After 33 months of hard work we became debt free! That’s right, we paid off $107K in 33 months. But, we only had a $1,000 emergency fund in the bank. At that moment, as glorious as it was, we knew we couldn’t stop. In fact, we were just getting started. Here is the story of how we saved a $12,000 Emergency Fund in 3 months…and paid cash for a vacation.
Table of Contents
Debt Freedom
After the debt payoff, you would think we felt on top of the world. Erin was pretty excited, but I can’t say that I did. I’ll get to why I didn’t in a bit. It many ways it felt surreal to be in the moment that we dreamed about for 33 months.
Heck, a few years before that, if you told me we would pay off that much debt I wouldn’t have believed you. I would have thought we had to win the lottery to do that. I mean, who has even heard of such a thing?
Well, fortunately, after coming across Dave Ramsey, I started to hear stories of people doing just that. That gave us the motivation to believe that we too could pay off this debt.
…In Case Of An Emergency
Now that we were debt free, why did I not feel invincible? I mean, we were out of debt and didn’t have a negative net worth for the first time ever! It was also at that moment I realized that we didn’t have any money!
Well, not technically. We always kept a $1,000 buffer in our checking account. We also had $1,000 dollars in an online savings account that was our ‘emergency fund.’
Even with that money though, which is more than most people have available unfortunately, I knew that we needed to act quickly. While we hadn’t had an emergency pop up during our debt payoff you never know what can happen.
I felt more exposed than ever.
We also wanted to take a vacation a month after starting this savings goal. How were we going to save for an emergency fund and pay cash for a vacation?
How Many Months Should You Have In Your Emergency Fund?
There aren’t many things financial gurus agree on. I’m sure in private they agree on lots more than they let on, but mostly everyone seems to agree on having 3-6 months of expenses.
What I like about the 3-6 month target is that it is specific, yet still allows you to adapt to your individual situation.
If you don’t have an emergency fund at all and have debt, then start with $1,000 in the bank. Then, start attacking your debt. Once debt free, then you can come back and beef up your emergency fund.
If you have a family, one income and a house I can understand wanting more than $1,000 in that emergency fund. That is where you really need to evaluate your own situation. If you’ve never had a $1,000 before then stop at $1,000 and start attacking the debt.
If you have an ability to save up a few thousand more easily then I could see doing that before paying off the debt. The key is to make sure that you don’t get hung up with the emergency fund and never get around to paying off the debt.
For us, we wanted to save for a house down payment but we knew how important the emergency fund was. So, we chose to increase our emergency find to $12,000 which was almost 4 months of expenses.
How To Build An Emergency Fund Fast
Newly debt free, we were basically starting at zero. While it is better to be at zero than negative $107K, it is still daunting. In order to do that, we relied on what we learned paying off our debt as well as using our new found cash flow to make big strides.
For a step by step guide of how we approached our debt payoff check out our 6 simple steps to get out of debt. This provides a foundation that can easily be applied to save for an emergency fund.
In addition to those broad steps, we employed the following steps to build our emergency fund fast.
Convert Minimum Debt Payments Into Emergency Fund Savings
At the height of being in debt we had about $1,100 a month in minimum payments. Those were all now eliminated. So, to keep moving forward, instead of spending that $1,100 elsewhere, we put it directly towards our emergency fund.
A big reason to get out of debt is because of the monthly burden of minimum payments. So, the best way to stay out of debt is to put the freed-up money towards savings.
That way, you can protect yourself from emergencies and then start hitting retirement savings hard.
You’ve worked so hard to become debt free that you owe it to yourself to keep pushing and never be in debt again.
At the end of each month, if not right away, transfer that money out of your account into your emergency fund. You can even make it automatic by setting up an ACH transfer to your emergency fund to ensure that money is going into that account.
Lower Your Monthly Food Costs
One of our biggest struggles with the monthly budget is food costs. When paying off debt we limited ourselves to what we referred to as 1.5 meals out each week. Basically, one meal at a restaurant and one at a fast food joint.
Food can be so variable and if we don’t watch it our food budget can increase by a few hundred dollars if we aren’t careful. We continued our approach that worked for us during the debt payoff. Except for the vacation, we remained diligent with limiting our food spending.
Eating at home is the best way to eat for less. With both of us working full-time jobs at that time it was tough to not eat out. That is where we needed to be prepared and put mind over matter sometimes.
We brought lunches to work and had food in the freezer that we could heat up for dinner if need be.
Erin wrote a great post about drastically cutting your food budget which has lots of great suggestions too. You can read that here.
Establish A Spending Freeze
If we were going to save $12K and pay cash for a vacation, we needed to focus hard. This meant freezing the rest of our non-essential spending and direct all extra cash towards these goals.
We didn’t deprive ourselves. Instead, we splurged by paying cash for a vacation and got a $12K emergency fund instead.
That isn’t a mistake in wording. We splurged on those things because we deserved it. By doing that, we gave ourselves the best thing possible, security. It was much more rewarding than going out to eat more or going to the movies.
Cut Cable And Keep Phone Costs Low
As a holdover from our debt payoff we did not pay for cable. We stuck with subscription services such as Netflix or Hulu.
In addition to those we have since come across the app Hoopla, which allows you to stream movies and TV shows, amongst other things, for free through your local library. I encourage you to check that out.
We owned our phones and limited the amount of data we used. These types of monthly expenses can really add up. If you keep these costs low, you can put that money elsewhere and make progress in ways you didn’t think was possible.
With that, about a year ago we switched to Mint Mobile and drastically cut our monthly phone bill. We ended up saving $60 a month, or $720 a year. That is some serious savings and the service is the same. Seriously, do it if you can.
Get Motivated To Save!
