why the 1000 emergency fund choice 1

December 12th, 2007

Why the $1000 Emergency Fund? Choice #1

Personal finance is, at its heart, personal. If it was just about numbers and figures and dollars and cents, there would be one plan that works for everyone and a whole lot of personal finance authors would be out of business. For every person, there is a unique set of circumstances, ideals, and beliefs that make them who they are, and a little bit different from everyone else. Over the next few weeks, I’ll be highlighting some of the personal choices that make me uniquely me and my family’s story uniquely ours. None of our choices are unique in and of themselves – but together they make up our own little slice of the personal finance world. For easy future access to the entire series, they each will be in the “Personal Choices” category.

The first is the $1000 emergency fund. There are those that advocate more, there are those who advocate less, and there are those who agree. Most of whom agree are followers of Dave Ramsey’s Baby Steps, which call for a $1000 emergency fund while getting out of debt. I actually have never read Ramsey directly, and settled on $1000 because that was the amount of my son’s college fund that we had basically been using as a “if we are completely desperate we’ll have to break into that” fund for the past several years. Which meant, for us and our situation right now, we felt a $1000 emergency fund would be generally sufficient. I’m happy to say that our $1000 emergency fund is completely separate from either child’s college fund now and is its own separate stand-alone account, that will someday form the seed money for our life emergency fund. And it has earned a whole ~$2 in interest. ;)

With everything, there is risk. I can think of dozens of things off the top of my head that might happen and cost more than $1000. But for every thing I think of that would require more than our emergency fund, I can think of dozens of smaller things that the emergency fund is sufficient to cover. For us, there needs to be a balance between a safety net and reducing debt as quickly as possible. Reducing debt is also a sort of emergency fund builder, in that for every dollar our minimum payments are decreased, that is a dollar freed up in our budget that if we needed to tap into in an emergency, we could. So in essence, for us, we are building some emergency funds into our budget every single time we pay extra towards our credit card debt and reduce that minimum payment.

Why an emergency fund instead of using our credit card in an emergency? We do have available credit on all three of our credit cards, two of which have a zero balance. If we needed to, we could use our credit cards as an emergency fund. We haven’t yet, since establishing the $1000 cash emergency fund, had to tap into it (although a few times I was tempted to “just in case”) and that is one of the two main reasons I won’t rely on the credit cards as the primary emergency source. Our budget is tight. I am trying to maximize every single dollar and use as much as possible towards debt reduction. That means that a lot of the time, our checking account is running close to the edge. I don’t want to be tempted to use credit “just in case” I don’t have enough cash in checking to last until payday. If worst comes to worst, our emergency savings account is attached to our checking account and I can pull the money out of the savings into checking until payday just in case. I can’t do that as effectively and cleanly with a credit card.

The other reason we use cash as our emergency fund is for piece of mind and self reliance. We are relying on ourselves to get us out of any mess we happen into, and we have given ourselves the means to do so. No, it will not cover every conceivable emergency, but we are balancing our perceived risk with our perceived benefit of using money over $1000 to pay down debt aquickly as possible.

So, that is the place we are at now and why we chose to have a $1000 emergency fund at this point in our lives. Ask us a year from now, and the answer might be quite different. What is your emergency fund, what circumstances influenced your decision, and why have you chosen that amount? Leave a comment or write your own post and I’ll update this one with a link to your perspective. I look forward to hearing your input!

Other perspectives on the Emergency Fund: 

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26 Responses to “Why the $1000 Emergency Fund? Choice #1”

  1. Our emergency fund is several thousand dollars–and it’s also our financial cushion for this upcoming job change. Basically, if the fund gets down to $1000, I start looking for another job.

  2. Although my husband has his own savings that can be tapped in an emergency I feel I should have my own mini fund. This seems an impossible idea right now considering I put every extra penny into paying off debt (which isn’t much). In the new year I will consider a new budget and rethink the emergency fund. Next year will be TIGHT as I will be off most of the year on maternity leave. In fact, I think I will officially be below the national poverty line. Yikes.

  3. Thanks Paid-Twice for the insightful post. I also am working towards the $1000 emergency fund cushion. Right now I am reaping the benefits of OT at work, getting all I can for now – there are rumors the OT can stop at anytime, so for today (One dayat a time!) I am living on (trying to) my hourly 40 hour work week, not expecting OT, nor basing my budget on OT. I am going to build an emergency fund of at least $1000 and then consider increasing it when the times draw nearer. As of right now though my savings account I just recently opened last week only has $150, so I have a ways to go before even hitting my $1000 buffer in savings. Again thanks for your posting.
    -Bill W.

