If you are into sports or business you know that things are given a specific plan or for sports a ‘play.’ If a situation changes, the players need to know what changed and how to compensate for it. It should be the same in finance.
I have a budget. I typically follow it, but sometimes things happen. I may pay a bill using the wrong account and get $100 in fees between the two organizations. I may send in the wrong amount to the Gas bill because you didn’t look closely enough and get an additional charge, or maybe I scheduled the bill using bill pay, but scheduled for the wrong month(yes, I have done that).
In all these situations you need a backup plan. It may not be that big of a deal to get an extra $2 for forgetting the gas bill, but what about $100 or $500.
A great solution is to get an emergency fund. Whether you run over a nail and need a new tire or break your tooth biting into a hard candy things happen and they cost money. Even if you have $150/month set aside for medical expenses, what if you need reconstructive ‘cosmetic’ repairs they aren’t covered by the insurance. Do you use a credit card to pay this? Or get a personal loan?
No, you shouldn’t need to. You should be able to repair the muffler on your car and not have to take money out of the car replacement fund. You should be able to pay the $300 to get the AC unit repaired. And you can! You just need an emergency fund.
I am personally not a fan of Dave Ramsey, as I don’t see him as the ‘be all end all’ of money, but lets face it everyone knows his name. If you don’t, do an internet search and you can find books he has written and his goal to be debt free. I also think that most of the things he sells are principles that have been taught for decades, but since people haven’t listened for decades, I suppose he is needed.
With that said, I think his plan to have an emergency fund before paying extra on debt makes a whole lot of sense. He recommends $1000. I would recommend more, but $1000 seems more attainable for most people. I would recommend that your emergency fund be at least the amount of the deductable for your house/auto insurance policy (whichever is higher). So if your deductible is $2000 you had better have that much in an emergency fund. To me a car accident or tree falling onto my house are not budgetable, so its best to be prepared just in case.
It may seem like it takes you a while to get your emergency fund together, but if you decide to brown bag lunch instead of buying from the vendor in the cafeteria and save $4/day you can save $20 a week. Even if you cut back to a couple of days a week it would free up money to go toward the emergency fund.
Once you get a funded emergency fund, you can take that money and put it towards debt. Again, $20 may not seem like that much, but if you had $20 as part of your balance of a credit card and kept that much on your account every month you would be paying $2.40/year in interest assuming you have a 12% interest rate. Some rates are lower than this, and if yours still is I envy you. I got some wonderful new ‘terms and conditions’ at the start of 2009 almost doubling my interest rate on my primary credit card. I have to find it ironic that home loan interest rates are in the 4-5% range and credit cards are increasing thier interest rates, but that is evidence that we shouldn’t live on credit.
So good luck! Enjoy the PB&J and if you take a plastic water bottle to 2pm matinee at the theater and fill it at the water fountain, I won’t judge you [afterall its $2 less per ticket to see the matinee].