It’s Time to Build Cash and Get Out of Debt

Last week’s disappointing jobs report has underscored what many of us already knew – we are still not out of the woods. What we are now experiencing is turning out to be one of the longest recessions since the Great Depression.

The current economic and political climate, as well as the projections for the near future, have convinced me of one thing – there has never been a better time to get out of debt and build an emergency reserve of cash. That’s right, the day of debt reckoning has arrived.

Yes, I do say that to alarm you. I think people need to be alarmed. Some people need to take off their rose-colored glasses, remove their political hats, ignore their favorite celebrities, and look at the stark reality we face. Our country is bankrupt. We are at war. We are tearing ourselves apart along the lines of Left vs. Right, and they have both been wrong.

I don’t know what might happen in the next year or two. None of us do. However, I do know this – those who have freed themselves of the burden of debt, built an emergency fund, and made adequate preparations for a worst-case scenario, are those likeliest to succeed – even thrive – in the coming years.

This is where I differ from others in the personal finance realm. I think the number one priority for anyone, particularly those with a family with people depending on them, is to build a six-month emergency fund of liquid cash to cover basic household expenses (food, rent/mortgage, utilities, transportation). I don’t care how much debt you have. I don’t care how much interest you are paying. You have to start building a cash reserve…now.

Why a six month emergency fund? The average unemployed person in America has been looking for work for 39.7 weeks, so we really aren’t even covering that full period of average unemployment, but it’s a start.

Most disability insurance policies have a six-month waiting period. If you get sick, or are injured, and cannot work, it will likely be six months before your disability coverage kicks in.

Why not nine months, or a year? If you are still deep in debt, you must start paying down that balance. Six months of savings is a good point to make the switch from savings to debt repayment. Once completely debt free, I think everyone should have a full 12-month emergency fund.

The Four Pillars of Paying Off Debt

1. Pick a plan, any plan. There are plenty of “get out of debt” plans floating around out there. A couple of my favorites are the debt snowball, made popular by Dave Ramsey, and the Debt Tsunami, which advocates giving an even higher priority to emotions elicited by a particular debt, and using that emotion to prioritize a repayment plan.

Both plans largely ignore interest rates, unless everything else is equal, as a determining factor in which debt should repaid first. I generally agree with this approach, as the emotional “win” from paying off a low-balance debt quickly is more valuable than paying a little more interest on a larger balance.

However, I don’t think completely ignoring interest rates is the perfect solution either. After all, paying down a large credit card debt at 19% interest while making the last nine minimum loan payments on a 3.99% car loan with a smaller balance seems to make a lot of sense, from purely a financial perspective.

On the other hand, paying off that small car loan balance in three months, and freeing up another $400 a month that used to go towards car payments, may provide a quicker win in your own plan. Do what works for you.

2. Keep it simple. Whatever plan you choose, my best advice is to keep it simple. The more elaborate the plan, the less likely you are to stick with it. That’s just human nature.

Ask anyone who has tried (and failed) elaborate diets how successful they were month after month. Chances are, somewhere along the way, they slipped. Not that slipping is necessarily bad – we will all do it, but if we have a simple plan to begin with, it makes it that much easier to get restarted.

3. Stop spending. This one is probably the most obvious, but it also the most difficult. People who spend more than they earn on non-essential items are often trying to fill an emotional void. That was certainly my case. I bought stuff because it made me feel good, because I was bored, and because I was trying to keep up with others who made much more money than I did.

Of course, others are swiping their credit cards because they have no cash, for a variety of reasons – some quite legitimate. This prolonged recession (when will we finally admit this is a depression?) has left many, many people unemployed and under-employed. In fact, a record 44.7 million people are now receiving food stamps.

That means a lot of families out there are having to decide between swiping the credit card, or going without food, gasoline in their cars or paying an electric bill. Chances are, many of these families have already cut most frivolous spending from their budgets. If not, or if you find yourself in debt, but not to the point of having to ask for assistance, I plead with you to radically change your spending habits and start working to pay down debt (after establishing a minimum 6-month emergency fund).

4. Increase your income. Earlier, I mentioned #3 was by far the hardest step. However, in today’s climate increasing your income is a very close second. Many families have been hit by layoffs, with one or both spouses losing their jobs. Self-employed people have seen work dry up, particularly those involved in residential construction and similar industries.

I think we are living through a monumental shift, a turning point. For the last 50-60 years many families made their living by working at a factory, or for a city, or a utility or similar, large institution. They were offered pensions and health benefits after reaching retirement. Their jobs were relatively stable, as was their income.

