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:
- Being Frugal: How Much Emergency Fund Do You Need?
- Loonies and Sense: Choosing An Emergency Fund
- This Wasn’t In the Plan: The Story of Our Emergency Fund