Why a Thousand Dollar Emergency Fund?

Why a thousand dollar emergency fund?

Followers of Dave Ramsey will already be familiar with the idea of a $1,000 “baby” emergency fund. The idea is to help folks stop borrowing money for small emergencies. It’s not meant to be the entire emergency fund forever; instead it’s his step one in getting out of debt. (With the idea that a full emergency fund will be built later as part of the process.)

It’s a lot of money! (And not enough)

I remember the first time I heard about having a thousand dollar emergency fund. My first reaction was “That’s it!? A thousand dollars?” But then about 5 seconds later I had a flashback reaction of “On the other hand, a thousand dollars is a LOT”.

So how can it be both a lot and not nearly enough? It’s a matter of perspective. When you’re in debt, or even just living paycheck to paycheck, even a hundred bucks can seem like a small fortune — let alone a thousand.

But once you’ve gotten a handle on your money and experienced a large emergency (like being out of work for months with no job prospects in sight), you realize just how little $1,000 might cover.

Both those ideas can be pretty discouraging.

So why a thousand dollar emergency fund?

While I don’t know Dave Ramsey’s thinking on the matter, my point of view is that $1,000 is doable for many people, although it may seem out of reach initially. You can sell stuff, work extra hours, do side jobs like babysitting or petsitting, and save up $1,000 fairly quickly with some hard work.

And once you have that thousand dollars, you have a weapon against Murphy. So instead of resolving to get out of debt and then not having a penny to your name (because you put it all toward debt), when an emergency happens you have m-o-n-e-y to use. That’s a whole lot less depressing than pulling out the credit card (that you just worked hard to pay down a little) and wiping out your hard work.

Easing the transition

Of course, it’s also a good idea to cut up your credit cards when getting out of debt. So having a $1,000 emergency fund gives you a little peace of mind. It helps ease the transition, and makes it less likely that you’ll keep a credit card “just in case”, because now you have money to use in those “just in case” situations.

And a funny thing happens when you have money. You know that the money is there for emergencies, but when an actual emergency occurs, many people find themselves reluctant to use the fund. Instead, they find other ways to come up with additional cash, ways that may not have occurred to them had they had an “emergency” credit card laying around the house.

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2 comments

  • I remember the first time I needed a car repair after building up a $1,000 emergency fund. My gut reaction was a sense of dread and panic, because I couldn’t possibly think of how I was going to find the couple of hundred dollars I needed to get it fixed. My wife had to remind me that we had $1,000 stashed away for that very reason. It was incredibly liberating and calming to just be able to go to auto shop around the corner and have a fixed car in a few hours with no hassle and no worry.

    I think that’s the big reason for the $1,000 baby step. It’s not much in the grand scheme of things, but it will cover many of the most common emergencies — a car breakdown or a doctor’s visit when you don’t have insurance, and it’s enough to replace or repair most household applies, including your stove, refrigerator, washer and dryer, and computers. And even if the unthinkable happens and a bigger emergency fell in my lap when I only have $1,000 set aside, I have a lot more options with $1,000 at my disposal than I do with none.

  • Good point! I remember when we first built up $1000 for emergencies after college and felt like real winners. Now it takes $15,000-$20,000 in cash for me not to break out in cold sweats. And after a recent $11,000 hit for dental bills, I know exactly why we need “so” much just set aside. Life is weird.