Step 1: Save $1,000 as a starter emergency fund

So what do you do when you have created a budget and are ready to tackle your debt? The first step in this process is to save $1,000 to start an emergency fund.

You may have thought that paying off the debt would be the first step. We will get to this in step two, but we need to have money saved first. The main reason for this emergency fund is because of Murphy’s law.

Murphy’s law states that “Whatever can go wrong, will go wrong.” Most people are familiar with this quote and end up going into debt because of it. People will use credit cards for life’s emergencies. The biggest time this happens is Christmas.

Christmas is not an emergency. It comes on the same day every year. Most people wait until December to begin thinking about Christmas and max out credit cards that never get paid off.

Having an emergency fund in place will catch the small emergencies. Murphy may not be gone completely, but you can at least handle a real emergency while you are paying off your debt.

Be careful what you consider an emergency. A job layoff is a real emergency. A leather couch on sale is not an emergency. Another reason for an emergency fund is to stop the dependence on credit cards.

You should save $1,000 as fast as you can. This step should not take very long. If you dip into the emergency fund while on step two, then go back to step one until the $1,000 has been replenished. This will keep you from borrowing money to cover emergencies.

April and I have completed step one. When we first started we would dip into the fund often. Every time we did this we would build up the emergency fund before moving on. Now we rarely touch the money.

We have learned to budget better and stopped borrowing money. We use debit cards so that the money comes directly out of our checking account. This makes a big difference on how much we spend.