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Feb

29

Extreme Frugality: How to Save an Emergency Fund When You Have A Negative Cash Flow





emergency fundGetting out of debt is a struggle, and you are guaranteed to have some setbacks, no matter how much great progress you make on your debt-reduction. One way to make sure those setbacks don’t just put you deeper in the financial hole is to have an emergency fund.

To get anywhere, you first have to decide to get out of debt, make a written budget to stick to, and then start saving up the emergency fund, which means you will no longer have to grab your credit card when disaster strikes.

Stop Depending On Credit Cards

The ability to rid yourself of your dependency on credit cards comes from creating an emergency savings fund for yourself. This emergency savings allows you access to some cash if the need arises, without having to turn to credit cards to cover the expense of a REAL emergency (not a couch!). The purpose of this savings fund is to give you a buffer for real emergencies while you tackle your debt - for this reason, the emergency fund needs to be liquid.

This emergency fund is Baby Step No. 1 on Dave Ramsey’s Total Money Makeover plan. Dave suggests that to get an emergency savings, you pay only the minimums on all your debts and save the rest of your extra income until you’ve met the $1,000 mark in the savings fund. I learned of Dave Ramsey well into the year 2007 and didn’t go by his plan when I started getting out of debt (2006), but I still came to the same conclusion that I needed an emergency savings fund if I was really serious about this whole debt-reduction thing. Dave recommends a thousand dollars. Depending on your life situation, though, you may not need that much. Personally, I only put a few hundred into savings before tackling my debt because I decided that I had very little risk in my life.

How Much?

What you will need in emergency savings is completely personal and I cannot tell you how much that will be. Easily figured, the more you rely on yourself to pay for emergencies that may come up, the more you will need in this baby savings fund. Things to consider in your life are:

  • the likelihood of car problems
  • the likelihood of a job lay-off or being fired
  • being a home owner
  • your health insurance
  • and the people who are dependent on you (such as kids, spouses, or parents)

I decided that for myself, $400 would do. Many factors went into my decision to have a little fund: I drove a car that didn’t break often and I had many mechanic friends who could fix it for free, I worked at a job I knew I wouldn’t be losing (at least for a year), I rented (no broken appliances to replace or emergency home-repairs), I had fantastic health insurance through work, and I had no dependents. I also decided that because I was a healthy 20-year-old with parents in their 40’s/50’s, I wouldn’t encounter too many surprise health problems or suddenly dependent family members. Again, this is a determination you will have to make for yourself based on your life situation.

But how do you save for an emergency fund when you can’t even make the minimum payments to your debts?

Get Frugal: Honestly Live Below Your Means

“Act your wage!” (Gotta love Dave Ramsey.)

In order to have money to throw at the emergency fund (and later at your debts), you have to make more than you owe each month. JD at Get Rich Slowly has written an excellent post on how to escape living paycheck-to-paycheck which I encourage you to read if you want another person’s take on this.

What do I suggest you do?

First, you need to cut spending. I know, I know. I found this to be extremely difficult, and struggled with it for over a year. Eventually, though, you will stop spending if you put your mind to it. A great way to do this is to set yourself a little challenge: try and go a week without buying anything you don’t implicitly need. Don’t assume the pleasure will be granted to you after the week is up: work hard to disallow yourself things WITHOUT thinking to yourself, “well, I’ll just buy it once this week is up.” You’ll find yourself slowly letting go of your need for things. Then, when the week is up, challenge yourself to do it for another. And then another. I find that if you make it into a little game, eventually you will think of it as commonplace, and then you’ll really start to get somewhere.

UPS BoxesSecond, you need to make more money. Whether this is by getting a raise at work, taking on a second part-time job, or selling the things you own (or all three!), you need to make your time and stuff earn for you. This is how to get your foot in the door. Take a second job at UPS stacking boxes at night, at a pizza place delivering pizzas, at a restaurant serving part-time. Sell your stuff on eBay or Craigslist. Once you get into a positive cash flow, all these little things that earn more money are affectionately called snowflakes - little bits of money that collect together to make a snowball of money that goes into savings (and later, toward debt.)

