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's that emergency fund that you can get your hands on at a moment's notice. It is essential for successfully - and permanently - getting out of debt.
It's not chump change. Even though you can begin building your CF with the change you have in your pocket, your goal is to save enough to pay your bills for at least three months (six is better) without any income. Under the Debt-Proof Living plan, 10 percent of your net paycheck goes straight into your CF before you pay any bills.
It's counterintuitive. When you're in debt and committed to getting out, it seems to make no sense to keep any money for yourself. Common sense says you should be sending your creditors every penny you have. Here are the top five reasons why you need a contingency fund, even if you're deeply in debt:
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 wants 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. 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
3. It gives you an alternative to hitting the panic button. When you're broke, you live on the edge of panic. Even the smallest thing can make us 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 get all the way to paying off your very last debt without facing some unexpected expense (tires, water heater, medical expense), you will be fortunate indeed.
The chances are far greater, however, that while on your journey to becoming debt-free something unexpected will happen. It's your contingency fund that will allow you to keep going without having to run back to your credit cards for a bailout.
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 contingency fund, whether fully funded or in process, is the secret to your debt-free success. It creates the emotional and financial margin you need to move away from the edge.
Your contingency fund will keep you going and going. And going some more, until you pay off that last dollar of debt.