Build an emergency fund versus getting out of debt?

If you look at The Crown Money Map or Dave Ramsey’s Baby Steps you’ll find both suggest saving $100o before paying off debt. This is suggested to help you avoid the use of a credit cards should an unforeseen emergency related expense arise.  However, The Money Map, differing from the Baby Steps, suggests you save one month’s living expenses after paying off credit cards to further establish safety.  The Baby Steps suggest paying off all debt before saving more money.  Obviously, the Money Map is in favor of more initial cash savings.

Believe me, I’m all for taking Dave Ramsey’s approach of using gazelle like intensity in paying off debt.  I hate debt.  But, I also don’t think it’s wise to spend too much time paying off debt with only $1000 in the bank.    Of course, Dave suggests you should be motivated to getting out of debt and making sacrifices to do so in a short amount of time.  I agree, but many people may pay down debt slowly with only this $1o00 in savings for a couple of years.  Having only $1000 in savings is unwise unless you can approach your debt pay reduction with the intensity he talks about.

So, emergency savings or paying off debt?  The answer, is both.  You should save the initial $1000, pay off your credit card debt and then grow your cash savings to one month’s living expenses.  Once you’ve attained that savings goal, continue your debt pay off plan with Dave’s gazelle-like intensity.

Use your emergency fund to get out of debt?

But, perhaps you’re unlike many people today and already have several months in emergency savings, but are still carrying some amount of debt around with you. Should you use some of your emergency savings to pay off your debt?

The previous answer helps answer this question too.  In this particular situation, I go back to keeping the one month’s emergency savings on-hand.  For example if you have 3 month’s of expenses saved and are still in debt (other than the mortgage), I suggest paying off the debt and leave 1 month’s living expenses in your emergency savings account.  You can then build your emergency savings back up when you’re out of debt.

The bottom line is you are still furthering your journey to financial freedom if you pause debt pay off to get to save one month’s living expenses.  One you start your debt pay off plan again, you’ll be much more financially secure and the chances of you going back into debt for surprise expenses will be much less.  But, make sure you’re using intensity, motivation and dedication in saving the one month’s living expenses, otherwise, it will drag on too long while your debt limits your freedom and costs you more money.

What do you think about an emergency fund versus getting out of debt?

If you’re not familiar, here’s a quick overview of the 7 destinations:

1. Begin using a spending plan & save $1000 for emergencies.
2. Pay off all credit cards and increase savings to one month’s living expenses.
3. Pay off all consumer debt & increase savings to 3 months living expenses.
4. Begin savings for major purchases (home, auto, etc.).  Begin saving for retirement.  Begin saving for children’s education.  If you want to start your won business begin saving for it.
5. Buy affordable home.  Begin prepaying home mortgage.  Begin investing wisely.
6. Home mortgage paid off.  Children’s education is funded.  Confirm estate plan is in order.
7. My retirement is funded.  I am free to to be more generous with my time and money

10 reasons why I love the Money Map

Here are 10 reasons why I love the Money Map and why I think it’s a great tool for anyone to use on their financial journey.

1.  Logical guide

The map is a logical guide to saving, paying off debt and accomplishing other personal finance goals.  For me, it was a relief to focus on one destination at a time and not all of them like I had been doing before using it for the first time.  But before focusing on my first destination, I love the fact that the map recommends giving to the work of the Lord as a step before taking the journey.

2.  Retirement contributions

The Map is open about retirement contributions.  If your employer matches, you should take advantage of this match and begin investing in retirement (even if you’re in debt) as long as you can continue to make forward progress.

3.  Save for major purchases

When do you save for major purchases such as a new car?  This is clearly spelled out in destination 4.  It’s important to build up your emergency fund before saving for other big items.

4.  Begin using a spending plan

Begin using a spending plan is the first step at Destination 1.  A spending plan is what will help you complete each destination.

5.  True financial freedom

True financial freedom is the final destination.  At this point, retirement is funded and you are more free to by generous with your time and money.  Sorry, it doesn’t mean you don’t work and sit around all day watching Andy Griffith reruns.

6.  Planning page

The flip side provides a planning page to help you determine your life purpose.  After reaching true financial freedom (the final destination) knowing your life purpose will help you determine what you’ll be doing with all of that time to give.

7.  Emergency savings

Before paying off all debt (destination 3), the Map directs you to increase your emergency savings to one month’s living expenses.  I think this is a good risk averse way to approach emergency savings.  The alternative is to pay off all debt first and then fully fund the emergency savings.

8.  Biblical finance

It’s Biblical.  Each destination has a scripture memory verse that provides encouragement and motivation for completing the destination.

9.  Money Map Coaches

You can get personalized help.  Crown has trained volunteers (Money Map Coaches) to assist people with specific questions and planning associated with each of the destinations.

10.  Roadmap to your finances

It’s truly a roadmap that you can display in your house and refer to each day.  I keep my personal copy with me and refer to it often to reflect on the goals we’ve achieved and where we’re going.

