5 Reasons You Need a Contingency Fund
- 2008 28 Mar
No matter your situation—even if you are up to your eyeballs in credit-card debt—you must have a Contingency Fund. Every household needs one. It is as essential to you getting out of debt as water is to your health. Without it you won’t go far.
What it is
A Contingency Fund (CF) is an emergency fund that you can get your hands on at a moment’s notice.
It’s not chump change
Even though you can begin building your CF with the change you have in your pocket right now, when you follow the rules of debt-proof living, it will begin to grow—slowly, steadily until you have accumulated at least $10,000 or the amount of money you would need to pay your bills for three months without any income.
When you’re in debt and committed to getting out, it makes no sense to keep any money for yourself. Common sense says you should be sending your creditors every nickel you can scrape together.
That’s the same “common sense” that said it’s okay to use credit cards to buy stuff and pay for it later; the same “common sense” that says if you are severely overweight you should not eat again until you have achieved your goal weight. It’s a nice thought, but it’s just not going to happen. You’ll be able to follow that kind of thinking only until you get hungry if we’re talking weight, or until something unexpected happens when talking about money and credit.
How it grows
Under the debt-proof living plan, ten percent of your net paycheck goes straight into your CF before you pay any bills.
Face it. Getting out of debt is no simple feat. It takes commitment, knowledge and most of all endurance. You didn’t get into this much debt overnight, so it’s going to take longer than a few days to get out. This will not be a sprint, but rather a marathon. Your CF will be the assurance you need to see it to the finish line.
1. It is the antidote for your credit card habit. Just knowing you have money in the bank quiets that thing inside of you that demands to have stuff right now, even when you have no money to pay for it.
2. It counteracts that pathetic feeling of being broke. One of the reasons you are in debt is that you can’t stand that feeling of being poor.
No one likes being broke, but some of us like it a lot less than others. Curiously, a pocket of credit cards makes us feel rich in a really false way. Knowing you have money in the bank is the authentic way to not feel broke—even when you are determined to not touch the money you have stashed away.
3. It gives you an alternative to hitting the panic button. When you’re broke, you live on the edge of panic. And when even the smallest thing happens, even if it is not a true emergency, it feels like one because you press the panic button. Having money in the bank allows you to calm down so you can think reasonably.
4. It’s the lifesaver that keeps you afloat while going through deep waters. If you can make it all the way from right now to paying off your last debt without facing some unexpected expense (tires, water heater, medical expense, car repair, and so on), you will be fortunate indeed. And you’ll arrive with an intact CF.
The chances are far greater, however, that while on your journey to becoming debt-free something unexpected will happen. It’s your CF that will allow you to keep going without having to run back to your credit cards for a bailout. Just imagine how defeated you will feel should that happen. Of course you can start again, but you want to do everything possible to avoid getting off course.
5. It’s your guarantee that you’ll make it to the finish line. I say this on the basis of my own experience and that of countless readers who are now debt-free—having a CF, whether fully funded or in process, is the secret to your debt-free success. It’s that second wind we all depend on when we’ve come to the end of our endurance, but there’s still more journey ahead.
Your CF will keep you going and going. And going some more until you pay off that last dollar of debt.
A Contingency Fund creates the margin you need to move away from the edge.
Complete details for how to start your CF, including where to keep it, how to manage it and when to use it, are in Chapter 6 of Debt-Proof Living, by Mary Hunt (DPL Press, 2005; $16.99). DPL members receive a 20 percent discount on all of Mary’s books in the DPL Bookstore. Call 1-800-550-3502 to order by phone. Or visit DebtProofLiving.com then click on Bookstore.
© 2008 Debt-Proof Living. All rights reserved. Used with permission.
"Debt-Proof Living" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates. Click here to subscribe.