The idea is to put together $1,000 as quickly as possible. The $1,000 then functions as a beginner or starter emergency fund. This helps handle small emergencies that come up without using debt. So if a minor repair needs to happen or an unexpected medical bill arrives, this starter emergency fund allows to handle those issues without using credit.
3 MIN FROM 00:23 TO 03:24
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Debt Snowball: Payoff All Debt Except House
The Debt Snowball is a methodology for aggressively eliminating debt. Here's how it works: List all of your non-mortgage related debt from smallest to largest irrespective of interest rate. Then make minimum payments on everything except the smallest debt. Direct all of your remaining free cash flow at the smallest debt until it's paid off. Once the smallest debt is gone you move onto the second smallest debt. You can now pay what you were paying out of free cash flow on the 2nd smallest debt and whatever the payment you would have previously made on the smallest debt. So by eliminating the smallest debt you've increased your free cash flow by whatever that minimum payment was, which is now more money you can pay onto your 2nd smallest debt. You continue this process, eliminating the smaller debts and moving onto larger and larger debts. This process continues to compound... like a snowball.
2 MIN FROM 06:54 TO 09:13
3 MIN FROM 03:24 TO 06:30
2 MIN FROM 01:12 TO 03:09
Build a 3-6 Month Emergency Fund
Once you've paid off all of your consumer debt (mortgages are addressed in Baby Step 6) you begin establishing a complete emergency fund, which should be 3 to 6 months of your fixed expenses. It's not necessarily compiling 3 to 6 months of paychecks, but 3 to 6 months of fixed expenses. Fixed monthly expenses could be housing, gasoline, groceries, daycare, television, internet, cell phone bills, monthly insurance costs, etc...