Is $1000 enough for an emergency fund?

[wwjdmsl]

Originally Posted by Writer@Large

Someday, we will have to sit down and have a chat about the psychology of Dave Ramsey's Total Money Makeover. But the short, short version:

$1,000 is not what Dave suggests an emergency fund should be--that is, it's not what he calls a "fully stocked emergency fund." $1,000 is Step One of the TMM, the first goal you're to reach in the plan, and the first of many 'small victories" meant to keep you eager to save, not spend. It is a safety net for when the car needs repairs or the furnace breaks, because many people who find value in the TMM have a much smaller emergency fund: like "$5 in dimes and two credit cards with some money left on them."

Step three of the TMM is "fully stock the emergency fund." Which means--say it with me now--three to six months of expenses.

--W@L

Totally agree...this first 1000 is to change the behavior so if the car needs a repair, it will come out of this and not from the plastic that some folks will pull out and continue to utilize. As far as the 3-6 months goes, I like to stay close to the 6 month side.

[shengmei]

I think 1K is probably enough if you don't pay rent. That being said, it is only enough if you are adequately insured.

[cbmeeks]

I think you have to look at your family situation too. I have a wife and three kids (and three pets). I am going to get mine to at least $2k.

If I were single and no kids again, I could get by with $500. :-)

[boefixepa]

.....I must be odd...the more I have the safer I feel. There's no way 1k is enough for me. That's not even enough to pay the mortgage for a month. My long range emergency savings goal is between 18-20 K.

[wwjdmsl]

Originally Posted by cbmeeks

I think you have to look at your family situation too. I have a wife and three kids (and three pets). I am going to get mine to at least $2k.

If I were single and no kids again, I could get by with $500. :-)

Yep...gotta look at the family situation....our family size was 6 until the past year when the two adult children moved out of the nest but I still like to stay on the high side - 10k at least

[b4freedom]

How do you calculate what your emergency fund should be?

Bust out your budget.

To get your minimum emergency fund, multiply your monthly “essential” expenses by 6. Essential expenses are expenses that you must pay in order to keep yourself out of default, to keep your family sheltered, safe, and feed. This includes mortgages, loan payments, utilities, insurance, groceries, etc.

To get your ideal emergency fund, multiply your monthly net income by 12.

For example, if our monthly essential expenses are around $2500/month, our minimum emergency fund should be $15,000. If our combined take home pay was $4000/month, our ideal emergency fund would be $48,000.

That’s a lot of money to try and save up for an emergency. But, that’s basically what you’d need.

My wife and I had a child 9 months ago. Two months after our son was born, my wife was in an accident and couldn’t care for our son. She was immobile for 15 weeks. She couldn’t hold or nurse our son. The responsibility of caring for our son and my wife was on my shoulders. To top it off, our son was colicky.

Luckily, we had $18,000 in a net money market for an emergency fund. It took us 3 years to save that up before we had our son. Because of the accident I had to make some really hard choices. We didn’t have enough for me not to work, so we placed our son into day care, which added about $1500/month to our expenses. We cut every expense that we could. We became minimalist. For Christmas we asked that people not buy gifts and toys but give our son savings bonds and gift certificates to baby stores (for clothing, formula, diapers). A few friends even purchased us gift cards to grocery stores.

My wife is doing much better, my son is doing great. We are still over budget every month, but we get by because we had a safety net and because we stopped spending as part of an emergency financial plan. If we continue to be careful, we could "survive" another 6 months. After that, we’ll have to borrow more money in order to stay afloat. But, I don’t predict that will happen because things are getting better.

The problem with borrowing money to stay afloat is that you’re borrowing money which you really can’t afford to pay back. This leads only to financial insolvency.

[jmjj215]

Great post b4freedom! Glad to hear things are looking up for you as well. I can't imagine what that would've been like had not you not been prepared.

[parafly]

I will probably get bashed for saying this, but if there is ever a real emergency, a credit card with a high limit can be used.

My goal is to always have at least $2000 in my checking account at all times for rent, utilities, and every day expenses. All other excess income gets put directly into my high interest hsbc account. If an expensive emergency comes up, I can simply pay for the emergency with a CC, transfer the money from my hsbc account into my checking account, and pay the balance in full when the bill comes.

[sweeps]

parafly, I agree with you. But ultimately your emergency fund is your HSBC savings, since it's backing your credit card.

[boefixepa]

See this is what I mean. What happened to b4freedom....now that was an emergency. And a pretty dang big one at that. Those are the kinds of things you can't plan for. Those are what real emergency funds are for. Way to go with being prepared and having your ducks in a row!! Way to be the example....thanks for sharing!

I know things happen (like car repairs), been there, but if you know it's going to happen (you just don't know when) then you need to have that built into the budget.

[Lemony]

$1000 was not enough for us this month, as we had to replace our water heater and had car repairs during the same week. Total cost was $1500 (luckily we've got enough cushion in the budget to afford it). We're saving more in our EF this time around.

[lrjohnson]

It seems like a lot of people don't budget for certain expenses, and they become emergencies.

A blown trannie on a car. Missing a week of work due to being sick (no sick pay. Plane tickets to a funeral.

If I was in the very early stages of getting out of debt, those things might paralyze me. They aren't what I would consider emergencies, but having the $1,000 to take care of them might keep me from getting derailed.

I think the idea of a $1,000 cushion is great. Then i would build an emergency fund, and plan for certain expenses so that when my car needed repairs, I'd take it out of my "banked" car repair money instead of an emergency fund. (Maybe not funeral money-that's a bit macabre-but "urgent travel" or "family travel" or whatnot.)

[Writer@Large]

Originally Posted by boefixepa

I know things happen (like car repairs), been there, but if you know it's going to happen (you just don't know when) then you need to have that built into the budget.

But, again, the $1,000 is a baby step towards a fuller budget plan. The kind of people who start out with a $1000 fund (like myself a few months ago) do so because they don't have the means yet to be bankrolling money for anticipated future car repairs.

Originally Posted by lrjohnson

If I was in the very early stages of getting out of debt, those things might paralyze me. They aren't what I would consider emergencies, but having the $1,000 to take care of them might keep me from getting derailed.

Exactly. And for most of us with the $1000 fund, that's all it is--it's there until we can build a better base.

--W@L