Eventually, you’ll get to a point when you are your making last payment off your debt, and damn, you will feel good! You’ll be able to hold your head up high and know that you did this. YOU did this! You took control, forced your behaviour and your money to your own will, and did a good thing.
On the Dave Ramsey show in the US, people call in to give their debt-free scream. We can be a bit more British and reserved about it, or not – your call. But you should definitely mark the occasion.
You are now VERY different to the majority of other people in the country, for whom debt is an everyday part of life. For you, it’s past history, and you’re not going that way again. Sure, you may still have a mortgage and student loans, but those are good debts, remember? And the skills you have learned getting to this point are now going to help you build wealth, and fast.
First things first, though we need to top up our emergency fund into a fully-funded emergency fund. This will add up to somewhere between three and six months’ worth of your regular monthly expenses.
So, use your budget to work out your minimum standard of living. If you had to, you could survive on £X per month and still keep the lights on, food in the fridge, get to work etc. Multiply that figure by between three and six to work out what your FFEF should be.
Again, is it three months or six? I tend to say that if you believe your job is fairly secure, then you can probably get away with three months. If you’re self-employed or you think your job might be vulnerable in anyway, err towards the six months. It’ll also come down to your own risk tolerance – how close to the wire do you want to be?
The podcast this blog series is based on was recorded in October 2020, when we were about seven months into the Coronavirus pandemic. Easily the number one subject of emails I had in that time were to say that people are grateful they had an emergency fund, and thanking me for going on about it so much.
It can be really tempting, having achieved such a great result with your debt, to want to move on to the sexy stuff like investing and pensions. Yes folks, listeners to my show find investing sexy – and we’re not ashamed to admit it!
But don’t rush ahead. Having got back to zero – that is, you now don’t owe any bad debt to anyone – you need to lay your foundations before you start to build, and the emergency fund is part of this.
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