An emergency fund is the money your grandma always said she was saving for a rainy day. Life happens. And sometimes life can be expensive. Car problems are usually the most frequent. But if you own your house or condo, there are also broken water heaters and refrigerators that go out. And so on.

For us freelancers, emergency funds are extremely important. Our income usually various from month to month and some months can be really slim pickings. Of course, on our slow months is when everything will break down. You don’t want these unexpected costs forcing you to turn to credit cards and debt.

Most financial advisers recommend an emergency fund that would cover 3 to 8 months of expenses.

Take a quick look at your budget. How much do you need to cover your bills for a single month? For our example here, let’s say you need $1,500/month. You’d then want to save a minimum of $4,500 in your rainy day emergency fund. We can slowly build this emergency fund while paying down our debt, and then attack it once our debt is gone.

Having this emergency fund money readily available when something terrible happens means you won’t have to whip out a credit card, and add even more stress – financial stress – to an already terrible situation. If you’re in a car accident, or a relative gets ill, or your muffler falls off, you don’t want to be worrying about where the money to get through will be coming from. Instead you should be focused on fixing or dealing with whatever the emergency is.

This money should only be tapped into for emergencies. Christmas isn’t an emergency. A trip to England isn’t an emergency. A new book, or lunch out with a friend, or LeakyCon – not emergencies.

So where should we stash this cash?

My emergency fund is in an online savings account. Safe, boring and easy to ignore until I need it. My emergency fund is fully funded for 6 months worth of expenses. It’s not earning me much sitting in a boring old savings account, but this money isn’t for investing. It’s meant to be liquid and available the moment something happens.

Many people choose to keep their emergency fund in a CD (Certificate of Deposit) with a local bank. You’ll certainly earn a little more on interest than I will, but remember, most CDs have rules about when they can be cashed in, and if you cash them in too early, you may have to pay a small penalty. One way around the cash-in penalty is to ladder your CDs, and we’ll discuss how to do that in a future post.

Finally, you could also keep your Emergency Fund in a money market account. Where you decide to start saving and building up your emergency fund really isn’t important, what’s important is that you start saving and building up your emergency fund.

Keep in mind you don’t need to save your entire emergency fund at once. If you’re focused on paying off debt right now, then set up an automatic deposit of just $100/month. The important thing is that you start. And start with a goal. If you say you need $4,500 in your emergency fund, write that number down, and write down how many months it will take you to hit that number at your current contribution rate.

Goals and milestones are so important when learning and trying something new. You have to be able to track your progress and see that you (and your money) are growing. And you wouldn’t be here reading this if saving wasn’t new to you.

I’ll spend more time in future articles on goals, their importance and which ones you should start setting soon. Until then… have you started contributing to your emergency fund yet? Why not? Get on that before your transmission fails or your boss catches you tweeting from your desk and fires you.

While it may be true that money won’t make you happy, it sure as hell won’t make you sad.

Now that we’ve budgeted, we’ve cut expenses, and we’ve looked into various ways to make more money, we should be running at a surplus every month. So, what do we do with all this “extra” money?

You will fall into one of the following two groups: Group A has debt (credit cards, student loans, personal loans, car loans) to pay off. Group B is debt free and needs to learn to save and invest.

Group A: You guys are going to take every extra penny you can squeeze out of your budget and you’re going to throw those pennies and dimes and dollars at your debt. Sit down with a notepad and write down all of the creditors you owe. Then list them in order of smallest amount, to largest.

We’re going to use Dave Ramsey’s Debt Snowball method (I’ll explain in a minute) to get rid of these debts.

Making a monthly payment sure does sound like a good deal in the beginning. Department stores will let you take home HDTVs, laptops, clothes, Playstations, and anything else you want, in exchange for a low, low monthly payment. But stop for a moment and calculate the interest payments you’re making on all of that stuff. Reader Bill (@drnoise) had a credit card with a $500 limit. He used it to buy some tools for his job a few years ago. He’s been making monthly payments since and just paid off that credit card three days ago. He ended up paying a total of over $1,300 for those $500 tools.

That is not how you build wealth.

Now that I’m no longer making monthly payments on my car, my credit cards, or any other debt, I’m able to save and spend and donate all of that money however I see fit each month. There is a wonderful feeling of security and safety that comes with not living paycheck to paycheck. It’s completely changed my life and daily attitude. And you can feel that security too.

Bill started his Debt Snowball four months ago when he and I were talking and he asked how I got out of debt. So, let me share with you too how it works.

The Debt Snowball method is taught by financial adviser Dave Ramsey. I did not invent this. But Dave advocates preaching it as much as possible, and I’m proof it works. So here we go:

• Line up all of your debts from smallest amount to largest amount. Do not worry about interest rates.
• Pay the minimum amount due on all debts except the smallest one. We’re going to take all the extra money we can find, and focus on paying off the smallest debt first and fast. The goal here is to pay off the smallest debts quickly. Not only is this going to free up more cash in our monthly budget, but it’s also going to help motivate you to get out of debt, and start building wealth.
• After you pay off the smallest debt, take the amount you were paying on that, plus your extra money every month, and roll it over to the next smallest amount. When a snowball rolls, it picks up more snow with each rotation. That’s exactly what we’re doing here. Each time we pay off a debt, we’re going to take the amount we were paying towards it, and roll it over into the payment on the next debt.

Using the Debt Snowball last year, I paid off all of my credit cards within six months. Then cut them up. After that, I took the payments I was using on my credit cards, and rolled them over into my monthly car loan payments. Suddenly, instead of paying $200/month on my car, I was paying $600/month. At that rate, it doesn’t take long to save a ton on interest payments, and pay off the loan completely.

Before beginning your Debt Snowball, many people advise you first save up a small emergency fund. This is a $500-$1,000 buffer in a savings account. This isn’t for clothes or vacations or awesome sales on Amazon. This is for emergencies only. Flat tires, broken windshield, extended illness where you must miss work.

We’ll talk more about emergency funds in the next post. For now, start compiling your list of debts.

Group B: Congrats on having no debt! Now we just need to be smart about how we save and invest our extra money. Starting with the next post, I’ll discuss various savings accounts, retirement accounts and investments for your money.