Reduce Debt Increase Wealth

Emergency Fund

February 12, 2023 MIsterchuck Season 4 Episode 152
Reduce Debt Increase Wealth
Emergency Fund
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Show Notes Transcript

Why is emergency fund important? How to get started funding and is there the need to increase the balance for inflation. This is only one thing needed to build wealth or reduce debt. What other things are needed  to be done to achieve financial wealth. 

 Article Link: by Margarette Burnette

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Charles McDonald:

Hello, I'm your host, Mr. Chuck, I retired accountant turned truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence determination. Emergency Fund, why is emergency fund important how to get started funding and is there the need to increase the balance for inflation. This is not the only thing needed to build wealth or to reduce debt. But other things are needed to be done to achieve financial wealth, or to help you reduce your debt. Mostly, I'm going to talk about an emergency fund. What is it? Well, it's a bank account, preferably a savings account. In the same bank, you have your checking account, that's money you set aside to pay for large unexpected expenses, such as major car repairs, unemployment, home appliance repair, or replacement or unforeseen medical expenses. But that's not the only thing that could be. The main part of definition is on expected expenses, things that are not normal, and your monthly payment budget. So I talked about this is only one item that you need an order to help you reduce your debt, or in order to help you increase your financial wealth. So when other things are needed, I've talked about it, he needs to track your spending, you need to have a budget, he needs to have a written financial plan, setting your goals of financial plan, written as nothing but you're setting goals, and how are you gone to achieve them? You put that in writing and you look at it once a month, and now you know where you are. You can keep track of things. But in this episode, I'm talking only about an emergency fund. And why do you need an emergency fund, it's to help you to quit creating new debt. If you don't have an emergency fund, and your car breaks down, how you're gonna pay for the repairs? Well, you're gonna borrow the money, whether it's on a credit card, or a personal loan, you're gonna borrow the money. Now you are slave to that credit card, you are a slave to the bank, you know, money is working against you, your money is not working for you. So the when you go into debt, you're working, your money is working against you 100% of the time, because you got to pay the interest, you got to pay the loan back, you got to pay the interest. If you're late you pay penalties. How you help yourself, by not creating new debt is having an emergency fund. As I said before, you also need to look at your spending habits. I'm just gonna go over this briefly. But you got to look over your spending habits. You got to track all your spending, you got to look in the categories that you may be spending too much on, such as going out to dinner, or buying too much, spending too much money on clothing, when it's not necessary needed, things like that. And you set yourself up a budget to help control where your money is gone. And we start out paying the budget on air needs, housing, transportation, food, and clothing. The basics is your needs. And you got to pay those things every month, no matter what. And you got to pay that with money that you're earning your income that's coming in. Also, a part of your needs should be setting money aside, and your savings account, whether it's 5% of your income, or $5 of pay, whatever it may be, you need to do it and it should be classified as a need. Now we're not talking about a need of paying your debt, which is obviously you have to do that every month, but we're just focusing on what it takes you to live housing, transportation, food, and clothing. How can we minimize these basic needs cost, that's what you need to focus on. And this will then help you increase your savings for your emergency fund. And the more you have in your emergency fund, the better off you're gonna be. Because if something major happens, that's unexpected, then you'd have enough money to cover it. And you won't have to borrow more money. In order to fix the problem. The emergency funds can create a financial buffer that can keep you afloat at a time of need without having to rely on credit cards or high interest loans, it can be especially important to have an emergency fund if you have debt, because it can help you avoid a borrowing more, one of the first steps in claiming out of debt is give yourself a way not to go further into debt. So how much you need? The short answer if you just starting small, set aside at least $500 and then build it up $100 at a time until you have at least some $1,000. Now and then my one of my questions is we're in an error of inflation. So saying you already have $1,000 and your emergency fund and you're working on paying down debt, do you need to increase your emergency fund, because perhaps the cost of whatever you would use it for is going up, such as tires for your automobile cost more, maybe a new hot water heater cost more, whatever it is, you can just think of things you might use a for, see what the price would be, and then try to increase your emergency fund to cover these items that you're thinking could be emergency. But do you really need to do that? I say no, because over time, you're automatically going to be starting to increase it as your debt is being reduced. And you get that first credit card paid off. That's that one less payment you have to make. So you're gonna have more money, so your, your emergency fund is going to build up a little bit faster. As your debt goes down over time, the savings account or your emergency fund is gonna build up over time, and the less debt you have remaining the pay off, you could just leave little bit extra in there. So instead of taking all the money out down to $1,000, to pay off some debt, once you achieve the the amount that you're looking for, you can maybe just leave $1,500 in there and apply it to your remaining debt, whatever it is you're trying to pay off. If you listen to my past episodes, you probably understand what I'm talking about. If this is your first episode, you probably have no clue what I'm talking about. But what I do is you make all the minimum payments on your debt, and then all the money that you're not spending. And you Cree, you got your spending under control, you have your budget, and your tracking, so you know exactly what's due and when it's due coming up. So you always have enough money to pay for your needs, then the rest of it is command transferred into your savings account