The best way to tackle a big challenge is to break it up into smaller pieces. Otherwise if you try to do everything at once, you will fail. So tackling our financial situation needs to be divided into steps, and these steps need to be done in order as they build on one another—otherwise they do not work.
As we all know and have probably experienced, a rainy day will come and you need a rainy day fund. The car breaks down, the boiler stops working, you stop getting a bonus from work, you get fired, you need an operation that the insurance doesn’t cover or you have a big co-payment… Things happen! This is not—or should—not be a surprise: So be ready. You need an emergency fund. Obviously, 500 JD isn’t going to be enough for all big events, but it will be enough for the small ones until your emergency fund is fully funded in Step Three.
The ‘emergency fund’ is not for buying things or for vacations! It’s for emergencies only!! Many of us use our credit cards for emergencies—that’s how the banks convince us of the need to keep our credit cards. Some of us consider gifts for Eid or clothes for our growing kids as emergencies. These events are not emergencies and should be budgeted for in your budget. Real emergencies are those things that we can’t or don’t plan for and have no control over, such as a car breaking down or a medical condition with a big co-payment.
The first major step to your financial independence is to begin the emergency fund. A small start is to save 500 JD in cash… fast! If you have a household income less than 750 JD per month, then start with 250 JD. Again this amount is not major, but it will cover most of the small emergencies and will deter you from using your credit cards when these emergencies happen. And that’s the key:
No more borrowing! You have to break this cycle.
OK, we’ve worked hard, saved hard, and now we’ve got the 500 JD… Now what…?
‘Hide’ it! No matter what you think, you can’t keep the money handy you’ll almost certainly end up spending it. I put mine in a savings account with no access to it from my checking account—i.e. if I write a check that is not sufficient, the bank won’t pay out on it.
If you put your emergency fund where you can easily get your hands on it, your emergency fund will be spent on a whim.
Saving 500 JD is not a huge step, so do it quickly. Don’t let this step take months! If you already have this money in other forms, such as stocks, certificates of deposit, or anything other than liquid, then get it out. We are not going to become rich from 500 JDs but we do want it to be liquid in case of an emergency.
OK, you’ve got your emergency fund together, but what if you’ve then moved on to Step Two but you had to use your emergency fund to fix the boiler? Well, if this happens, stop Step Two and return to Step One until the full 500 JD is replenished. Only then can you go back to Step Two. It seems like a small thing to say, but if you don’t do it like this, you’ll get used to not having this small buffer and be back to old habits of borrowing to cover real emergencies.
Some might think this step is easy and simple. For some, this is the first time they have ever had enough control over their money to save it. In my case it was a difficult step: I’d never saved purposefully and when I started, I was in debt and had great difficulty not tapping into the emergency fund. But as I mentioned earlier, you need to keep this fund filled up. Eventually, you’ll find it becomes a habit.
For me, this step was very important and emotional: It was the one thing that I could do to prove to myself that I really could take control over my financial situation. The joy… the relief from that is actually hard to put into words. When you’ve saved your 500 JD, then you’ll know what I mean.
Once you start your 500 JD emergency fund and are ready for the rainy day, you can move on to Step Two and start the Debt Snowball reduction. We’ll talk about that next time. But until then, it’s time to get saving!