But What If I STILL Can’t Make the Minimum Payments?!

If you still can’t even make all the minimum payments to your debts after cutting back and earning more, then you need to get more serious about your debt reduction. If you make less than you owe each month and are having to chose between food and lights, you need to get control of your situation, and fast. This can be a very hard place to be in, but you can do it. You CAN. And you need to know that.

The first thing you need to do is pay for the necessities: food, shelter, and basic living expenses. This means groceries, rent or mortgage, and heat, gas, water, and sewer, and perhaps gasoline if you absolutely must drive your car. The creditors can wait, though they’ll be hollering, no doubt. But you have to take care of your family and yourself more than anything. Keep in mind, though: this is a time to be buying Top Ramen and soups, not a time for anything even remotely expensive. But get yourself fed.

After you have covered the basics, you can now look at your remaining money with purpose. If you still have a negative cash flow, you will not be able to pay all of your payments with the money left over. So now you need to change your lifestyle to get ahead of the game. I detailed above how you need to cut spending and earn more. If this alone doesn’t do the trick, here are more radical suggestions. You are completely capable of doing all of these things below if you’re determined enough to get out of debt.

Get Your Money in the Black!

Move to a less-expensive location, get a roommate, sell all your furniture on craigslist. Take the bus to work and accept the long commute because you will save a ton on gas. Better yet, bicycle to work if you can.

Eat inexpensive food like rice and canned goods and never, ever eat out. Cut all your extraneous living expenses: no more Netflix, cable, cell phone, or internet. Cut yourself off from the services you pay so incredibly much for. Remember - this is temporary. You need to get ahead of the game before you can win. If you absolutely must have these things, cut them back to the bare minimum. Cut your cell phone to the $20/month plan, switch to basic cable, suspend your Netflix or Blockbuster.com subscription and get dial-up internet as opposed to broadband. You could potentially save hundreds a month doing this, depending on what you were used to spending.

Still need more ideas? It’s time to really sacrifice. Turn off the lights - use only the light you need in the room you’re in. Read by the window during the day rather than at night. Spend the evening in candlelight and go to bed early. Turn down the thermostat and get used to wearing layers. If it’s summer - deal with the heat and drink lost of ice water. There are some people in the world who will never know heat or air conditioning - surely you can live without for a couple of months ;)
Once you cut out all your spending above you very, very basic NEEDS, and you are working extra and selling everything you own, you will have a positive cash flow. This is essential. This means that now you can make pay your regular living expenses and the minimum payments to all of your debts and you still have money left over. Use all this left over cash to create your baby emergency savings fund.

Once you’ve used this extra “left over” cash to save up an emergency fund, you’re ready to move to the next baby step: The Debt Snowball.

Other Great Reads:

Other Relevant Resources:

Did I leave anything out? What is your experience? What crazy things did you do to get to your baby emergency fund? :D

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Filed Under Self-Help and Personal Progress, money and finance, simple living 

Comments

5 Responses to “Extreme Frugality: How to Save an Emergency Fund When You Have A Negative Cash Flow”

  1. Glblguy on February 29th, 2008 2:25 pm

    Really good and thorough write-up. Thanks for including my article!

  2. shanti on February 29th, 2008 2:38 pm

    Thank you :) And you’re welcome - the M Network writing about the baby steps has me inspired to write my own take on them, which is in most cases very blunt and sometimes “extreme.” ;)
    Thanks!

  3. Melanie on March 2nd, 2008 2:39 pm

    Very interesting post and blog!

  4. MoneyBlogga on March 5th, 2008 9:03 am

    Very good post. I have already implemented some of those suggestions. It’s taken me a year of half heartedly tracking expenses to finally get tough and say enough! It’s hard to break out of that cycle of feeling bad and then spending money to compensate. I’ve found that taking a good hard look at my situation and why I do the things I do (which has also been emotionally painful as well) has been very instrumental in helping me to break this cycle.

  5. James on September 24th, 2008 11:01 am

    Reviving an old post cuz it’s a good read with some food for thought. Thanks Shanti. :)

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