Set Aside $1,000 in an Emergency Fund. Now

This is a guest post by FWP. FWP from the Financial Wellness Project shares her stories, lessons, and progress reports as she attempts to get a handle on her finances and make sense of money while still living a ‘rich’, enjoyable life. Please consider visiting and subscribing to the Financial Wellness Project and share in her endeavors. She writes several times a week from the San Francisco bay area, in California.

This article is part of her ‘Friday Cures.. for a lean purse!’ series.

I have been reading Dave Ramsey’s famous book, The Total Money Makeover. Being part of the personal finance blogging community, it is difficult to not have been exposed to the famed debt snowball concept.  The idea piqued my interest, thereby prompting me to go out and borrow a copy of his book from the local public library.

In the book, Ramsey discusses his ‘baby steps‘, where he lists 7 steps for achieving freedom from debt.  Over the course of this series, let’s visit each step and evaluate how it pertains to our lives . I hope that you too might find this exercise enlightening and useful.

Today, we visit step #1:

Huzzah! I currently have about $1300 in my emergency fund, an FNBO Direct online savings account opened this past summer. (I am actually in the process of moving this money along with a few hundred dollars to a new EverBank account, due to a higher interest rate there.)

Why Should I do Such a Thing?

Before I began, I was skeptical and a bit confused. I had several thousands of dollars in consumer debt, about $7000 at the time. Interest was accruing on whatever was still sitting around at a high 16%. Could I really afford to NOT be putting in as much ‘spare change’ as possible towards my debt payments, rather than hoarding a bit aside (for very little interest rate anyway) ? Did this really make any sense?

Online, a fellow PF blogger had put aside $1000 to put his mind at ease. Apparently he had learned the lesson the hard way.  He initially had not, and then suddenly encountered car problems and as a result, immense car expenses. He did not have the funds for this, and so went further into debt, borrowing money for those new expenses. This reaction disrupted his debt-paying rhythm, and troubled him tremendously. In retrospect, he decided that he should have put aside some emergency money, and that he would set aside at least $1000 to avoid such a setback in the future.

This scenario pretty much reflects Ramsey’s reasoning.  He mentions also that some become discouraged from moving forward with their ‘total money makeover’ from encountering such a potentially stressful situation.

What About if I Don’t Have $1000?

Put aside as much as you can today, even if it’s $500.  It is imperative that you make building your emergency fund a top financial priority.

Where Could I Store This Emergency Fund?

Ramsey recommends opening up a regular savings account for this purpose.  Do not set up an account that will impose a penalty for dipping into the fund, such as a certificate of deposit (CD).  We want to be able to access that money when we need to.

Furthermore, he suggests that we put it aside in an account that is NOT linked up to any of our checking accounts.  It would make it too easy and tempting for us to falter and transfer funds for supposed ‘emergencies’ from the savings account to the checking.

Pros & Cons

I can see the advantages of this ‘baby step’:

  • I feel better knowing that i have some money — no matter how seemingly small — set aside that is liquid/easy to access, available to me in case of emergencies.
  • I would not incur any fees/penalty with the right set up (i.e. not putting funds in a CD) in case of needing to withdraw those emergency funds.
  • As long as an emergency didn’t cost me greater than $1000, I may be able to continue to make at least my minimum monthly debt payments without too much disruption, while slowly rebuilding the depleted funds.

Basically, I would feel a little more secure, knowing that I have some sort of backup just in case.

The main disadvantage, of course, is that that $1000 could be helping me to lower my future debt payments, by lowering the balance that the interest is applied to monthly. Using the money in this case instead would help me get closer to reaching $0 in debt.

However, I need to choose one set up or the other. After rationalizing and also consulting my emotions, the cost of not using the funds for a chunk of debt payment may well be worth the price of not having subconscious anxieties about a lack of backup resources.

Additional Resources

How about you?  Have you been putting aside money for an emergency fund of your own?  If so, how have you been doing? If not, why not?  What are your thoughts on this baby step?

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Filed Under: Credit Cards

About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.

22 comments
Mack jackson
Mack jackson

There is a great possibility of unexpected expenses for which you should keep some money as emergency fund. Post is giving great detailed knowledge regarding emergency fund, it will help the people who is having some less idea about it.

Debt Relief Geek
Debt Relief Geek

Nice post, very informative. It is really a good thing and even though our budget is short we really tried to set aside money for emergency cases.