Money Map giveaway!

Okay, considering my appreciation of the Money Map, I’d like to give away 5 copies to 5 winners of a random drawing!

How does the drawing work?  Let’s keep it easy!  1)  Become a free subscriber to One Money Design posts by email or RSS.  Then, leave a comment here by midnight December 27th letting me know you’ve done so.  I’ll randomly pick five people (you can only win once) from the comments and announce the winners on December 28th.  Winners will be announced on Twitter and an email will be sent to each of them.

By the way, if you already have a Money Map, or you’re not planning to use it yourself, consider signing up anyway and give it to a friend or family member who might appreciate it.

Both plans provide great financial guidance.  I’ve been doing some thinking lately about highlighting the best of both (and some of my own ideas) and bringing them together in one list.   And this post will bring some of that thinking and brainstorming to a reality.

I wouldn’t say this changes course on what both Crown Financial Ministries and Dave Ramsey are saying with their plans, but I think it might allow one to consider additional steps or further options in working towards their objectives.

Money Map: things to do now

1. Create a personal financial statement (assets – liabilities = net worth) to get a clear picture of your net worth.
2. Create a spending plan or budget.
3. Track your spending against the plan on a daily basis for good personal cash flow management.
4. Execute a will.
5. Get an appropriate amount of life insurance.

The Best of the Money Map and Baby Steps

1. Save $1000 for emergencies.
2. Pay off all debt with the debt snowball paying smallest principle balances first.
3. Pay off a second mortgage if the balance is 50% or less of your yearly income (advice from Dave Ramsey I heard on his radio show).  Otherwise, second mortgages get paid off as you pay off your home.
4. Save up one month of emergency savings.
5. Take advantage of employer matching for your retirement plan as long as you can continue to make forward progress.   In other words, if your employer matches 50 cents on the dollar if you contribute 5% of gross income; go ahead and begin investing up to 5%.
6. Save up three to six months of living expenses for emergencies.
7. Begin savings for major purchases (home (20% down), auto, vacations, etc.)  Increase retirement contribution to 15% of income.  Begin savings for children’s education.  Emergency savings could also be built up to 6-9 months depending on your threshold for risk.  Obviously, there will be a lot of savings buckets created in this phase.
8. Buy affordable home if you do not already have one.
9. College savings funded.
10. Home paid off.
11. Retirement funded.  Continue to build wealth and give more, give more, give more!

I’m sure the above plan isn’t perfect,  As I mentioned, its not meant to be original, but I felt I needed to have a little more guidance around the savings area, in particular, that would define what we’re going to do with our money once emergency savings is funded.  Again, I tried to include what I liked about both the Baby Steps and Money Map in this post.

I think an interesting observation is that steps 1 – 7 could be done very early in life if you have the right motivation.  If  only I were in my twenties again!

What do you think about this plan?  Would you suggest any changes?

If you’re just joining, this is article #6 in a series about The Baby Steps and Money Map.  I invite you to follow along with me as I walk you through both approaches, discuss my observations, hopefully, stimulate your thinking and raise some questions. I’ll round out the series with some summary thoughts.

Baby Step 6 – Money Map Destination 6

What does the Baby Step say?

• Pay off your home early.

What does the Money Map say?

• Home mortgage paid off.
• Children’s education is funded.
• Confirm estate plan is in order.

Observations and Questions

• Essentially, both approaches are coming in-line with one another in phase 6.  At the end of this phase, both the Baby Steps and the Money Map have us paying off our homes and funding our children’s education.
• Have you ever thought about what it would be like to not have a home mortgage?  Many people don’t think about the home mortgage as being debt, but it is just another form of debt.  There are tax advantages to having a house paid for, but imagine all of the money one would have each month and over a year if the mortage payment was going to other financial objectives.  The home mortgage by the Money Map and Baby Steps is the last remaining debt to be paid off.
• The Money Map highlights a very important step in planning and that is confirming your estate plan is in order.   Since Destination 6 is near the final destination of retirement and in most cases the elderly years we are reminded to check our estate and make sure it’s in order.  Setting up a will was recommended as something to do sooner than later.  Here are 9 articles about estate planning created by Crown Financial Ministries.
• The Money Map scripture in this destination is John 8:32.  “You will know the truth, and the truth will make you free.”

What are your thoughts on this phase?  Have you ever given thought to paying off your home mortgage?

If you’re just joining, this is article #4 in a series about The Baby Steps and Money Map. I invite you to follow along with me as I walk you through both approaches, discuss my observations, hopefully, stimulate your thinking and raise some questions. I’ll round out the series with some summary thoughts.

Baby Step 4 – Money Map Destination 4

What does the Baby Step say?

• Invest 15% of income into Roth IRAs and pre-tax retirement plans.

What does the Money Map say?

