The second step everyone needs to have is an Emergency Fund setup. For most, this amounts to $10,000 sitting in a savings account. If your income is greater than $250k a year, you may want to up this number a bit, but for the vast majority, $10,000 will do.

What exactly is an Emergency Fund for you might ask? Well, to start with… emergencies!!

The top two emergencies that affect our financial lives the most unexpectedly are Medical and Auto related. Breaking a leg skiing, getting food poisoning and puking your brains out, or any of the million other things that happen to us can land us in the Emergency Room end up being quite costly to boot. To add insult to injury, most insurance policies have a $500+ ER deductible. That’s where the Emergency Fund kicks in.

What about that car accident you caused while putting on your makeup or eating a McMuffin and drinking coffee and driving with your knee and the $1,000 deductible you have? Or that blown transmission that will set you back $2,000? Again, Emergency Fund.

What if you have credit card debt though? Good question. You still need the Emergency Fund because cash is king and you don’t want to only rely on what credit you have left, if any, on your cards to bail you out of a tight situation. Building your Emergency Fund is A-#1 priority and must be built before you start paying off your credit cards for a number of reasons.

First, I’ve already said, cash is king.

Second, having the $10,000 in savings gives an extra level of that good ole’ peace of mind factor that helps you sleep just that much better at night knowing you’ve got a little financial cushion to fall back on in case you slip on a banana peel.

Third, and this is the BIGGIE… by saving up $10,000 and not touching it, you start building a muscle most don’t even know they have in their body… the Saving Muscle. It is just like any other muscle, it hurts like hell when you work it out the first few times, but the more you use it, the bigger it gets and the more it can lift. If you follow the advice of so many ‘guru’s’ out there spewing their views on ‘being debt free’ and getting everyone to hate ALL debt, even the good ones, you’ll never build this muscle when it counts. If you go and pay off all your credit card debt BEFORE you’ve built the Saving Muscle at all, you’ll have that much harder of a time not going back into debt.

I know, saving money before paying off high interest rate credit cards isn’t the least expensive way to do it, but it’s much, much healthier and will pay off in spades in the long run. A couple of pointers about your Emergency Fund:
-It doesn’t have to earn interest since growth is not the point
-Put it in a CD if you can’t keep your grubby paws off of it and want to tap into it for every Retail Emergency you have
-Think of it as you would the fire extinguisher at work that’s behind the glass that says ‘Break Glass In Case Of Emergency’ and ask yourself if you’d actually break the glass for the reason you want to tap into that money after it’s saved.
-Put a fixed percentage of every dollar that goes into your bank account into savings so that it happens every time, not just on the bigger deposits.

Read step 3 by clicking here