or your emergency fund. Once you build that up to three or $4,000 over the amount you want to maintain and your emergency fund, then you take that money that's over the minimum of your emergency fund, and you apply it to a debt as you deck is paid off, if you started out with four credit cards was a $20,000 balance on each and a personal loan and a mortgage and a car payment. You got to keep that emergency fund down low amount of $1,000. So you can apply it to that debt. Because we all know you're not gonna make much interest, if any on a savings account at your local bank. And you're gonna be paying interest on that credit card quite a bit. And now it could be as much as 20 to 25%. So instead of being a slave to that debt, you want to get it paid off so that you can start having your money work for you. Instead of you working for your money. That's The main difference, and that's the key into building wealth over time. I hope that answers a question or just makes it as you know, as confusing as ever. The two links in my show notes is a consumer finance And then central guide to building an emergency fund. And the other ones a nerd emergency fund why it matters. As the two links in my show notes, if you want to read the whole article, feel free to do so. In fact, I encourage it, they both pretty much say the same thing. But how you build it are different strategy and getting your saving started the strategy rains from situations, including the if you have a limited ability to save if you if you pay tends to fluctuate, it could be okay, as it is giving you different things set a goal. automatic transfer to your savings account every pay period, whether it's$10, or $5, whatever it is, this is money that you are trying to save if you're putting money in your savings account. And then you have to transfer it back in your checking account, you're trying to save too much, you need to get something under control, you need to get your spending under control, you need to make the minimum payments on all your debt, he needs to pay either look at where you can save money, we need to look at where you can reduce your spending, whether it's cable TV, on your utilities, every place that your money is going, you need to figure out how to spend less for that same service. And that's going to vary based on where you live. While this is mainly focus on your emergency fund, it's a savings account that you set up, to put money in to build up over time, so that you can then apply a large chunk of it but not all of it to some debt that you have. It's important, because you never know what's gonna happen in the future. If you don't have a savings account, or if you have a savings account was $5 on there, and you never put money in there, you really don't have an emergency fund, the primary focus on emergency fund is to cover that unexpected expense that may happen sometime in the future. And that's gonna depend on how much you have on where you are. In your financial life. If you have a lot of debt, then you want to try to keep your emergency fund somewhere between 1015 $100 Because you're gonna build it up over time. So you're gonna, you know, might have 1500 in at the low point. And then the next month, you might have 2020 500, and then 3030 500, that whole time that you're building it up, so that you can have a large chunk of money to apply to debt. It's still there, it's still your emergency fund. So as something would happen, before you apply that to debt, you have a good sizable emergency fund. And remember, the primary reason you want a emergency fund is so that you quit using credit, you quit creating new debt. The minimum amount you keep in your emergency fund, is the minimal amount that you would think you would need is something would happen. How much is gonna cost you to replace two tires. On your automobile you blow one tire, but you need to replace a set two, or maybe four tires, or how much is gonna cost to replace a hot water heater or fix that clogged plumbing pipe. That's what your minimum emergency fund should be to cover those type of expenses. Hopefully they all don't happen at the same time. That may be the car would happen in one month and then eight months later, maybe the hot water heater might go out. You know it's not all gonna happen at the same time. So you need to figure that out. 1015 102,000 is a good number, for your minimum amount on your emergency fund, then we're gonna build it up past that amount, in order to apply a big chunk of money all at once on a credit card or some debt that you may owe. So the reasoning for the minimum payment is so you can build up your emergency fund. And then you apply it to whichever method you want to snowball method, pay off the lowest balance first, or the Avalanche Method, pay off the highest interest rate first. It doesn't matter what you do, as long as you have it written down in a financial plan, and you stay consistent with what you're doing. If financial plan should also include your goals, why are you trying to get out of debt? Well makes life easier, believe me? What's your reason, maybe you want to get out of debt. So you can save up some money. So you can start your own business, it could be a reason, maybe you're trying to retire early. So if you pay off your debt, he can say more money up for your retirement, so he can retire it at age 55 instead of 60. Or age 50 instead of 65. Whatever your reasons, are, maybe you're trying to save up money to buy a larger home, a newer car, college for your children, whatever it is, write it down, have a plan on how you're going to achieve that particular goal. He can have multiple goals, he should have a goal of saving for retirement, that you need a minimum of say 1000 or $500,000, he should have a goal for saving up for a down payment of a house, that if you're gonna pay for 20% down on a $500,000 house, you know, how much do you need, how long is going to take to get there, write it down, have a plan, and then review it every quarter or every month to see how you're doing. But you're not gone to reach any of your goals if you have a lot of debt. So getting rid of your debt is the first step. And to reach in any goals you've set for yourself and reaching towards that financial wealth that you may want in life. Don't rely on your inheritance to make it for you. Because you may not inherit anything. Or you might have to divide it up between many people. And you may not get as much as you think you got to rely on yourself, and you got to work at it. You have to watch your spending, you got to track your spending, that's the lifeblood, you got to have a budget that chick control panel, you got to have a debt reduction plan. That's a goal to read to become debt free, or become debt free, have all your credit cards, or all your personal, whatever it is all your student loans, you have