You need to be ready to change your lifestyle, be ready to commit to no more consumer debt, and know that people are going to think you're a little bit strange. But that's OK because being normal means you're broke!
Baby Step 1: $1,000 To Start An Emergency Fund
Once you're current with your creditors, the first of the baby steps that Ramsey talks about is to save a $1000 emergency fund. What's an emergency fund you ask? An emergency fund is your umbrella for when those rainy days come. Rainy days could include a good number of things:
* Car repair
* Emergency room visit or other unplanned medical incidents
* Unplanned travel expenses (funerals, weddings, etc)
* Job loss
* When you don't have enough for occasional expenses (like car insurance, property taxes)
Murphy's law says that "anything that can go wrong, will go wrong". Dave Ramsey likes to say that an emergency fund will help keep those "little murphies" from turning into new debt, especially while you're trying to get rid of old debt.
Ramsey quotes a statistic about unplanned expenses on his site:
Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.
Ok, let's look at that figure again. 78%! A majority of us will have a major negative event in any given ten year period! Even if you haven't had that major negative event, I'm sure probably 100% of us have had those minor negative events pop up from time to time.
When it comes time to save up the emergency fund a lot of people wonder if $1000 will really be enough. My opinion is that it is. Most small emergencies will be covered by $1000, and only some major life events or other problems won't be covered. Some people will still opt to save up a bit more.
Figure out for your family if you think $1000 will be enough. Look at your circumstances, how many children you have, job circumstances, etc and decide on a number. Just make sure that you don't set too large a number for the baby emergency fund because you can start short-circuiting your debt reduction plan if you try to save too much.
When it comes to where you should put your emergency fund, I think it's a good idea to make sure that you're keeping it in a place where you'll be able to access it quickly.
The key here is to keep your money accessible and liquid, in case you have one of those emergencies where you need to get the money quickly.
Places I would not suggest putting your emergency funds include CDs, stocks, real estate, or other investments. Keep it somewhere you can get to it in a short period of time. The purpose of this money isn't to gain a ton of interest, but instead to insure you against unplanned events.
After deciding to change, and starting on your emergency fund, it's probably a good idea to do your first budget. John Maxwell said: "A budget is telling your money where to go, instead of wondering where it
went." That quote is so true. If you're not telling your money where to go (into an emergency fund), it will just disappear. Do a quickie budget, figure out what your income and expenses are, and then assign every surplus dollar a job.
At this point in the baby steps you should be paying the minimums on all your debts, and then saving as much money as you can towards your $1000 emergency fund.
If you need to sell things on ebay, get a second job, or sell your sacred comic book collection, just do it! Crank it out and get that $1000 saved! If you need a good template to do your first quick budget, try out the one at Dave Ramsey's site: http://www.daveramsey.com/media/pdf/fpu_qbudget.pdf
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