An amount of $1000 is already enough for our family unlike for Atwater Village Newbie I guess they need more. And also, I agree with the comment of Retired at 24. We should learn to live within our means or we will be homeless after this economic collapse or we will never experience a debt relief.

fwp
fwp

@movingonup!
that's great you're saving as you can -- how did things go with your corporate office since you last commented?

@retired at 24
wow, did you really retire at 24?! if so, congratulations, that is amazing.

i indeed hope that more people will learn to live within their means too, so that they do not become homeless!

@cheapfinance
thanks for the compliments, and for sharing!

@nabloid.com
sound advice; thank you for sharing!

i agree that $1000 isn't much. but that is only the beginning, according to ramsey. after paying off your debts, he recommends revisiting your emergency fund to grow that. you do this by directing the money you sent towards your previous debts to this account instead. but that's a topic for another article..

@brad castro
thanks! and thank YOU for taking the time to read and share your thoughts.

it sounds like in your own way, you do have an emergency fund, of well more than $65! that's great -- this approach won't necessarily work for everyone, and it sounds like your method works well for you. the important thing is to have something in the background, i think.

@john
that's great advice. i certainly wondered about that myself when i contemplated what sorts of payments should be included/anticipated for an emergency fund.

@high return investing with dax
i absolutely agree with you that this should be a continuous thing. as i mention above in response to another comment, ramsey does recommend building your emergency fund after all your debts are paid off. and inevitably, since you may dip into this emergency fund at some point(s), you'll need to continue to add funds to it.

@robert
that's great! thanks for sharing your success with us. i agree that this is about minimizing future debt by having the funds ready for those future emergencies, and not having to dip more and more into credit and borrowed money.

@karla
yes, you are absolutely right! this is ramsey's advice for a first step. he certainly encourages readers to later grow this fund even more later.

not always spending cn be a wonderful and helpful habit indeed.

thanks everyone, for these latest comments!

Karla (threadbndr)
Karla (threadbndr)

As I understand it, Ramsey's view is that you should not use credit at all, for pretty much anything (though he does make an exception for a 15 yr fixed rate mortgage on your primary home).

The $1000 is so that a minor emergency won't put you back on the credit card merry-go-round. He seems to focus most on those who are just beginning to get a grip on their family finances. And so $1000 is a reasonable first step. Just getting into the habit of not spending every penny (and then some) is good.

Robert
Robert

My wife and I were big fans of Dave and did this - and it works just fine! The $1000 is there is keep you from using credit cards. Forget about interest, this is not wealth creation, this step is all about keeping you from going into further debt.

Good Luck!

High Return Investing with Dax
High Return Investing with Dax

I wouldn't just look at it as a 1 time thing. You should always be saving and have a buffer for emergencies. Those savings should be in liquid form and not in stocks.

John
John

If you still have debt other than mortgage than you should probably have enough money set aside so that you can make minimum payments for 6 months should you lose your job. That way you can live on credit for a while and still make payments thus avoiding insolvency. The best is to be debt free with some money in the bank of course.

Brad Castro
Brad Castro

LOL - I've got about $65 in my emergency fund. I suppose I should call it An Extremely Minor Inconvenience fund.

Actually, just about all my disposable income goes into the stock market, mostly via conservative options strategies. In theory, if I really needed some extra money fast, I could be creative with my investment account, and figure out a way to borrow it from myself.

But from a psychological standpoint, I agree with the idea of having $1000 in a safe, liquid place. It just makes you feel better knowing it's there.

Thanks - great post.

Nabloid.com
Nabloid.com

After you stop spending more than you earn, and your debts are paid off, you should have an emergency fund and a healthy and increasing investment account.

I think $1,000 is a good start - but it doesn't get you off the 'living pay cheque to pay cheque' boat that many of us are on. You never want to be one pay cheque away from bankruptcy, but many people are.

I also recommend that your investment dollars be outside of a 401k or RRSP plan so that you have access to the money if you need it (just remember, market prices fluctuate so you may not be able to count on selling it at the best time).

cheap finance
cheap finance

I just sent this post to a bunch of my friends as I agree with
most of what you’re saying here and the way you’ve presented it
is awesome.

