The first tip to achieving bajillionairehood is courtesy of doodskee, a friend and “one-time trust funds marketer and term insurance racketeer.”
Yes, as he pointed out in his comment, there’s is no point in putting our money in mutual funds and the like, if our credit cards are charging us more than triple the amount we can potentially earn from these investments. Although I don’t think this means that we shouldn’t save anything at all, and MoneySmarts agrees.
If we use ALL of the rest of our money – after basic expenses – to pay off our debts, we’ll be left vulnerable to financial shocks in case of emergencies, like an illness or an accident. When this happens, we’ll be forced once again to borrow at incredulous interest rates, and thus negate any progress we’ve made towards our quest to becoming debt-free.
Thus, while paying off as much of our debts as we can, we should still stow away some for emergency purposes. But how much? Is 5% of our income too little, or 10% too much?
And how do we make sure we don’t use the money we keep for non-emergency things anyway? Will a passbook account work? Open a joint account with your mom, who will absolutely not co-sign a withdrawal slip unless it’s for an emergency?
I tried this a few years ago, when I still wasn’t in as much debt as I am today, saving around 5% of my salary in a separate bank account. But when our family ran into financial trouble, the money that had slowly been accumulating for some months in that account was all too quickly depleted. Worse, my credit cards began to get maxed out one by one.
So, the question now is, how much of a buffer is enough?