to have a plan as a goal and a plan, how your goal is to be paid off. The plan is how you're gonna do it. And write it down. If you have a computer, you got a word processor, write it down, then you have it II can look at it, print it out, have it handy, and review it. It whether you review it once a month or once a quarter, it's up to you, you need to keep track of this kind of stuff, because that's the only way you're gonna get had in your financial life. Now, do you need to increase your emergency fund for inflation? Not really. And the reason I say that is once you set your minimum amount, whether it's $1,000, whether it's $1,500, whether it's $2,000, that's going to remain the same. And again, it might take you three months, four months to build up enough in there to apply it to some debt. So you're gonna have a larger amount of new emergency fund. So it's kind of already adjusted for inflation. And then you're gonna take it down to the minimum emergency fund. Were about 1000 to 1500 or $2,000. And it's only going to be at that amount, maybe 30 or 45 days and then you're going to start Bill And ended up again. Because as your debt is getting paid down, the your minimum payments are also going down. So the amount of money that you have available to put in your savings should be increasing over time this system works, it's slower to get started. But then it gradually over time speeds up as your debt is getting paid down, you're gonna be saving more money faster, over time, it's gonna build up faster, and you're gonna pay off debt faster, and it's just gonna keep rolling like a snowball, and it's gonna go faster and faster and faster. Now, if you listened to my past episodes, you know that I kind of do a hybrid, I started with paying off the lowest balanced debt first, so that you have at least one credit card with a zero balance. And then down the road, they may offer you a balance transfer, and have 12 to 18 months of interest free for on the debt that you're transferred in to on that credit card, and they charge anywhere from three to 5% to do the transfer, then you can help reduce that you can use that credit card to reduce your higher interest rate credit cards faster, which then speeds up the process because you're applying more money to the principal, and you're paying less money on interest, so that your balance is being reduced much faster. I'll be back in one moment with my final thoughts. If you're interested in learning about an online software that helped myself get out of debt, it does tracking, budgeting, and keeps track of all your assets and all your debt. And even tells you how much and when to transfer money into your savings account, and how much and when to transfer money to your debt and which debts to pay off in order. First. It's not cheap. It's a one time payment. But it will definitely be an investment, something and yourself and an investment in your personal financial life. If you're interested, send me an email at reduce debt increase And I'll send you the information about this online software that worked great for me. If you use my system, to reduce your debt, or to increase your wealth, because what are you going to do once your debts paid off? Well, you're going to start increasing your wealth hardship, you're going to start investing more money in places such as your savings account in places that's high yield savings, and your 401 K through work wherever your IRA, because one way you can build wealth faster is to minimize your taxes. And you do that by putting money into retirement plans and put off you're paying your taxes until a later date is called Tax Management. My particular method on what I'm doing, it's mostly focused on those trying to get out of debt. But you can do the same exact thing. If you don't have any debt. You just put the money towards an investment and stead of your debt. Because if once you get your money to work for you, especially while you're sleeping, the better off you're gonna be in there soon on to achieve whatever goals you have set in your written financial plan. So you need a written financial plan with your goals. And once you figure out what that is, how are you going to achieve your goals, then you need to track all your spending. You need to have a control panel, your budget, and it all works together to keep your financial life under control. You're starting out with just the basics. Pay your needs first, housing, transportation, food and clothing. After that, you look at some of your wants. Make sure you don't overdo your wants because that's gonna throw you off track for whatever goals you've set for yourself. All this is up to you. If you don't do it, nobody else will do it for you. You got to be focused, you have to give yourself a reason to go to work. Maybe you hate your job, maybe you don't want to do your job. Well, how do you get out of a job you don't like us have goals, you have your own financial independence, you don't have a lot of debt that bogging you down and holding you back to what you really want to do. So become debt free, at least from your credit card debt, your personal loan debt, your automobile loans. And if you've gone to buy a toy, a toy is something you really don't need, such as a boat or a second home, a vacation, condo, whatever it may be, you need to pay cash for that particular item. Because the debt will bog you now. And don't justify it by saying, I'm gonna buy a vacation home, I'm gonna rent it out half the year. But what happens if you don't rent it out at least half the year, how you gonna pay for that loan, maybe how you're going to take care of the property, who's gonna go in and clean it, if it's far away, all those become an expense. And then you have to replace the furniture because it gets broken and beat up because renters don't care. I hope you understand where I'm coming from. And the more debt you have, the more you're gonna be a slave to your debt. And that is why you're trying to get your debt paid off. As you know, quickly. It's not gonna happen overnight. There's no miracle unless you win a lot of money in the lotto, which Good luck from that because I don't win nothing. That just me. It's just a tough thing to do. So stay focus, have a written financial plan, have some goals, a way to get to the goals, stick to it, review it, and have your emergency fund. Have fun, that's there to help you quit using credit. It's there to help you pay down your credit. It's there to help you. And in case of an emergency on expected expense that pops up that you want to pay for without borrowing more money. The primary focus for those of you in debt, trying to reduce your debt is to quit creating new debt and emergency will then help you create new debt unless you have the money set aside to Kate. Take care of it when the need is there. And you'll be glad you did so