I’m a huge Dave Ramsey fan, seriously I live by the baby steps. This post is the first in a series where I will walk through his baby steps and detail how I went through each one. In case you are wondering I am now working on baby step 3, 4 and 7 all at the same time.
Dave recommends a start up fund of $1,000.00. This amount seemed too low for me and I was getting a bit anxious so I opted for a slightly higher fund of about $1,500.00. The amount of your emergency fund will vary based on your circumstances (medical issues, single parent, children, etc). If you are married you will need to discuss this amount with your spouse as it is important that you are both on the same page. And if you are single then just pick a number and move on. Keep in mind this is only a temporary small emergency starter fund; as you work your way through the steps Dave will actually suggest increasing this amount. His reasoning for the low $1,000.00 is that he wants to get you started on paying down your debt as soon as possible. Your mission is to make sure you have just enough to pay for these emergencies.
What is an Emergency?
If you are married then this is something you have to discuss with your spouse. Home decor, clothing, travel, etc is NOT an emergency. This money is only to be touched during serious circumstances. For me an emergency would be a blown transmission, travel for family emergencies, medical emergency, unexpected veterinary care, etc. I have had to touch my emergency fund several times due to Buddy eating fertilizer (didn’t really plan on him doing that) and a family emergency where I had to pay for travel arrangements.
An emergency will happen and you have to be prepared. Trust me when I say this little fund will save you headaches and anxiety. Hopefully you never have to touch it but if you do you will be glad its there.
Where to keep it?
I have mine in a money market account. All I have to do is log in and transfer this money into my regular checking account and it is accessible to me in about 2 days. I keep this money separately from my checking account because well . . . I don’t trust myself. I see this as preventative maintenance. If I were to log in to my checking account and see a huge balance I would be extremely tempted to spend it. Since this is an emergency fund, this money should be liquid and instantly accessible. Instantly as in a couple days not 6 months. Please do not go open a CD with your emergency fund money. Dave always stresses that this NOT an investment. Don’t try to get all fancy about it. Go open a savings account (be mindful of the service fee) and stick your emergency fund in there and do not touch it. Just leave it alone and pretend it doesn’t exist.
Saving up for the Emergency Fund
First thing first, have a budget. Some of the ways I saved money was by switching phone plans from AT&T to Cricket, locking in a low rate on my electric bill and alarm monitoring, meal planning and getting a toll tag. All in all this saved me about $250 a month. I was throwing away $250 a month just because I was not paying attention to my bills. All of these I just mentioned were set to automatic payment and so as long as they got paid I didn’t care. That’s all changed now because I am on a mission and I watch it all like a hawk. Look at your expenses and bills (actually look at the statement) and see what you can do about lowering some of those expenses. I will go into more detail on these expenses when I post about budgeting.
Once you have your emergency fund set you are ready to move on to Baby Step #2. The biggest and longest step of all, paying off your debt.
How did you save money for your emergency fund? Did you end up cutting out any expenses?