In my first “How Do You Get Out of Debt?” post, you learned that if you want to completely get out of debt, the first things you have to do are to get mad, get naked, and make a budget.

So what do you do next after you find yourself sitting naked at the kitchen table with budgeting forms and a calculator?

You start the next step to getting out of debt, of course!

The Emergency Fund

That next “get out of debt” step that will propel your naked self toward debt freedom is putting together a beginning emergency fund of $1,000.

That’s right, in order to get out of debt, you need $1,000 cash on hand.

However, if you have a low income, say $20,00 or less, you can do $500.   If you have a high income, say $100,000 or more, then $1,500 would be sufficient.

I can hear you now, “Seriously Doc?  I’m living paycheck to paycheck, I’m deep in debt, and you want me to come up with $1,000 cash, just to let it sit in case I need it?”

Yep, that’s exactly what I’m sayin’.

Your next question would likely be “Why?  If I could come up with $1,000, shouldn’t I just use that to pay off my debt?”

No.  Let me tell you why.

Having an Emergency Fund Boils Down to One Word: INSURANCE.

Your emergency fund acts as insurance against all those inevitable small to medium sized financial emergencies that spring up out of nowhere and ruin your day.  Like when the washing machine or the water heater dies, or the roof springs a leak.

They ARE going to happen.  You know they are going to happen.  They always do sooner or later.

Remember, at this point in the process, you’ve gone “naked” when it comes to using credit.  You’ve sworn off incurring any more debt, and that means you have to be prepared for what you know will inevitably come your way.

Your emergency fund allows you to be prepared to pay cash when the inevitable happens. You won’t be tempted to resort to credit cards or “easy payment” plans that will keep you in bondage for months or even years.

Having an emergency fund also helps you change your mindset about how to deal with the unexpected.  When you don’t have a plan (like most people), you end up deeper in debt.

But when you become proactive and have money set aside in cash or in a bank account specifically for an emergency, you just pay cash to clean up the problem and move on.  The result is that you have less stress and you’re not dealing with that emergency 6 months or a year from now because you’re still paying for it.

You are self reliant and self insured. No longer will you have to call upon Chase or Discover to bail you out.

Getting an Emergency Fund Together is Not as Hard as You Think

I know, I know.  You’re in debt and you’re struggling.  It’s hard to come up with $1,000.

You CAN do it, anybody can do it, you may just have to get a little creative, that’s all.

Maybe you can pick up a few extra hours at work, or sell all the junk you don’t use and don’t need in a yard sale or on EBay.  Cut some yards, clean some houses, babysit, bake cookies, or use any job skills you may have like accounting, bookkeeping, or computer skills.