Get Out of Debt in 9 Steps # 4 – Create an Emergency Fund

The personal savings rate in the U.S. is currently under 1%. Not quite negative territory as we often hear in the media (it was actually only negative for one quarter in 2005), but 1% is clearly not enough. Personally, I never had much more than $100 in a savings account until I started my financial turnaround and saved my basic $1,000 emergency fund. I do have small retirement savings as well, but if I were to look back at the money I have earned in my life versus how much I have now, it’s quite easy to see that my savings rate is less than 1%. We can’t allow this to continue!

If we know that the national savings rate is under 1%, odds are good that you too have very little cash saved for emergencies. Basically, that makes you ‘normal’, but to get out of debt we need to break away from the ‘normal’ American lifestyle.

If you haven’t saved any money yet, saving $1,000 probably seems like a daunting task. It did for me, but once I committed to saving the money it didn’t take very long at all. I started by setting aside $250 and opening an ING Direct Orange Checking account. I started with $250 because I had referral code that earned me a $25 bonus and my referrer received $10 (be sure to ask your friends if they have an ING account and a referral). I like the Orange Checking account because the interest rate is decent and you can use the debit card to handle your emergencies. ING has a very nice online interface as well and I am happy with my choice. You shouldn’t spend too much time worrying about the interest rate on your emergency fund though, you will find that rates vary a lot with the online banks and we aren’t talking about a lot of money in this account (at least not at the start) so just creating an account that you can easily access when you need it is the key.

How much should you save?

Starting with $1,000 is an arbitrary choice, really just a nice round number that will cover most normal emergencies. The rule of thumb is to eventually save 3 – 6 months of living expenses, but that isn’t very realistic for someone just getting started. I will be working on increasing my emergency savings more quickly once my credit card debt is paid off, but until that is done, I’m willing to live with only $1,000.

Ultimately, the amount of your emergency fund needs to be what you are comfortable with. What allows you to sleep well at night? You may need one year of living expenses available in cash. It is entirely up to you, there is nothing wrong with having cash. As your emergency savings grows to larger levels you could safely look at putting some of it to work in CDs or Treasury Bills to earn a little more interest if you wish, but you aren’t going to get much more than a good money market fund if you want to keep your money safe and liquid- which it must be if it is an ’emergency’ fund. Remember, this money is not an investment, it’s a safety net that will allow you to pay the bills if things take an ugly turn in your life. Just think about how you would feel if you lost your job tomorrow. Then think about how you would feel if you lost your job tomorrow and you had $30,000 in the bank. That money really changes everything- you wouldn’t have to rush out and look for a job or take a job that you don’t want just to survive.

It is true that you could have some of your emergency fund invested in mutual funds and most of the time you will earn a far better return on your money. The problem is, you will be at the mercy of the stock market. If your emergency hits when the market is at an all-time low, that $30,000 might only be worth $15,000. You have to decide how much risk you are willing to take, but I strongly advise treating this money as strictly reserved for emergencies and not invested in anything that can go down in value. You will have other dollars to invest so don’t feel like you have to have every dollar in high-yield investments. Remember, it is okay to have cash!

Next up in the series I will cover Living Below Your Means.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 3- Turn Your Junk into Cash

If you have been living beyond your means for a while and spending frivolously with credit cards, you probably have a lot of ‘junk’ in your house that you don’t need and never should have bought in the first place. It’s time to get some of that money back! This isn’t easy, and it can take a really long time (I’m still working on finding stuff I bought frivolously and getting it sold), but it is well worth the effort. I have made roughly $800 since starting on this step and I still have more junk to get rid of.

There are several ways to sell your stuff and I will offer a few ideas here.

  • Mention it to friends and family – you don’t want to nickel and dime your loved ones so this may or may not work for you, but there is a good chance that people you know will want to buy some of the stuff you have. This can save you time and shipping expenses.
  • Yard sale – I’ve never tried this, but obviously yard sales go on all of the time. Your success here will probably vary by the community you live in and how much time you feel like investing in the process. Check out this comprehensive list to see if you can handle it.
  • Craigslist – Again, I have not done this myself, but I know many people who have and it is obviously a very popular resource. Check out this link to learn more
  • Ebay – Probably the most popular way to buy and sell used stuff these days. You can search for tips on selling with Ebay and you will certainly find a lot of information. One thing I have noticed though, no one really seems to agree on the ‘best’ way to be an Ebay seller. I recommend picking a process and trying it, but be ready to change your methods and learn as you go.

