How a $1,000 Emergency Fund Can Help You Pay Off Debt

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Today’s post is contributed by Ashley at Budgets Made Easy. She teaches people how to budget, save money, and pay off debt in order to build long-term wealth. Ashley was able to pay off $45,000 in 17 months. Now she helps people budget their money so they can pay off their debt. You can follow her on Facebook.

I wouldn't have thought this would be a good way to get out of debt, but now I'm totally building up this mini emergency fund.

Having a small $1,000 emergency fund is the first step in building long-term wealth. It is the first step to changing your financial habits and stop using debt so you can build wealth and give generously.

Imagine all the things you could do once you are debt-free. How much more you could give back to your community? Where would you travel and what you could do for your family?

It all starts with $1,000 emergency fund.

Why You Need a $1,000 Emergency Fund

Emergencies will happen

A $1,000 emergency fund will not solve all your problems, but it is a start. It will keep you from having to use credit cards or debt when something unplanned comes up.

Think about the last time you had an emergency. How much was it? Chances are that it was less than $1,000. Most things can be covered with $1000.

This is especially helpful when you are just starting your budget. It will take a little time to save up for specific things. If something comes up before you have saved for it, you have your small emergency fund.

It’s important to only use this fund for emergencies. Once you get other funds saved up, it will be easier not to use it for things you just forgot about.

Avoid Debt

A small emergency fund will help keep you from using credit cards when something unplanned comes up. When you want to build wealth, you must stop using debt. But there are times where an emergency may be more than $1,000.

However, you can find other ways to get the cash above the $1,000 or as a last resort, use debt. If you have to use debt, at least it’s a smaller amount than you would have used without the emergency fund.

Spend Less

If you have cash and you know you don’t want to use debt, you will find a way to save money. It is harder to spend cash. You actually spend 15-20% less with cash than with a credit card. There is a reason that companies give you rewards on credit cards. They know you will spend more with a card.

If something comes up, you can negotiate better with cash. We had to replace our HVAC system this year and saved several hundred dollars by offering cash. A lot of small businesses will give you a discount for using cash. It saves them fees from the credit card companies. They also don’t have to worry about credit card disputes.

It also gives you power by saying, “I only have this amount–take it or leave it”. Some places will try to pressure you to use debt because they get a kick back from the lender. However, stand your ground and push for the best deal for you.

Don’t be afraid to ask for a cash discount! Even at major retailers, some can and will negotiate.

You may be thinking, “That’s all great, but how do I save $1,000?”

Here are some tips for saving money quickly. Remember our, goal is to get $1,000 saved and pay off our debt as quickly as possible. I was able to pay off $45,000 in 17 months! I did this while working as a police officer. It is possible to be debt-free and do it fast.

Make a Budget

The first step in saving money quickly is to do a budget. I have even put together a step-by-step guide to help you do it. When you make a budget, you will feel like you got a raise!

Making a budget is the foundation for your finances. Everything starts with a budget. It will help keep you organized, save money, and spend less.

Cut Expenses

The next thing to do is see where you can cut expenses. Make a list of all your expenses and categorize them by needs and wants. Now really think about this.

Cable is not a need. Starbucks is not a need.

Food and clothing are needs (within reason.) Transportation costs are needs.

You can cut back things slowly so that you are successful. It’s hard to quit something completely all at once.

Call your providers, like cell phone and cable, and negotiate a different package or price. Call around and get new quotes for insurance.

Cancel things you don’t use, like subscriptions and gym memberships.

Cut back on eating out and start sticking to a food budget. When I did my first zero-based budget, I realized we were spending $1,200 a month on food and eating out. We were spending nearly $300 every time I went to the grocery store. I now meal plan and have groceries down to $600 for a family of 5. This includes household items and dog food.

Sell, Sell, Sell!

Start selling everything! You would be surprised at the stuff people will buy. You can even check out dumpsters in nice areas or free stuff on Craigslist to resell. You can literally get items for free and turn around and sell them without any effort.

Sell things you aren’t using. If you haven’t used, worn, or thought about something in 6 months, sell it.

We sold a ton of stuff when paying off our debt. I even sold my living room decor and lamps! It looked like we just moved in but I didn’t care. I wanted the debt gone and fast.

Focus on one thing at a time

When I saved my $1,000, I only focused on that. So, no paying extra on debt–I only paid the minimum payment.

You don’t want to stretch yourself too thin. You also want to do this quickly. If you have money going in a hundred different directions, it’s hard to gain traction.

You can also adjust your tax withholdings. Check out the IRS withholding calculator to see what you should adjust it to. I would check it a couple times a year just in case you need to make another adjustment.

What’s next?

Once you have your $1,000 emergency fund, you need to make a promise to yourself to no longer use debt. This is extremely important for your long-term wealth building.

The next step is paying off all your debt except the mortgage. The small emergency fund is only for getting you through paying off your debt as fast as you can. If you continue to use debt, you won’t be able to move forward in the process. You won’t be able to be debt-free.

Once you are consumer debt-free, then you build a 3-6 month emergency fund. The small emergency fund is just to get your through paying off debt.

In conclusion

A small $1000 emergency fund is the start to paying off debt and building wealth. It is possible to be debt-free; you just have to figure out how to get there as fast as possible. Emergencies will happen and the more prepared you are, the less of an emergency they will be.

There are few true emergencies in life. Most things are just unplanned events. Your car will get a flat tire. It will break down at some point. Your house will need to be maintained and things will have to be replaced.

The more you are prepared for these things the more they become an inconvenience instead of an emergency. Plus, if you have planned for them, the less stressed you will be.

When you are less stressed about it, you’re more likely to make a better decision, and you’ll have more time to shop around. When you are stressed, you are more likely to rush into a decision.

 

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2 thoughts on “How a $1,000 Emergency Fund Can Help You Pay Off Debt

  1. MrMoneyBanks

    I’ve always been quite anti-emergency fund. If you’ve got the money to build an emergency fund then you probably want to prioritise paying off the debt first and saving yourself the interest costs. Assuming there was an emergency then you’d simply (“though not so simple”) go back into debt. At least you’ve saved yourself some interest compared to the alternative of building an emergency fund whilst still holding debt

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