How do you know a crisis is coming? When you aren't prepared for it.
It at least seems like that to me. I would have money in my checking account, my bills paid, so I would go buy something pretty for myself (like a nice Sand Wedge :) ). The next day a bill would arrive from the IRS asking for $1200 I didn't realize I owed them. Scramble time! I would run around, maybe do a Direct Deposit loan at Wells Fargo, use a credit card, whew..all is well. Of course, I racked up debt, blew my budget and didn't manage my money well at all.
I have extolled the virtues of having an Emergency Fund before, but I believe being prepared for success mean, not setting yourself up for failure. Here are my top five ways I have seen me and my friends set ourselves up:
- No Emergency Fund - Enough of me beating a dead horse to death, but I disagree with some that say pay your Credit Cards off first, because you can charge any issue that comes up. This was my fervent believe, but I didn't pay it off right away. Plus I never broke the Credit Card vicious cycle.
- Budgets like a dictatorship couldn't live under - You really want your budgeted amounts to be based in reality. Not, we'll I read you can live on $40 a month per person even though we always spend $150. You are setting yourself up for failure. Nothing wrong in beating your budget! Successes breed more Successes, Failures breed Pop Stars..sorry I meant Failures.
- Not reviewing at least the last two years expenses - You will miss large swaths of land if you don't. Like "oh yeah, I need a car battery every x year, and tires."
- Cut up your cards, but don't cancel your accounts, yet - I disagree with Ramsey a bit here. Bad things do happen. As you are paying off your credit leave the accounts open. This is in case something happens that swamps your Emergency Fund. Not to mention that a big part of your FICO Score is your percentage of available credit and credit length. Better scores mean better rates.
- Expect Everything to get Better in a Month - You hopefully didn't spend it overnight, ingrain the habits overnight, don't expect now that you are working it rain will stop falling. Too many get discouraged by a setback. Setbacks are learning experiences! Embrace them and move forward
As with everything I post I am not a CPA, nor did I sleep in a Holiday Inn last night, do what works for you and your budget, it is the only way you will ever stick to it and that's all that matters...