I don’t want to turn this into a how-to article on selling your stuff since those articles are plentiful on the Internet. Instead, I want to focus on how to go about finding the stuff to sell and why you should consider certain things.

The easiest way to start is by looking for the stuff you have hidden away in closets, the garage, or storage. There is a good chance if something is hidden away already you won’t miss it if you sell it. A good rule of thumb is if you haven’t used something for 6-12 months you can safely get rid of it. Of course you will need to make these decisions based on your needs. I find it very helpful to look at the item I am considering getting rid of and think if I would rather have it or rather have the cash in my emergency account or the extra money paid on my debt. Emergency funds and debt payments will trump most things, but you also need to consider how much cash the item you have is going to bring in- I’m not generally going to bother with something that is only worth a few dollars so that item becomes a candidate for charity or the garbage.

A wonderful benefit of this process is not just the cash you can raise by getting rid of junk, but you will also be simplifying your life. The junk we have accumulated has to be moved, cleaned, or stored- that takes time and energy. This brings us back to living simply and de-cluttering, topics brilliantly covered in Your Money or Your Life. You should really read that book if you haven’t already. I have reached a point that I am annoyed by seeing clutter or junk that I don’t need in my house and I am constantly moving things to boxes for donations, sales, or garbage.

One major downside to selling your junk is the time it takes to get it done. I spent several hours listing things on Ebay for a couple hundred dollars worth of stuff, followed by the hassle to package the items and bring them to the post office. Personally, I find those tasks highly annoying but I made the time to do it because I wanted the cash and I also consider it partly as paying for my mistakes of the past and using it as a reminder not to make frivolous purchases in the future. If you are really busy and don’t want to invest the time, you might try finding someone to do this for you- teenagers in your family might be a good option since they likely know Ebay well and will be happy with a small commission. There are also businesses that take your stuff and list it on Ebay for you. You’ll have to decide how much of the cash you are willing to sacrifice for your time.

It’s up to you to decide how ‘vicious’ you want to be with getting rid of your junk, but so far I don’t miss anything I have sold and I keep adding things to my box of stuff to sell. Spend time thinking about your wants versus needs and decide where your priorities fall.

Some people are very serious about selling on Ebay and there are a number of ways to run an Ebay business to earn an extra income. We aren’t taking it to that level for purposes of getting rid of some junk, but it’s something to think about if you have the time and desire to find another source of income. This can be a test run of sorts to see if maybe that is a viable option for you some day.

This step is great to do early in your Get Out of Debt phase because it can give you a nice head start on saving your starter emergency fund, catching up on late bills, or getting a quick start on making extra debt payments. I strongly encourage you to take the time and try to be a bit brutal on your first pass through the house to find stuff to sell.

Good luck and come back for the next step in the Get Out of Debt series- Creating an Emergency Fund.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 2(b) – How to Make a Budget

In the previous step, I covered why you should make a budget and now it is important to talk about how to make a budget. As with any new thing you endeavor to do, the best advice is to start now and start with something, don’t worry about making it perfect on your first try.

No matter how you start, just get started- start on paper or start with a spreadsheet, whatever works for you. Start by writing your expected net income for the month at the top. Don’t just take your average salary for the year and use that. Look at how many paydays you will actually have this month and how much money you expect to earn. Admittedly, this is more difficult if you have a variable income, or if you expect large commissions or bonuses from time to time. There is a slightly different approach to budgeting for variable incomes that I will look at later.

Assuming you have a mostly fixed income, follow this basic format:

Cash on hand: $500
Net Income: $2,000
Total: $2,500

Mortgage: $1000
Utilities: $200
Groceries: $300
And on and on…
Difference– calculated field subtracting your expenses from your income.

