How To Start Saving Once You're Out Of Debt.

3/11/2016

How to start saving once you're out of debt.

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Once you pay down your debt be sure to build up (or start) an emergency savings fund

Dear Kim,

I recently made my final  payment on the debt management plan! My payment was $400 per month, which I will now be able to save. I currently have no savings and I am not sure what the best vehicle for my savings would be. I am thinking I should put the money in a CD or even an IRA. I currently have a bank account with about $100 in it.  What are your thoughts?

Sincerely,
Jeremy

 

Dear Jeremy,

Congratulations on paying off your debt! I know it can be a long road, so celebration is definitely in order. I am very excited to hear that you are planning to save the money you were using to pay your debt management plan. I do have a concern, however, which is that you only have $100 in your bank account.

I believe it is in your best interest to have at least 3-6 months' worth of  expenses saved in your bank account for emergencies. If you do not currently have a spending plan, I suggest that you track your expenses for 30 days to determine what you are spending on a monthly basis. Multiply that number by 3 and that is the minimum you should have in a bank account.

A Certificate of Deposit and an IRA are both wonderful savings vehicles, but they do not allow for quick access to your funds in case of an emergency. There is often a penalty involved if you withdraw the money from these accounts too soon. My suggestion would be to investigate opening an IRA or putting money into a certificate of deposit (CD) once you have saved the 3-6 months' worth of expenses in a savings account. An additional perk to having this level of liquid savings is that if an emergency does arise, you will not need to use credit cards.

Thank you!
Kim

 

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