However, things are changing. Many manufacturing jobs have left, and will likely never return (at least not in our working lifetimes). Politics have made public-funded pensions and benefits an endangered species, and likely a thing of the past. No longer can one count of getting a college degree, finding a job and working there for 30 years until retirement.

New generations will have to be much more adaptable, much more creative in their ability to earn a living. They will have to create a variety of income streams by cultivating a combination of their personal and professional talents and interests.

  • White-collar professionals may find themselves building privacy fences and decks on the weekends (or going full-time with a popular blog).
  • Teachers may host tutoring workshops after school to earn extra cash.
  • Policemen may start landscaping companies to supplement their income.
  • Nurses may offer to watch an elderly person in poor health to relieve caregivers.

The possibilities are endless, and in reality, we already see many examples of these types of things happening. The difference is that in the past we looked at people with two careers (or a side hustle) as a bit odd – like they were workaholics or people lacking the ability to pick a career path and stick with it.

Going forward, this will be the norm. And those not looking to diversify their income will be the hardest hit every time there is a downturn.

Get creative. Coordinate a block yard sale with neighbors and split the advertising costs. Build a blog about whatever it is that interests you and write about it. Engage with others online in your area of expertise or fields of interest. Ask your current boss if there are any overtime opportunities. Put in applications for part-time work.

Use every single extra dime you can scrape up to put towards that 6-month emergency fund, and then towards your debt repayment plan.

I’ve never been more convinced that this is the time to get out of debt. And if I’m wrong, and things suddenly turn around and the economy booms, you’ll still be better off without debt and a solid emergency fund.

You will be able to seize opportunities others can’t. You will free up income to make investments others will miss (yes, I’m still bitter about being in debt back in 2008 and missing the many opportunities during the “recovery”).

The bottom line is this…you have to start today.

Ignore the television tonight, sit down with a pad and pen and list your debts. Figure out how long it will take to save six months of basic expenses. List things you can sell to make that happen even faster. Brainstorm ideas for increasing your primary income, and for creating new income streams. Now’s the time.


  1. Dad, another great article. I can’t help but think that we are on the verge of another Great Depression. Can you speculate on this and what it will mean for society in general?

    My husband and I are debt free, including mortgage, and are now living in our retirement home. We have steady income(pensions) and try to live as frugally as possible. Just prior to reading this I opined to my husband that perhaps it would be wise to start living as if we were already in a depression. Too radical?
    We have our own vegetable garden, have installed both solar and photovoltaic cells to our cabin(greatly reduces utility bills and oil consumption) and have an emergency supply of non-perishible food and other essentials. We use coupons, shop for sales and bargains and curtail unnecessary trips and expenditures. We’re trying to be as self-sustainable as possible, short of acquiring livestock, but can we do more?

    • Lynda, to answer your last question first, yes, I think we can always do more. However, I think you are much further along than most of us! And, I would add to that, one must balance preparedness with other goals.

      As for another Great Depression…I really think with the perspective of history, we will look back on this time as the beginning of a prolonged depression. I believe what we’ve experienced from early 2009 to now is a false recovery in that much of the increased valuations in stocks have come at the expense of cheapening dollars – and increasing prices elsewhere.

      I don’t know if it is a sliver of optimism, or normalcy bias, but it is hard for me to imagine America going through another depression. However, my grandfather used to remind me that people thought the same thing in 1929, just before the Great Crash.

      If we do go through another depression, I think we’ll see some old-school skills make a comeback. People will find themselves having to do more with less, making things last longer, and repairing rather than replace.

      I wish I could hone my own mechanic skills, carpentry skills, etc. I alluded to some of these potentially in-demand skills in the types of side jobs people may be working.

      Unfortunately, many young people (and middle aged, too) have no idea how to use their hands to craft anything other than a text message. My grandfather was an excellent carpenter, but unfortunately I didn’t inherit all of his skills!

      • “People will find themselves having to do more with less, making things last longer, and repairing rather than replace.”

        My wife and I do this now, because I enjoy the act of maintenance and because she feels empowered by the practical arts.

        However, repairing something starts before you buy it. Consider a kitchen gadget. Most of the ones on the market today are designed to be unrepairable, to reduce cost and to increase “repeat business”. So, before buying an appliance or kitchen gadget, it’s worth examining it carefully and to see if it’s something that you can sharpen, maintain, and repair.

        I’ve found this to be true with items as sophisticated as automobiles. I had a 1989 Ford Tempo that was designed for rental fleets, and wasn’t designed to be serviced in the owner’s front yard — you were supposed to lift the engine out of the car to perform such basic tasks as replacing the belts, and there wasn’t enough clearance between the pulley and the wall of the engine compartment to get a belt or wrench in there if you didn’t. But my Ford Ranger is designed to be user-serviced for the most part, and it shows. A quick look under the hood to see if the various parts of the engine are accessible is it takes to tell the difference. So it is with appliances, too.

