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.