As I previously mentioned, we didn’t have much money and if a big emergency hit we could be forced to go back into debt for it. We’d worked so hard to be debt free we couldn’t go back now.
It was a different motivation though from when we were trying to be debt free. Before we were counting down to zero. Now we were building up from zero.
It can often take a lot of energy to get moving from a fixed position. It is tough to build momentum. Since we had the momentum from paying off the debt we knew we needed to keep moving.
If you don’t have the advantage of having momentum like we did then examine your ‘why.’ Set goals and reward yourself along the way. Look for extra money coming your way that you can earmark for this goal.
Find that jumpstart that will get you going. Once moving it is easier to maintain.
Emergency Fund Thermometer
We tracked our progress using an emergency fund thermometer. Similar to the debt thermometer we used for our debt payoff, we colored in a thermometer to track our savings progress.
These thermometers are great! They provide additional motivation that is always handy and keep you pushing for more. It is always so rewarding coloring in the thermometer as you make progress!
Save The Extra Paycheck
In the first month, one of us received 3 paychecks in a month. We typically budget for 2 paychecks each. Therefore, the third paycheck is basically extra. So often though, it is easy for the third paycheck to disappear without an explanation of where it went.
We made sure to take advantage of it and transfer it directly into savings right away.
That was easier to do when we were both working. Now that we only have one income we have to take a different approach to save a portion of each paycheck in that month.
Here is the information about that method. After doing that 3 times it will total up to the amount of that extra paycheck.
Save Your Bonus
We were fortunate that during this time each of us received a bonus. After tax, we received about $3,500 combined. That was a big help and more than covered the cost of the vacation.
Like the extra paycheck we could have let it disappear. Instead, we transferred it to the emergency fund right away.
Bonuses are a great way to get ahead. This was an important part of our debt payoff strategy and it was critical for us to do the same here.
Once you get that bonus, put it towards that financial goal you have in a separate account. Don’t let it disappear in the wind.
Save Your Emergency Fund In A Separate Account
As you can see there were lots of opportunities for us to lose track of the extra money we were getting. By having a separate account to put that money in, it meant we could capture those savings right away.
If you keep it in your checking account it is so easy for that money to get spent eventually. The idea is to avoid that temptation and to just make it out of sight, out of mind.
That doesn’t mean you don’t know where it is or how much is in there. It just means that it is in an account that is not used every day or making purchases out of.
Where To Put The Emergency Fund?
The best place to keep an emergency fund is in a money market account. This is also referred to as a high interest online savings account.
There are a few reasons why you want to keep your money here instead of another type of account.
- It is less likely to be spent than if it was in a checking account.
- It is not subjected to the whims of the market. That way you guarantee it will be there if you need it.
- It can earn between 0.85% and 2% in interest which is much higher than a traditional savings account from a bank. The rates often change. Check in every once in a while to see if you can transfer to a new bank to get a higher rate. The higher the better. Don’t obsess over .10% of a difference. Your energy is better put elsewhere.
Verify that it is FDIC insured.
Some banks that you should consider are:
Any of these are great, so don’t get hung up on a particular one. It is easy to switch to a new bank if you feel the need.
Don’t sign up for a CD or anything that requires you to keep your money in there for a given period of time without access to it. While you don’t want to be pulling from it daily, you need to be able to transfer to and from it at any point in time you need to.
It also helps to track all your accounts using an app like Mint or Personal Capital. That way, you see your checking account and this savings account in one place giving you a better idea of your overall situation and progress.
We Went On A Vacation Too!
Following our newfound debt freedom, it was important for us to go on the Dave Ramsey show in person and do an official Debt Free Scream. This meant that we had to travel.
His show is located in Nashville, TN so we started to find destinations around there that appealed to us. We decided we would fly into Nashville and drive east a few hours to the Smokey Mountains. We would also visit the Biltmore in Ashville, NC which is America’s largest house.
It was early November, so fall was in full swing and it even snowed while we were there. What a fun experience!
We then drove back to Nashville to do our debt free scream. We wrote about experience here if you are interested.
Being able to do that was a great way for us to close that chapter of our lives and start a new one. Also, paying cash for all the travel was a relief too. It meant that we could truly enjoy it without worrying about how we are going to pay for it later.
Vacations are way more fun when you pay cash.
Our Income During This Time
How much did we have to make in order to save $12K in 3 months and pay cash for a vacation?
When we paid off our debt our income started at $83K and went up to $107K per year. That was with both of us working keep in mind. Than is roughly $41K – $53K per person.
Right after we finished our debt payoff our income bumped up to $110K a year. That bump helped but it was far from the reason we were able to save that money.
Don’t be dissuaded if your income isn’t this high. There are lots of ways to increase your monthly income and cut your budget to find extra money.
Also, keep in mind that we were making progress paying off our debt making $83K a year. At that salary we found at least an extra $1,200 a month on top of the $1,100 minimum payments.
Even if it took you 6 or 9 months to save $12K that is still awesome!
How We Saved A $12,000 Emergency Fund In 3 Months…And Paid Cash For A Vacation
As you can see, we took many actions to save $12K in 3 months and pay cash for a vacation.
The cumulative effect of all these efforts meant that we quickly were prepared for a sizeable emergency. I hope we never need it, but we don’t have to worry about whether we will be OK financially if something does happen.
Not long after our vacation we learned that Erin was pregnant with our first child. What a blessing to be able to bring our kid into a debt free family with a substantial emergency fund.
Now, it wasn’t something that just happened though. We were intentional with our money and resources. We had debt pay off and the emergency fund as our top priorities.
Saving for the emergency fund served as the perfect transition between the debt payoff goal and our future savings goals. To be able to save that much money in such a short amount of time helped prepare us for our next goal. That goal was to save for a down payment on a house.