I also blog from time to time on this stuff. In fact, here’s an
expert from my most recent blog post…

The internet is a wonderful place to find information. You can educate yourself about personal loans on the internet. There are many great sites that explain the types of loans to you. Here you will find definitions for terms pertaining to personal loans. You will also find sites that offer you tips and pointers for getting the best possible personal loan. If you are interested in comparing personal loan rates, the information is at your fingertips.

The complete post can be viewed easily on the following page…

I just sent this post to a bunch of my friends as I agree with
most of what you’re saying here and the way you’ve presented it
is awesome.

I also blog from time to time on this stuff. In fact, here’s an
expert from my most recent blog post…

The internet is a wonderful place to find information. You can educate yourself about personal loans on the internet. There are many great sites that explain the types of loans to you. Here you will find definitions for terms pertaining to personal loans. You will also find sites that offer you tips and pointers for getting the best possible personal loan. If you are interested in comparing personal loan rates, the information is at your fingertips.

The complete post can be viewed easily on the following page…

retired at 24
retired at 24

people will learn to live within their means or they will be homeless after this economic collapse

Movingonup!
Movingonup!

I'm finding out next week whether or not our corporate office is shutting down my office. I'm saving as fast as I can!

fwp
fwp

@donny, atwater, and savings account
yes, i agree. ramsey's suggestion here is that 1000 is the minimum, base amount at first. later on in the list of baby steps and after paying off your debts, he does discuss the step of building your e-fund even more to 3-6 months' worth of funds.

@stocks
that's awesome; good job! how long do you think it might take you to reach 1000? do you have your sights set on any particular account at this time (although certainly rates constantly change!)?

@wayne
congrats! that's quite a feat. it's great that you actually tried out the different ways, and have found that ramsey's way works out for you.

thanks everyone, for taking the time to read, and to offer comments/feedback.

certainly, no one way necessarily works for everyone; this is just one method out of many. choose what works best for you, as long as you keep reducing that debt and building wealth satisfactorily!

fwp
fwp

@traciatism and nick
certainly i see your points of views -- it was a rather difficult decision to make initially, as noted in the story. i agree mostly with the idea that you want to think with your head, and not with your emotions. for this situation, my head tells me that i want to stay as far away as possible from remaining dependent on lines of credit. setting/saving up an emergency fund may also help you discipline yourself for future money-related decisions.

wayne
wayne

To everyone dogging the idea. You are going on the assumption that you can just pay down and pay down, and no emergency is going to come along and drive your 12%int balance back up. EMERGENCIES HAPPEN! I've tried it both ways. The 'apply that money to the highest int rate' method didn't work, the Dave Ramsey way did. This way, as the balance goes down, it stays down.
How many of you 'logical' people are carrying debt? I've paid off 2 credit cards and an IRS debt ($6K).

savings account
savings account

I was wondering why $1000, that seems to be putting a barrier on how much interest rate that one gets?

stocks
stocks

Right now, I have $600 set aside, and as soon as it reaches $1000, it's going in a higher interest rate account, then rinse and repeat, over and over again.

Nick
Nick

I don't really agree with this. If you have debt with high interest, you pay that off. Lower the amount you're paying in interest, while lowering the amount you have on your card. So one day, when that emergency does or doesn't come, you'll have the extra $1000 available to you, same as you would if you had saved the cash, but it will be in the form of a line of credit. Plus you save the interest on $1000 of debt.

Donny Gamble
Donny Gamble

This is a very smart decision to make, especially during these times. I would suggest even putting more money up that allows you to live up to about six months without your current salary or any other additional money that you are making.

Traciatim
Traciatim

Mathematically doesn't it make more sense to just pay the money on your revolving credit at the highest interest and not have the E-fund anyway . . .

Lets say you have $1000 cash and a $5000 credit card at 12%. You put the $1000 in an ING account at 3% to keep you safe and have $5000 on the card. Your card limit is $7500, giving you $2500 available on the card and $1000 cash leaving you OK as long as your emergency isn't above $3500. After a month you get $2.50 from ING and your credit card charges you $50 bucks in interest, for a total cost of $47.50.

Instead you take the $1000 bucks, put it on the credit card. You now have $3500 of available funds in case of emergency, and it costs you $40 bucks a month to keep.

You may say it feels better to have the floating funds since using credit in an emergency makes it feel like you are going backwards, but simply knowing your choice is the best possible way out of debt should make it feel the best anyway. Logic over feelings when it comes to money, the money doesn't care how you feel.

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