        The point is that the repair process starts before you even buy something. Trying to repair cheap disposable junk that wasn’t designed to be serviced stacks the deck against you from the beginning.

  2. My worry about this exact thing is why I am trying to have multiple income sources, cut expenses and learn to do things for myself. We still have a way to go, in both short term (a fully funded EF) or long term enough income from a non-primary wage income but we are making progress and that is all we can do.

  3. How timely… I was just pondering our debt and savings today and thinking that maybe we should up our savings. Since the grim job report on Friday and gas prices shooting up 20 cents (in MN) I am feeling a revamp is in order.

  4. Jason, thanks for taking the time to answer my questions. I, too, think that another depression is likely and normalcy bias is what paralyzes people who don’t realize what a precarious position this country is in. These problems are not going away nor will they be solved overnight. It was quite some time ago that I first heard of this “lost decade.”

    Being 57(with my husband 61), I can attest that it is never too late, nor is age relevant, when learning new skills. This is only my third year of gardening and we learned from trial and error what works and what doesn’t.

    Your blog is timely and I will take the time to research your archived material. I’ll also give you a shout out on my own local newspaper community blog. Keep up the great work!

  5. Getting out of debt is possibly the single most important way to change your life. the important thing is to do it now. Think how much extra money you will have if you are not paying interest. Better you can use it as an opportunity to simplify your life

  6. Frugal Dad, I disagree slightly. You are panicing, and acting like people who are convinced the economy is going to collapse, so they put all their assets into gold and guns.

    I feel the best approach is diversification, both in “savings” and income sources.

    For example, if someone has the free financial goals of 1) saving for retirement, 2) build an emergency fund, and 3) paying off debt, then I feel devoting 1/3rd of all savings to each is the way to go.

    Furthermore, diversification in income is important. Spouses have an advantage over singles here. But never devote all your time to your career, always have somethings going on the side.

    For example, at one point in the 1990’s I had 4 income sources (one full time job and 3 part time jobs). All eventually fell through as circumstances changed. Be prepared to “reinvent” your income sources.

    Anyway, that’s my 2 cents.

  7. I do have a cash reserve at home, but I am also working on a food supply. Coins are going to be good to have also. It can’t hurt anyway no matter what happens. 🙂 Be prepared for anything.

  8. Gooch, I agree with you comments. While I like the post, I personally don’t see anything different about the ideas and they are no different than what I have read elsewhere. The Dolans webpage and many others have been voicing this mantra for a long time. I also agree that this same advice of living a debt-free/cash reserve lifestyle ALWAYS applies, but concede that the present times and what may loom ahead does give the message more urgency and I think that may be Jason’s motive. If people need a reason to live this way, perhaps this will motivate them a little more. The bottom line is ALWAYS live debt free or as close to it as you can get given your personal circumstances. I never liked the feeling like other people economically owned me or I was one step away from financial disaster if there was an unexpected job loss or disability. Sadly, many live on the edge and I have seen it several times. I am surprised at the number of people that lease expensive autos, buy items they can not afford on credit, etc. and live beyond their means for image reasons or to keep up with the Jones’s.

    The bottom line is don’t panic about the economy. People who panic often freeze or react in the opposite direction than what makes sense. Instead, be cool, calm and collected…..and VERY SERIOUS about getting your financial house in order, and if you didn’t start doing so yesterday, start TODAY!

  9. The ideas aren’t necessarily new, but the implementation I recommend is often more extreme than what is suggested by others.

    For instance, I’ve long recommended a full one-year emergency fund while most of the financial gurus still recommended 3-6 months. I think it was Suze Orman who finally acknowledged this wasn’t enough, and began recommending 8 months worth ot cash reserve.

    I haven’t seen many other mainstream financial bloggers cover long-term food and water storage, and advocate bug out bags. I’m not defending my ideas as unique, rather the idea that I cover them in this forum is rather unique. Maybe I’d just like to think they are!

    I appreciate your feedback, and the suggestion to cover the topics you mention. Stay tuned – I definitely have something in the works on extreme couponing, and plan to cover more “living frugally” topics in the near future.

  10. I especially like point #1. Most people don’t really have a plan for getting out of debt. To add to that, you also need to make a commitment to yourself – without a clear goal, and the commitment to make it work, no plan will get you out of debt.

