Have you looked at your health insurance documents lately? If not, you might want to do so. Your health coverage could end your debt-free adventure at any time.
I have an Aetna policy with a $5,250 in-network deductible. So far this year (fortunately) SMB and I haven’t had to visit a doctor or hospital. But if either of us gets sick, we have to shell out money from our pocket up to this maximum. (I am not discussing the ways to choose a health plan, so don’t get distracted.) The point here is, whatever your out-of-pocket maximum may be, are you prepared to pay it off? Do you have that money?
You have worked very hard and now you are debt free; a big congrats! Now the next big hurdle is to remain debt free and continue to build wealth till you become financially independent or till you die, as simple as that! Pundits will suggest don’t use credit card and you will remain debt free, what if you are on low income and can not cough up emergency cash without borrowing money?
An illness is just one of the ways your debt-free life can be cut short. There are thousand of other ways you can find yourself in debt again. You will be fortunate if you get some time to build wealth before any of the following happens.
1. Natural disasters like hurricanes, tornadoes, floods, earthquakes, or landslides can destroy your wealth if not you aren’t prepared.
2. A financial disaster like a stock market collapse, housing collapse, or basically any kind of collapse can be just as harmful as a natural disaster, if you haven’t planned for it.
3. Not having adequate insurance coverage (any kind) could force you to pay for whatever is not covered.
4. A theft or fire at your home or business.
5. Your financial stupidity and buying what you don’t need
6. Job loss
You can come up with many more but, If anything like this happens to you and you don’t have capital to compensate for the loss, you will likely incur debt.
I recently read a CNN Money article that says 64% of Americans do not have even $1,000 in emergency cash!
Dear reader, ask yourself honestly, do you have the cash required to compensate for an emergency like those listed above? Next time you brag about your debt-free situation to your friends and family, stop bragging and ask yourself this important question! You better be concentrating on building wealth and increasing that emergency fund cushion.
Since you are debt free, it can be assumed that you know basic money principles, or at least most of them. I don’t need to tell you how to use credit cards or the benefits of setting automatic deductions from your checking account.
The fact that you are debt free but don’t have enough emergency saving leads to only one scenario – you have a limited income. Remaining debt free on a smaller income is a big challenge probably greater than the challenge you faced to become debt free. If you lose your job and suffer from an illness at the same time, what will you do?
I will suggest you act now and be prepared for this scenario. A cushion of 3-6 months of expenses in your savings account is not the most appropriate solution. In order to remain debt free, come what may, you need to be prepared for hardship. Going by human psychology, facing hardship willingly is probably 100 times easier than facing hardship forcefully.
Imagine yourself in hardship now. Imagine what comforts and luxuries you may have to give up if disaster strikes. If you could give them up in case of emergency, you could give them up now!
Cut your internet costs (access the net from the library, work, or a friend’s place), phone (either cell or home), cut TV (other options are there), completely stop eating out (cook your own food), downsize your home, sell clothes and furniture, stop buying things other than food and other life essentials.
Basically, take all the steps you would otherwise need to take in our imaginary disastrous situation. Maintain this almost minimalist lifestyle for 6 months to 1 year (or 2). I can tell you for sure that at the end of it, you and your family will have sufficient savings at hand even if you are living on a paltry income. You can go back to your usual spending habits after this self-imposed hardship period is over and thank me that day, for you read it the first time on this blog.
Financial implication on Self imposed hardship vs forced hardship
|In a forced hardship you borrow money from a lender, most probably drawing from credit limit. Requiring at a minimum 7.5% interest on the borrowed money. For calculation purpose let’s assume you need to borrow $5000 for your emergency.At forced hardship of 24 months, you need to pay $225 per month which will mean you need to pay $5400 back to the card issuer. Where as, in self imposed hardship you need to save only $209 per month. Remember , this calculation is based on lowest interest on credit card possible and only 2 years of forced hardship, if you can not save the required amount per month you will have to eventually pay a significant amount towards interest.|
The stat from CNN is upsetting. We can only hope that those without an emergency fund will stumble upon your blog.
Yeah I wish 100M Americans will stumble upon this post 🙂 This post is targeted for debt free but low income earners and do hope someone will find their way searching..
I am totally on-board with your comments regarding an emergency fund. It is always shocking to hear that folks have less than $1,000 in liquidity. The health insurance costs are tough to swallow.
Yes it’s awful to know. Thanks for your comment, appreciate it!
Buck Inspire says
Sad, but a good reminder that anything can happen and set you back, big time. During the real estate bubble I was in between jobs and had no choice but to live on bare minimums. We made it through ok, but we may need to go through the fire drill again since it’s been a few years. Thanks!
You need fire drill again if you have spent from your cushion or your need of emergency reserve changed. What exactly happened Buck?
Shaun @ Smart Family Finance says
I haven’t always made smart decisions about personal finance, however I’ve always had emergency savings.I’m surprised that only 36% of Americans have more than $1,000 in emergency savings. Having a cushion any cushion is a load of my mind.
Shaun we make mistakes all the time. When we first start earning money we want to buy every worldly pleasures, isn’t it? Glad you learned and now on right track!
Same exact thing happened to me. Thankfully, Get Rich Slowly, Yakezie Network, and your blog has helped me try to get back on the right track. Your blog is very informative. Thank you.
Financial Success For Young Adults says
Staying debt free is very important. I think the biggest goal for me is to keep building a cash stash while investing and paying off debt. Some recommend paying off debt before investing or saving but it only takes one emergency to put you off of your debt free goal. I’d rather do all three at the same time.
Oh so you are doing all three things together. Heck of a task, you need to be very careful on your expenses and do some maths to see if you can stop one and give priority to other two.
Grady Pruitt says
I know I have a long way to go to reach this point. Still, it is the path I will take myself. Once debt is paid off, you won’t need near as much to live, if you really had to. But being prepared will give you that peace of mind that you can survive when others would have as a financial disaster. Thanks for the post and the inspiration!
That’s why I mentioned going for self imposed hardship, at least it won’t give you that pathetic feeling a forced hardship would bring.
Bean Bags says
yeah…it is an interesting point that everybody can remain debt free and may be enjoy a lot for the whole life.
Paul @ The Frugal Toad says
It is scary to think that 64% of Americans do not have $1000 in emergency savings. Do you think their might be a correlation between living beyond your means and the high number of home forclosures we are currently seeing?