Here is the next installment in our the Reader’s Questions Series which highlight questions emailed to me by you, the readers of Money Q&A. Be sure to find out at the end of this article how you can receive a free copy of Dave Ramsey’s book, The Total Money Makeover if your money question is chosen to be featured on an upcoming week’s blog post.
If you’re not familiar with Dave Ramsey’s book, you should run right out and get it. It is one of my top ten best personal finance books that everyone should read. Now….on to our reader’s question.
I have just begun reading Dave Ramsey’s book, and I am a little nervous about only have $1,000 in my emergency fund when I start following his plan. Only having $1,000 in the bank makes me feel like I’m walking on a tightrope without a net. Is a $1,000 emergency fund enough?
This is a great question, and it is one that a lot of people struggle with when they first begin Dave Ramsey’s program of seven baby steps. The first baby step is to get a starter emergency fund in the bank of $1,000. He wants you to do this as fast as possible.
There are several ways that you can accomplish this task. You can get on the right foot doing this by selling things that you have around your house that you do not use.
Or, you can get a small part-time job, even if it is simply delivering pizzas, that will help you pile up the $1,000 as fast as possible.
Baby Step 1 – $1,000 Emergency Fund
Have you ever tried to get out of debt? I mean really tried. It is incredibly hard. Many people find themselves trying and slipping back on their old ways. You relapse for many reasons such as not changing your habits that got you into debt in the first place and having to go back to your credit cards when emergencies and Murphy crops back up in your life. Having a $1,000 emergency fund in place before you start to tackle your debt will help you from having to go back to your credit cards for a bailout.
When a true emergency comes up, and we all know they will, you should have a buffer of cash sitting readily available simply in a savings account earning next to nothing in interest at your disposal.
$1,000 Covers 99% Of True Emergencies
Is a $1,000 emergency fund big enough to replace the transmission in your car? Is it big enough to foot the hospital bills after an extended stay? No, $1,000 will not be enough to pay for these big items, but it will be perfect for 99% of all the emergencies that you will face while starting out paying off your debt with The Total Money Makeover.
Think back to all the emergencies that you have had or the things that you have needed to put on your credit card. Very few of them ever cost more than $1,000. One of the biggest tricks though is truly understanding what constitutes an emergency. Far too many of us think that everything is an emergency.Is a $1,000 Emergency Fund large enough to start?Click To Tweet
We are not honest with ourselves, and that is one of the reasons that we are in debt. Do not cheat and use your $1,000 to fund vacations, minor things that can wait until you are out of debt, things that can be saved for and paid with cash, and others.
What Happens If You Have A Large Emergency?
So, what happens if you have an emergency that costs more than $1,000? While these are very rare when you honestly look at events, large emergencies may happen. Car engines, transmissions, extended hospital stays, and the like can wreck havoc on any budget and emergency fund.
You may still find yourself with other options rather than going back into credit card debt to handle these situations. You may not like the alternative that you are forced into choosing such as taking public transportation instead of buying a new car. In many cases, hospitals can help you set up a payment plan to allow you to pay for large uninsured procedures over time.
These payments would be added to your debt to be tackled in Baby Step 2 with your debt snowball. There are options out there for the large infrequent events that challenge your $1,000 emergency fund. The key is not to slip back and relapse into a life that you were living which found you in debt in the first place.
Having a $1,000 emergency fund is Baby Step 1 of the Dave Ramsey Baby Steps.
Past Readers’ Questions:
- How To Prioritize Which Bills To Pay First
- Should You Put Your Emergency Fund In Mutual Funds?
- How Do You Start Saving If You Live Paycheck To Paycheck?
- How To Find A Payment Plan Without Cutting Necessities
- Is My Money Save In A Bank?
- What To Invest In After The Company Match
Do you have a money question that you would like to ask? Email me your money, investing, retirement, savings, or other question to Questions[at]MoneyQandA.com. If I pick your question for the next article in the series, I’ll send you a free copy of Dave Ramsey’s book, The Total Money Makeover, or you can pick from any of these other free books instead.
Thank you all so much for the questions! Please keep them coming!