  4. Great post. I’m also in an Emergency Fund frame of mind recently. Here’s my post on the subject:

    Choosing an Emergency Fund

  5. Right now mine is a little above $2000. But that was purposeful because I’m about to graduate (in 3 days!) and I was making sure I would have money for rent and car payment if I didn’t have a job right after I graduate. (Which I don’t yet). So I’m glad I planned ahead!

  6. My emergency fund goal is $1,000. I’d like to make it more, but wanted an achievable goal first and I have some other financial obligations to attend to as well. Eventually I’d like to make the EF around $4,000.

    I’m having a direct deposit from my pay check to an account I set up for the EF. It’s a forced savings and earns just a little bit of interest each month, but better than nothing. I also split any unexpected income 50/50 towards the EF and the new to me car fund.

  7. My emergency fund is ~$2500, which is just over two months of living expenses, and I contribute $100 to it every month. I have it at Emigrant Direct, so it earns a fair amount of interest.

    An emergency fund does wonders for my peace of mind. I graduated from college last year and had credit card debt and no savings. (Luckily I found a job that I started immediately after graduation … like, the next day.) Then when my student loan payments kicked in six months later, I panicked and read Suze Orman’s Money Book for the Young, Fabulous and Broke. It really woke me up and I got into financial shape – I stopped buying frivolous things, established an e-fund, started a Roth, paid off my credit cards and am doubling the amount I pay to my student loans each month to pay them off more quickly. It’s funny that I read this post today because I was just thinking yesterday how a year ago I had no clue about financial stuff and now I’m doing well and very proud of myself!

  8. This is exactly why I chose to make my sinking funds and a one month income buffer priorities before making any “snowball” payments towards debt. I have to have some type of security that when KNOWN issues arise or UNKNOWN issues arise, I will not be forced to use credit cards to deal with the expense. I am insuring myself by having the cash available, and once that is concluded, debt reduction can go in full swing without constant wonder of what is waiting for me right around the corner. Perhaps I will pay more interest, but being able to sleep at night is priceless. There is no point in all the effort if the moment you take a step forward you get slammed to the floor 7 spaces back.

  9. I don’t know if I made it clear in the post but I do agree that a $1000 emergency fund is not the be all and end all. We feel it is the right choice for us right now in the position we are in (relative to our debt etc) but in the future, we plan to increase it significantly. Just not yet. :)

  10. You did make it quite clear. In fact, uniquely so. Noting that the level of your EF and your personal financial choices generally are determined by your family’s unique circumstances, goals, and perception of risk is right on the money. Great post!

  11. I think you’re very right that you have to look at your entire financial picture when making these decisions. How much or little debt you have, your expenses, how old your car is – all factor into making the best decision for you right now. As things change, you can change your parameters.

    At this point in my life I get stressed if I have less than $10000 in easily liquid money. I know it’s not the best use of my money, but for me it’s exactly what you said – peace of mind. That doesn’t mean I won’t put emergencies on credit cards – I would. Then I get an extra month to pay, and get reward dollars. Credit cards are a tool for me, not a crutch or a bail-out, so for me that works. I’m not judging anyone that either simply chooses not to use them, or doesn’t feel comfortable or doesn’t currently effectively use credit cards, though. I’m sure some people’s relationship with credit cards is much like my relationship with junk food. I’m much better off staying far, far away.

    $1000 is a terrific start to an emergency fund, especially if you didn’t have one before. Every step forward is a step closer to where you want to be.

  12. I think that having an emergency fund buys you peace of mind, and to me, that’s priceless. My EF is relatively large – about £3K and rising, but I have security issues and no consumer debt.

  13. Hmmm. I actually have a lot to say on this subject. Thanks for tomorrow’s post idea. :)

    I think you’ve got the right idea. It’s going to vary from person to person, based on your circumstances and risk tolerance.

  14. I am a fount of inspiration for you Lynnae :)

    Looking forward to reading tomorrow ;)

  15. Right now we have $5k in our emergency fund and I am not liking this! We are credit card debt free however do have 6 more months left on a car payment. We do have non-retirement investments we could touch it need be

  16. I wrote a post about this
    The Story Of Our Emergency Fund

  17. I’ve recently written about this, but from the perspective of the self-employed. For me, a $1000 wouldn’t get me far, as there are times when I’m just not working, and I don’t have a spouse that I could lean on during lean work periods. I think an emergency fund needs to be based off of how the past couple years of “emergencies” have been. When I’m working, I generally never tap my savings account for more than $200 every several months. When I’m not working, it’s obviously much different.

    http://smarteasymoney.blogspot.com/2007/12/balancing-saving-and-debt-reduction-as.html

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