Download this sample spreadsheet if you want an easy way to get started (Excel file, opens in a new window). The categories included are mostly what I use now, but you will of course change them as appropriate for your needs. Remember, this is supposed to be a simple starting point. I have come up with something a lot more complicated that I use now, but it didn’t start that way and I only made changes as I saw needs develop.

If you have a variable income, the same concept applies, but you need to go about it in a slightly different manner. Start by making a list of your expenses for the month and rank them in order of most important to least important. Then list your income, base income and cash on hand (whatever you know you will have) and start applying that to your expenses. Keep working your way down the list until you run out of money. I’m not an expert at managing a variable income. I have worked as a freelancer in the past and relied on a variable income, but I didn’t budget or spend my money wisely at the time. 🙂

The first time I created my budget I realized I was deeply in the red! It was over $1,000 negative. Of course, the only way to spend more than you earn is to use credit cards or savings, which is why stopping the credit card spending is critical to getting started on getting out of debt.

Ideally, your difference in income and expenses will be $0.00 or slightly positive. The idea is not to spend every dollar you have, but to allocate ‘extra’ dollars either to savings or debt payments. For example, if you work hard at cutting your grocery spending for the month, change your allocation and send that extra money to debt or savings.

Making your first budget is a huge step toward taking control of your finances. However, it is highly unlikely that your first month of living on a budget will go as you planned. Don’t let that discourage you! Just track your progress, update your budget weekly, and make changes as needed. You will get better at this each month, but it takes time to get it right.

In the next step I will look at how to raise some extra cash to give you a nice head start on getting out of debt.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 2(a) – Why You Should Make a Budget

Step 2 is Make a Budget, but I thought I should break that step into two parts- first explaining why you should make a budget, followed by how to make a budget.

We have all heard that you should run your finances like a business and all businesses have budgets right? Well, I imagine that any successful business does have a budget, but I’m not an accountant and I don’t know about you, but that advice never resonated with me. Let me tell you why I, a person who never had a budget before and never planned my finances ahead of time, think you should have a budget. It comes down to one word for me- empowerment.

You may think that making a budget will be boring, time consuming, difficult, nerdy, restrictive, or any other number of negatives that seem to surround the word budget. Guess what- I thought all of that before too, but since I’ve started living on a budget I can tell you that most of those words do not apply.

  • Boring – Yes, unless you love math and details this will probably be a bit boring.
  • Time Consuming – Yes, it will take a lot of time, especially at first, but it will get faster each month.
  • Difficult – Somewhat difficult at first, but once you’ve set it up the first time you are basically done with only minor tweaks left to make here and there.
  • Nerdy – Subjective, but nerds are a bit more popular these days so it isn’t all bad. 🙂
  • Restrictive – Not at all. I have found it to be exactly the opposite!

I think the greatest hurdles most of us face when it comes to budgeting are the fear of the budget restricting our fun and the amount of time we will have to spend managing it. These are valid concerns and it does take time to properly manage your budget, but the time commitment is far outweighed by the empowering benefits and control you gain after making a successful budget.


I’ve used this word a lot now so let me talk about how I find a budget to be empowering. If you are anything like me, your finances have probably been out of control for a long time. A budget is the only way to take control of your finances, and it feels really good to take back control of something that I couldn’t handle for so long.


  • Make faster decisions – Can we afford XYZ this month? Just look at the budget and you will have your answer.
  • Resist temptation – can I afford a video game this month? The numbers don’t lie. You can lie to yourself about how good or bad your finances are, but if you have it all on paper the truth is easy to see.
  • The power to say no – Having a hard time saying no to friends or family who want you to spend your money? It’s a lot easier to say no if you know for a fact that you can’t afford to spend the money and as an added benefit you can blame your budget for forcing you to say no.

If you still aren’t convinced, I can only encourage you to give it a try. Commit to at least two months and see what you think. I’m speaking to you as someone who was skeptical, but I am now convinced of the benefits of having a budget.

It’s nice to know why you should start a budget, but you still have to take the time to make a budget. In the next part, I will cover how to make a budget.

9 Steps to Get Out of Debt