Dave Ramsey is famous in the personal finance world. We feel so many of his tips should be followed before you start credit repair. The most important of Dave Ramsey’s teachings is his Baby Steps. Even though some of them are quite hard to follow, baby step 1 is not. Baby Step 1 is creating an emergency account with a thousand dollars in it. Having an emergency fund is a wise idea. Having one should make repairing your transmission easier when it blows or any other similar disasters. This should make it so you can use cash (debit card) instead of reaching for that credit card when emergencies happen.
Also, look at the stats from Bankrate.com on the chart below. It shows how many people have no emergency fund. Over 29% have no savings, 13% didn’t even know whether they had savings or not. These are scary stats to see how just one small problem could derail people’s lives.
Where should you place your emergency fund? Don’t use the same account as your checking account where your debit card is. This will make it too easy to swipe at that money instead of waiting for when things are financially challenging. We suggest also not using a local bank because most of them have horrible interest rates. You are probably asking well where should I place this money then? We feel both Wealthfront.com, Varo.com, and Marcus.com have some of the highest interest rates around. We also think its best not to connect your savings account to your checking account for cash transfers.
Where should I get this money? Well if you are even anywhere near tax time using your tax return for this is the best idea. Tax returns should be used for paying down debt or making an emergency fund, not for that vacation to Disney. What about if you already had to desperately use that tax return on an emergency or past debt. We suggest if you’re getting that big of a tax return to add another exemption on to your W-4. This will give you that extra money you need to start saving. Of course, if none of these is an option, driving for Uber or Lyft in your metro area for a couple of hours after work could build this fund. I recently tested this idea to see if it was reasonable. I was able to raise 64 USD in less than 3 hours.
When should you use that emergency fund? Only you can determine what is a true emergency. If you got into a car accident, then yes, using the emergency fund for your deductible would be meet those criteria. If you had a trip to the emergency room, this would definitely be a reason to use it and probably a primary reason for having an emergency fund. If your furnace dies in winter, this would definitely be something that you would tap that emergency fund for. The big question should always be, can I survive without using it? If the answer is yes, then don’t utilize the fund for these issues.
We also want to add this, being one of your steps out of whatever current financial problems and issues you might have, you could be experiencing a lot of emergencies at this time do what you can to not raid the emergency fund. If you are having trouble making your finances work and getting to this baby step, please take a look at more articles in our Smart Finance Blog. Also, if you feel you could use financial coaching before you start credit repair please contact us. We feel that if we get your finances flowing right first, then credit repair will go a lot easier.