If you’ve ever researched personal finance in the past, I’m sure you’ve heard of the Financial Guru, Dave Ramsey. He has helped thousands of people escape debt and live their best lives. His carefully laid out plan includes allocating specific percentages to different categories of expenses, such as housing, food, charities and even saving. But before any debt repayment can begin, there is one step he insists is first. Save $1,000 towards your emergency fund.
Before you can begin paying down your debt, working on a budget or any steps in between, the first step is putting away $1,000 for an emergency. Any unforeseen situations that pop up can then be properly handled with your emergency budget. Frantically searching for a credit card with enough credit available to afford your emergency is no way to live.
Since starting my path to financial freedom, I reviewed all my monthly expenses and every twist and turn life had thrown at me lately. It was clear $1,000 emergency fund is not even close to what I would need to keep me afloat and give me peace of mind. I mean, that’s essentially what it is. It’s a peace of mind account, to give you the reassurance to life your life without the dark cloud of uncertainty to follow you.
$1,000 is a great start though. Having even a little bit in your account can be just what the Doctor ordered for you. It was revealed in an article nearly half of Millennials wouldn’t be able to afford an emergency costing $500, so you would be in a much better position than most.
Reviewing my monthly expenses and taking into consideration those unknown elements, I determined $5,000 was a better starting point for me. I live in New York and have higher expenses than others, so this was a more accurate goal for myself.
Everyone’s monthly expenses aren’t the same and your situations are all unique, so the starting point for your emergency fund can be different. Remember, if you’re following Dave Ramsey’s 9 Steps to Financial Freedom, this is just the starting point to cover your back while you prepare to jump into debt repayment.
Do You Really Need an Emergency Fund?
Everyone needs that reassurance to continue their lifestyle even when the unknown hits them. A sudden card repair or the water boiler gives up. You never know when you may need to dish out a sudden expense. That’s why an emergency fund is so important.
However, some experts suggest it may not be needed if you are completely debt-free and are more financially secure. I assume they believe you can cover any expense that comes your way since you already have a little more freedom in your bank account.
I strongly disagree. I’m more on the side of Gandalf screaming, “You Shall Not Pass!” to anyone without a peace of mind fund. Even if you have no debt, a full bank account and investment portfolio going strong. Your money needs a purpose and assigning specific funds to your Emergency fund should be in place. You don’t want to take away from your vacation fund or house fund.
But that’s just my opinion. You could feel very confident you can financially handle anything life throws your way. I don’t know your situation and I’m no professional. I’m just a guy with a blog and too much coffee.
How Much Should You Have in Your Emergency Fund
If you are just starting Dave Ramsey’s plan, then I would suggest at least one month’s total expenses. $1,000 could cover one or two expenses, but you never know if it will be more. Giving yourself a full month’s expenses to cover the unknown is much more certain to cover those surprises.
If you are debt-free or close to it, professionals recommend saving anywhere from 3 to 6 months total expenses on average. So if your monthly expenses are $5,000, you should save $15,000 – $30,000. That sounds like a lot of money, but it’s the one place in your accounts that are solely dedicated to covering your back and letting you continue living your current lifestyle.
You may even be asking me, how can I possibly save that much when I don’t make much. Your Emergency Fund doesn’t need to be full by tomorrow. It takes time to build it up to the amount you want. Don’t rush this process and put too much strain on your day-to-day expenses just to build your Emergency Fund. Otherwise you would need an Emergency Fund to cover you trying to build an Emergency Fund!
I recommend taking your time, pulling money out of your monthly budget to start building this fund. Even a little bit is fine at first, slowly accumulating into a nice amount.
Where To Put Your Emergency Fund
I would recommend putting your Emergency Fund in an account outside your normal banking institute. You want your money available when you’re in trouble an truly need it, but you want it further away so you’re not tempted to use it when you shouldn’t.
Remember, your Emergency Fund is there to protect you, not cover impulse purchases or topping off your vacation budget. It’s there to cover the unexpected and help you continue to live your life without worry. A peace of mind account.
You should store your Emergency Fund in a High-Yield Savings Account, Money Market or a CD. Your money should be hard to reach for your daily life, like I said, but there when you need it. Sort of like State Farm Insurance, like a good neighbor.