• Begin savings for major purchases (home, auto, etc.)
• Begin saving for retirement.
• Begin saving for children’s education.
• If you want to start your won business begin saving for it.

Observations and Questions

• We see some key differences between Destination 4 and Baby Step 4.  The Baby Steps are more specific on what amount should be contributed to retirement.
• The Money Map recommends savings across four areas including retirement.  Note:  Baby Step 5 is college funding.
• I think it’s important to have a plan to save for major purchases beyond retirement and children’s education.  Once the emergency savings is fully funded (after debt is paid off) it’s important to create a car savings each month.  Otherwise, when the need for a car presents itself, one will be forced to go back into debt.  It’s also important to have seperate savings contributations for a home if that hasn’t already been purchased.
• The Money Map scripture in this phase is Proverbs 21:5.  “Steady plodding brings prosperity.”

What are your thoughts on this phase?  Do you think the Baby Steps left out important areas of savings, or were they meant to be high level and convered in Dave’s book, The Total Money Makeover: A Proven Plan for Financial Fitness.

Photo by Ann Cleaver.

If you’re just joining, this is article #3 in a series about The Baby Steps and Money Map. I invite you to follow along with me as I walk you through both approaches, discuss my observations, hopefully, stimulate your thinking and raise some questions. I’ll round out the series with some summary thoughts.

Baby Step 3 – Money Map Destination 3

What does the Baby Step say?

• 3 to 6 months in savings.

What does the Money Map say?

• Pay off all consumer debt & increase savings to 3 months living expenses.

Observations and Questions

• The Money Map pays off remaining consumer debt in this phase.  Remember, in Money Map Destination 2 you saved 1 month’s living expenses before paying off car loans, student loans, etc.
• Both approaches discuss saving up to 3-6 months of living expenses for an emergency fund.  This seems to be a standard recommendation from financial experts in books and around the internet.  Interestingly, there is a large gap between 3 and 6 months of living expenses.  Depending on how much you’re contributing to your savings, 6 months of living expenses might keep you in this phase for a while.  Obviously, the more emergency savings you build up the more you reduce the risk of going into debt which is a great thing to consider.
• The Money Map scripture in this phase is Romans 13:8:  “Keep out of debt and owe no man anything”.

What are your thoughts on this phase?  Are you in favor of 3 to 6 months of living expenses in savings?  If so, do you lean on the lower or higher side?

If you’re just joining, this is article #2 in a series about The Baby Steps and Money Map.  I invite you to follow along with me as I walk you through both approaches, discuss my observations, hopefully, stimulate your thinking and raise some questions.  I’ll round out the series with some summary thoughts.

Baby Step 2 – Money Map Destination 2

What does the Baby Step say?

• Pay off all debt wtih the debt snowball.

What does the Money Map say?

• Pay off all credit cards and increase savings to one month’s living expenses.

Observations and Questions

• It’s obvious the Money Map takes a more conservative approach to emergency savings because it recommends saving up one month’s living expenses before paying off all debt.  It advises to only pay off credit cards and then focus on building a bigger savings.  Do you think this is a good approach?  Dave Ramsey feels strongly about focussing all attention on debt, but others believe the emergency savings should be built up at the same time.
• The Money Map scripture in this phase is Proverbs 22:7:  “The borrower is servant to the lender”

What are your thoughts on this phase?

Coaching is free

Unlike many coaches and counselors, the services a Money Map coach provides are absolutely FREE. Some find this hard to believe, but it’s true. Most Money Map coaches are performing services as a ministry to help people with their finances and to teach them what scripture says about managing money from a stewards mindset.

Money Map Coaches are not employed by Crown Financial Ministries. They are volunteers who have most likely paid for their own training and operate under the authority of their local church (approved by their pastor) so that Crown can insure coaches are following Biblical principles in their teaching.

Topics not covered

Topics like investing, insurance, financial planning, and other related areas are not covered, other than to include these categories in a written spending plan when needed.

Financial counseling services

Below is a list of all the services Crown Money Map Coaches offer participants:

• Get a true financial picture of your situation and current state of your finances. For example, some people may not be aware their housing expenses are too high and are making it difficult to have money for other important budget categories.
• Create a spending plan with common spending categories and use percentage guidelines to determine if spending categories are out of balance with common benchmarks.
• Start tracking spending and measure spending against a spending plan to actively manage your finances.
• Learn the value of a freedom account and how to set it up to plan for future expenses that don’t occur each month.
• Help create a debt reduction plan and determine your debt free day.
• Learn Biblical financial principles about stewardship, debt, giving, saving, spending, family, work and more.
• A coach can also be helpful when individuals or couples aren’t experiencing immediate issues, but need to speak to someone about financial decisions such as buying a car or a house.

If you’re thinking about exploring financial counseling check out the below links to get more information about finding a Money Map Coach in your area, or talking to a coach on-line.

Money Map Coach Resources

• Locate a Money Map Coach
• What to Expect