate debt in your life, but the benefits will be more than worth it.

Put the money somewhere safe, such as an savings account in a stable bank or credit union (do your own homework, or check with one of several companies that offer ratings on the soundness and safety of various financial institutions). Don't worry about getting the best possible interest rate. Safety and liquidity are the goals for your emergency savings, not growth.
Pro Tip: Check out Dave Ramsey's Baby Steps and read his the book Dave Ramsey's Complete Guide to Money for more on getting out of debt.
Debt Busting Idea #1 - Making payments on your vehicle?  Sell it and buy a more affordable vehicle with cash. Downsizing your vehicle to get out from under the loan is an idea Dave Ramsey often suggests to his listeners. If you can't get enough for your vehicle to pay off the entire loan, you will need to raise some extra cash using other ideas from this article. 

Debt Busting Idea #2 - If you own any "adult toys" such as ATVs, boats, sports cars, RVs, pool tables, dune buggies, hot tubs, motorcycles, or other big ticket items that you use only for recreation and entertainment, consider selling them and dedicating the proceeds to debt repayment. Same goes for any home gyms and expensive exercise equipment that you don't really use. Depending on what you have to sell, you may be able to raise anywhere from a few hundred dollars to several thousand dollars. That's a lot of debt you can pay off.

Q.  Why pay off debt if we are headed towards high inflation? 

Inflation is often used by some folks as an excuse to not pay off their debt. It may be true that by waiting to pay off debt, you will be paying it off with cheaper dollars. However, there are other considerations. For one, debt puts you, your family and your assets at risk. Pay off your debts now while you are employed and you run less risk of losing your home or other assets if you become unemployed later.

Also, debt can be very stressful, especially in difficult times, which can be a real detriment to your health, and to your ability to make calm decisions, at a time when you most need both.

Proverbs 22:7 "The rich rules over the poor, and the borrower is the slave of the lender." (NKJV)

Another reason is that debt can shackle you to your current job and circumstances, when what is really needed at a time like this is freedom and flexibility.

Additionally, people tend not to realize how fast interest, late fees, and other penalties can add up. You may be paying off your debt later with cheaper dollars, but still end up paying more in real terms because of all the added interest and penalties.

Finally, debtor's prisons are a thing of the past, but depending on what a future collapse looks like, they could return in the future. This is partially true if the future collapse includes a true police-state phase in which the Constitution and Bill of Rights are suspended or done away with completely. 

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