Now that you’ve got a better idea of where your money’s going, it’s time to take control of it.
Your first priority should be an emergency fund of some sort. People tend to think of things like car repairs, necessary doctor’s visits and family emergencies as unexpected expenses, but really they’re just unplanned expenses – you can assume that something will come up in the next few months to a year that will force you to spend money you can’t budget for right now.
Without a stack of money you can turn to for those sorts of needs, you’ll be forced to turn to credit cards and their massive interest rates, or even worse, have to put off something as important as medical treatment until you can afford it.
Everyone’s idea of an appropriate emergency fund is different, but I would shoot for at least $1,000. My health insurance deductible is $2,000, so I keep a little more than that on hand – your situation may mean you need more, but much less than a grand probably isn’t enough to provide the security of a good emergency fund.
Build this up as fast as you possibly can. If you’ve been paying extra on your debt, cut back to the minimum for a while and create an emergency fund. If you’re already only paying the minimum, cut something else out – the tracking you’ve been doing from Step One will help you see where you can tighten your purse strings – and start putting something into a savings account.
Six months from now, when your car needs to be towed from the top of a mountain, or you need to fly cross-country for a funeral, or you need a cavity filled, you’ll be thrilled to pay for that in cash.
And then, of course, the process starts again. Fill that fund back up as quickly as you can so that it’s there for you the next time you need it.
Do you keep an emergency fund? Do you have any great stories of when it saved you?