the psychology of the 1000 emergency fund

April 16th, 2008

The Psychology of the $1000 Emergency Fund

In my post about how all funds are emergency funds, one of the commenters pointed out that $1000 isn’t really some magic number for what an emergency fund should be, in fact it was just a number that was easy to remember, and may not be sufficient for many emergencies that the average person or family may face.

I do agree, and I replied to her comment, but I realized I have a lot to say about the importance of the $1000 emergency fund as a starting point. The $1000 emergency fund as psychological hack was what got me to finally save an emergency fund, and so I thought I would write my full response in a more formalized way.

When you haven’t ever saved anything without a specific purpose pre-assigned to it for spending, or even haven’t ever saved anything at all, the conventional wisdom of a 3-6 month emergency fund may seem so daunting and overwhelming that you never start doing it. To many people, even $1000 is a whole lot of money to have saved. I know it was to me. So even though I wanted to save a 6 month emergency fund, it was out there in my mind in the pile of “things I wish I could do but I don’t think I ever can”. The idea of the $1000 emergency fund was still pretty overwhelming, but it was small enough that I could at least attempt it. The idea, when I first started saving, that I could save 6 months of expenses seemed so far out of reach as to be impossible.

Yes, all it takes is actually trying, but if things seem impossible, it is hard to take that step to try. The idea of the $1000 emergency fund makes saving an emergency fund seem possible to a much broader range of people. In my world, $1000 is a whole lot of money, more than a mortgage payment, more than any single bill we owe, even more than all of our monthly non-mortgage debt minimum payments combined. This is not to say that $1000 is a sufficient end-all-and-be-all emergency fund for us. But making $1000 our goal made the idea of an emergency fund actually become a reality.

Now, at the point I am at now – do I think a $1000 emergency fund is ultimately sufficient? No, I do not. Even if I did, the $3600 car repair should have taught me I was incorrect. But still, we generally have the $1000 emergency fund as our emergency resource. Why? Because what keeps me up at night, still to this day, is the never-ending monthly obligations of our debtload, and how close to our minimum income our minimum expenses are. There’s not a very wide gap between what the minimum we bring in per month (which is my spouse’s salary) and what needs to go our every month to meet our minimum expenses. Yes, we bring in more than that per month due to my efforts, but all of my work, at its heart, is contract work and not guaranteed to continue past today (illustrated by the abrupt loss of my primary contracting position last October). Although many of my projects show no signs of ending, with the economy as it is, one never knows when a program will be cut or a position will end. Although the same could be said for my spouse’s employment of course, the company he works for, even in these economic times, has been rapidly growing every year, and shows no signs of slowing.

So for us, right now, we tip our balance of savings and debt repayment much more heavily to the debt repayment end, which means the minimum $1000 emergency fund. This won’t stay this way forever, and the more debt we repay, the closer we are to getting a good night’s sleep. And the more soundly we sleep, the more the emergency fund will become a priority. But until then, that arbitrary $1000 number works for us. Although I look forward to a time that both my lack of debt and healthy emergency fund of 6 months expenses plus foreseen replacements lets me sleep even better than a baby.

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21 Responses to “The Psychology of the $1000 Emergency Fund”

  1. The point of an emergency fund while someone is in debt is not necessarily to be their cover all so if anything happens they are secure, but to have *something* that helps protect them from going deeper into debt in the event that something does go wrong.

    I personally am working to have at *least* 6 months worth of expenses in my emergency fund. Does this make me think that I’m invincible? Heck no! Something still could happen that will wipe out all my savings.

    But the mental bonus of having a cushion in the event of a tragedy is incredibly effective for ensuring peace of mind.

  2. Thank you so much for this, I was feeling so overwhelmed today thinking about how long it is going to take for me to get to 6 months, this was such a great reminder that I need to think in terms of baby steps!
    Thank you!

  3. Excellent post! I too am looking forward to building a six-month emergency fund and sleeping like a baby. For now, just having ANYTHING in savings is a big step.

  4. A six month emergency fund would definately be amazing but as you so rightly point out, while you are paying off debts it is better to pay the money off of the debts instead.

  5. Great post! I have my $1000 Emergency Fund set aside too. I know more is better, but the interest on those debts adds up faster than the interest on my ING account.

  6. To those that are stuck and a little on edge at only having a $1,000, focus and be disciplined about attacking your debt with all your energy. It took us about 3 years or so to get out of our 70k in debt, and another year or so to get a full emergency fund built up.

    I will tell you first hand that getting $12,000 in an emergency is an amazing feeling. It really does make you feel somewhat invincible knowing that you have the discipline not to spend and that it protects your family. The $500 a year in interest that it generates is nice too. Keeping digging!

  7. It’s a hard habit to save if you haven’t done it in awhile. It took 2 years to save some money for emergencies. (I kept finding non-emergency thing to deplete the dang thing.)

  8. $1000 covers a lot of “emergencies”, so it is a good number to aim for if one does not have a lot of money. Of course, $10,000 is better, but it takes a while to get there. I advocate a $1,000 fund as well, as it sounds good and “safe”.

  9. You know i think that its really good to have that money as an emergency fund, because it gives you that sleep at night factor.

    Its good to know that of something goes wrong at least you will have a little backing.

    I guess 1000 bucks these days is nothing … and hey if it helps you to sleep better at night to put aside more then do that.

    But you do realize that you can accumulate about 1000 bucks over a year .. if you just save 3 bucks a day.

    Thats very easy to do!!

    Young Investor

  10. Good points on the psychological hurdle of $1,000. While it’s probably not enough to keep a family going for longer than a few extra weeks or a month, in the event of a financial hardship, it can symbolize the start of a real savings plan.

    For people who have never had a comma in their savings account before, getting to that magic number can be a real encouragement to keep saving money. In fact, just getting to that number can help reinforce the behaviors that led to the savings plan in the first place, even if the emergency fund isn’t going to cover 3-6 months of expenses yet.

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