If you find that you are debt free, let me say this — CONGRATULATIONS!!! So, does that mean you are done financially? Nope – not yet!
If you no longer have debts (outside of your mortgage), you need to continue building your financial independence. That means you should have a fully funded Emergency Fund.
When you started on the path to getting out of debt, you built up $1,000 in your fund. You did that just in case the unexpected happened as you did not want to go back into debt. Now that you no longer have debts to pay, you need to actually increase your emergency fund account to cover your expenses in case the worst should happen (like losing your job).
A few years back, experts recommended that the average person should have around 3 months of income saved up; 6 months if you had a family. That was before the downturn in the economy. That has all changed.
It is now recommended that you have at least 6 months of income in the bank if you are single and as much as 9 months (or more) if you have a family.
Don’t let that number scare you. I know it seems like a lot, but you CAN do this!
Do you remember when you thought getting out of debt was impossible? Do you remember thinking there was no way you could do that? Well – you did it! And you are better off for it.
What is great about building your emergency fund is that you don’t have to send a check off to someone else each month. Nope – you get to pay yourself! What an awesome concept!
To get started, look at your budget. Find the line item which says debts and remove it (didn’t that feel great). Now, add in an item under savings called Emergency Fund Savings. Now, enter the amount you were paying on your debts here.
When you make the deposit each month, you might actually want to separate the type of savings. For example, my husband and I have 2 different savings accounts set up at our bank: regular savings and emergency fund savings.
The regular savings is where we make deposits for things we know we have to pay annually such as life insurance, taxes, holidays, etc. The money will come and go in and out of this account throughout the year.
We also have an emergency fund account. That account has money going in — but does not come out (in case of an actual unplanned emergency). For us, it helps us differentiate what we have saved and we know what we have in cash at any time.
You worked so very hard to get yourself out of debt, so do what you can to avoid it from happening again. By planning now, you will save yourself a lot of possible financial stress down the road. If you are not sure about emergency funds, you can read more about How to Create an Emergency Fund.
(I am not a financial advisor and the information listed within these posts is not to be construed a financial advice. Financial concerns/issues should be addressed with a professional in order to receive advice and assistance.)