  11. We have long lived the plan you suggest. We lived overseas and learned to do without debt early in marriage. We also learned to keep money available….one never knows when you will be evacuated from a new war zone.
    I have a few suggestions.
    One should keep your emergency money in a LOCAL credit union. Hard to get something from an ATM that is closed or an internet bank when the electricity is down.
    One should have at least several hundred stashed at home somewhere.
    One should always have a decent first aide kit (not overboard- but basic).
    This should not be a temporary thing. Local catastrophes happen all the time. The more you have saved and kept up with your emergency fund—the better you will be.
    Last, FD – you ought to look at the LDS religion and see what they are doing for survival things. Cooperative farms, food supply, arming themselves, coin…all good things in case of a bigger emergency than people expect. Living with a former member has prepared us for everything—except our children moving 1200 miles away from us in either direction!

    • Coin and arming themselves is nothing but normal for survival. How do you expect to hunt deer? What do you plan on trading with- but coin? These are common LDS teachings in every ward from Arizona to Utah to Idaho that my husband’s very large LDS family tells me about.

  12. what has prompted this recent post. Is it the uptick in unemployment, the fight over the budget in congress, something you are seeing locally? I don’t want to be in”panic” mode nor do I want to live that way. I would love to be more self sufficient, but I really don’t know where to begin. I have a generator that runs on propane, a neighbor who gives us deer baloney, I also have a fireplace insert for winter so that cuts down on heating with propane. We buy the wood during the slow season and I try to stock up on what we really need as opposed to what we want. I have saving for retirement, but it isn’t a lot. I also don’t make a lot of money. I do have some savings but again it isn’t a lot. I work but not sure what additional income I could make freelancing, and what I should do in freelancing.

    • All of the above. The quantative easing (versions I and II), the prolonged unemployment, the astronimical debt, etc, etc. lead me to believe much of our economy is a house of cards, propped up by artificial means.

      I certainly don’t believe people should panic, but I think some amount of alarm is healthy, particularly if it motivates to get your financial house in order.

      I’ve always believed in a debt free lifestyle – I just happen to think it is more and more important the worse off we are, economically.

  13. one piece of good news…. I just found a job, and every extra penny is going into rebuilding my savings. I am aiming for a full year of minimum expenses.

  14. Love the keep it simple advice. So true. I like to pay myself first by having money put into savings every month automatically. Nothing simplier than never having to think about!

    • Kyle,
      If you have a 401(k) or 403(b) at work, you can also pay youself first (before taxes even!) by contributing to you plan.

      If you don’t have a plan at work, contributing to a regular IRA is also paying yourself first (before the government).

      Regular savings account contributions are after tax, so the government gets a cut at it first, then you second.

  15. Interestingly enough, I just had a conversation with my wife about padding our liquid fund up to a year of expenses.
    I’m not as “doomsday” as Jason is, but I there is certainly nothing wrong with having extra cash on hand rigth now. Whether for emergencies, or investment opportunities.

    • Friend of mine, who I trust, tells me average duration of unemployment has now reached 40 weeks. Many people have been unemployed for 3 years.

      Another friend of mine was unemployed for 4 years before she found a job.

  16. Absolutely right – you have got to start somewhere and start now. This depression is not going away anytime soon and the sooner we take back responsibility for ourselves the easier it will become. We gave ‘them’ control and look where it got us! Come on take action and take back control

  17. Excellent article. The unemployment rate is tremendous. People need to get and stay out of debt.

  18. Nice post. My wife and I were just talking about this. Our take was that we should seek to rid our financial life (now and in the future) of a dependence on credit and financial aid from the Government. This means we ignore what’s coming to us in social security, we build cash like we will need it for every purchase (big and small), and we don’t consider “subsidized” student loans an available source of financing for our kid’s education. Where I’m still uncertain is what to do with our investments….stocks vs cash vs real estate vs something else.

  19. I like your side hustle examples because — without meaning to — you PERFECTLY described two people who are close to me:

    “White-collar professionals may find themselves building privacy fences and decks on the weekends” — My boyfriend is an engineer during the week, and renovates a fixer-upper rental property that he owns during the weekends.

    “Teachers may host tutoring workshops after school to earn extra cash.” — this is exactly what my roommate does. Oh, and yes, I have a roommate (actually, I have 2 roommates), to bring my costs down, even through all three of us are professionals who have been out of college for many, many years. (Fortunately, we all get along great)

  20. A complete and balanced post. It is very important to have an emergency fund available. I think a lot of people don’t think about lowering expenses as a way of creating an emergency fund. Spending less money is like earning more… That and most people overlook the most important part of creating this: just starting.