Welcome back to the series “Steps to Financial Freedom,” before I get started with step 3, I wanted to answer a question I received from one reader who asked:
“After paying monthly expenses I barely have enough to cover interest on my credit cards. Any suggestions?”
With the economy the way it is now, handling finances can be tricky. For many of you who may be in this situation, I suggest calling your creditor(s) to explain your current financial situation. Then negotiate a low (very low) minimum payment. (Like $5 to $10 a month)
The one thing you DON’T want to do is cease paying your credit card bills at all. This will harm your credit rating. When you get more cash flow, start paying down the principal balances on your debt using the plan described in Step 2.
Just to recap here are the first two Steps to Financial Freedom:
Step 1: Save $1,000 in emergency cash.
Step 2: Pay off all debts except for your mortgage.
And now, step 3: Save three to six months expenses in savings.
“Three to six months in living expenses?!?!?? I can’t do that!!!”
“Yes you can.”
Having an emergency fund with three to six months living expenses is great for times of unemployment, when your starting a new business and won’t be getting a steady paycheck, or an inability to work due to illness. When the unexpected happens, you want to make sure you have a back up stash to carry you through the muddy waters.
What’s the appropriate amount to have? That’s up to you. I suggest calculating the amount you will need to live on each month and mutiply that by 3-6 months. By the time you reach Step 3 you will have no debt (except for that pesky mortgage). It will be a welcome relief to start stashing away money for yourself instead of paying those debts. Take the money you used to pay off your debt and use that toward your 3-6 month Emergency Fund.
This fund is only used for emergencies like unemployment, sudden illness, etc. Don’t use your emergency fund for major purchases like cars or a downpayment on a house. (I’ll talk about that in a later post.)
I hope after reading these posts many of you are seriously making a commitment to lifelong financial freedom. Financial security doesn’t come when you make a certain amount of money, or hit the lottery, or get a huge pay raise - it comes when you take responsible steps today. I like what it says in Proverbs 6:6-10 (NASB):
“Go to the ant, O sluggard, Observe her ways and be wise, which, having no chief, officer or ruler, prepares her food in the summer and gathers her provision in the harvest. How long will you lie down, O sluggard? When will you arise from your sleep? A little sleep, a little slumber, a little folding of the hands to rest - your poverty will come in like a vagabond, and your need like an armed man.”
Six thousand words of wisdom in a few, succinct phrases. I love it.
So start gathering!