When I was 28 I had an absurd amount of debt.
For years I struggled to get ahead.
I got to that point because I spent most of my 20s investing in myself and my career. I took out a loan for a new instrument, I went to numerous summer festivals which all cost me money to attend, (even if I was on a full scholarship), and I had endless supplies to purchase in order to perfect my craft.
Without a steady income, I relied on credit cards to support myself.
In addition to my career-related spending, I spent all kinds of money on “quality of life” items that I had no business purchasing. I purchased a brand new sports car to get me around, I had the newest big-screen television on the market, and I constantly ate out.
Taken together, the investment in my career plus my stupid spending habits put me in such a bad place that when I was 28 I was almost exclusively using credit cards to cover my expenses. At one point, I had a balance on at least five different credit cards.
I tried to stop using credit cards but there was always an emergency that came along that plunged me deeper into debt.
It wasn’t until I committed to getting an emergency fund in place that I was able to finally dig out.
According to LendingClub, most Americans (54%) currently live paycheck to paycheck. That number increases to 70% when considering only how many millennials currently live paycheck to paycheck. GoBankingRate found that 69% of Americans surveyed did not have a “nest egg” of at least $1,000 in the bank, making it difficult to stay out of debt in the event of an emergency.
Developing consistent saving habits is one of the best ways to have financial stability. If you haven’t already planned to save money, now is the time to start thinking about a plan for saving.
Take the time to figure out how you will save now so that you can gain financial stability as quickly as possible.
- Save for the short term.
Want to have a safety net to give you stability and flexibility? Start by setting a goal to get $1,000 in the bank. This money should sit in a checking account without fees and should be easily accessible in case a true emergency arises.
Tip: Before you save additional money, make sure you focus on paying off debt. The less debt you have, the more flexibility you have in your life and career.
- Pay yourself first.
Just like having your taxes automatically taken out of each paycheck, it is important to automate your savings, debt payments, investments, and giving. Plan to automatically contribute 10% of every paycheck toward these three areas; you might want to pretend it’s not even a part of your income.
- Establish a PAYGO mentality.
PAYGO (aka Pay As You Go) was originally used by the United States federal government as a way to curb perceived excessive spending. From the perspective of personal finance, PAYGO is a great way to ensure long-term financial stability. As suggested in its name, you should be purchasing something only if you have money saved up to make the purchase instead of using credit or taking out a loan to make the purchase. You will save a lot of money in the long run and it also helps you focus on how you spend your money.
- Save (at least) three months of your salary.
After you get $1,000 in the bank and pay off your debts, work to save at least three months of salary so you have a larger cushion should something interfere with your life or career.
It took me about ten years to fully pay everything off but I couldn’t have started down that path unless I had a $1,000 emergency fund to give me some breathing room. I found the process to be incredibly motivating and the perfect place to start on my zero-debt journey.
What recommendations do you have for building up an emergency fund?
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