Why $1,000? Several reasons:
- It's enough money to replace any appliance in your home.
- It's enough money to cover most car repairs
- It's enough money to cover most home repairs
- It's a low enough amount that you should be able to set it aside quickly
- It's better than paying for the next emergency by using a credit card
- There's comfort that comes from knowing you have $1,000 saved
While is is true that $1,000 won't cover every repair to your car nor your home it should cover the majority of them. The key here is that this money is to be set aside for EMERGENCIES ONLY.
- Swiping $20 from it to pay for pizza is not an emergency
- That new video game is not an emergency
- The new iPhone/iPad/Driod/Kindle/??? is not an emergency
- Books for college is not an emergency
- College tuition is not an emergency
Emergencies are those things that happen unexpectedly and we had no way of preparing for them in advance. In each case listed above we would have had time in advance of the event in order to prepare to deal with that event. An example of an emergency is you are driving down the road and hit an object in the road that you did not see because you were busy texting. You hit the object and it not only pops your tire it also bends the wheel the tire is mounted on. The only way to fix the problem is to have a new tire and wheel installed. Instead of paying for the repair with your credit card you use all or part of the $1,000 you've set aside to pay for the repair. As soon as you possibly can replace the money in your emergency fund a quickly as you can.
Your emergency fund should be easy to get to but not too easy. For example you should just say Okay this $1,000 we have in checking now will be our emergency fund and we'll just pretend it's not there. That won't work. The money being readily available makes it too easy to spend. At a minimum you'll want to move it into a separate savings account so that you're not constantly seeing the $1,000 sitting in your bank account.
In Dave's book he tells the story about one young lady that after setting aside $1,000 in the cookie jar she went to the bank and got 10 fresh $100 bills and framed them in a nice picture frame. On the frame she wrote "In case of emergency, break glass." and hit the picture frame behind her clothes in her closet. When I first read that I thought it was a wonderful idea. Now I'm not so sure. Yes it's nice to be able to look at that picture frame and see those nice $100 bills and because they're closed up behind glass you can't get to them that easily, but consider this. What is she going to do if she's away from home and has an emergency? How is she going to access the cash when she's away from home? Sure she could take the picture frame with her but would you want to carry a picture frame with $1,000 cash in it every place you traveled? Surely you wouldn't check that with your luggage if you were flying and can you imagine the looks you'd get from the TSA when you went through security? I would imagine in a case like this it would probably be too tempting to just charge the repair on the credit card and then take the cash from the picture frame to pay pay the credit card bill. But let's suppose this lady didn't have a credit card. Then what would she do? I think having the money in a savings account is probably the best option.
Some of you may be thinking why put it in savings when you could put it into a one year CD and earn fractionally more interest. Consider this money as your own personal insurance policy not an investment. Remember it is there only in case of an emergency.
When Donna and I got started with Dave's Baby Steps we were fortunate to have more than $1,000 in our savings account. Given that situation how should you proceed? Donna and I talked about it quite a bit. Neither of us was really comfortable with taking the extra money we had in savings and applying it towards our consumer debt even though doing do would pay off a big chunk on one particular debt. I did lots of research and asked others familiar with Dave's plan what to do. Everyone recommended following the plan to the letter. So that's what we did. We transferred all but $1,000 from our savings account and used that money to pay down debt.
I have to be totally honest and say I don't like only having $1,000 in savings. That scares me the crap out of me. What I have found that it has done is to highly motivate us to pay off our consumer debt so that we can get onto baby step 3 which is to fully fund our emergency fund with 3 - 6 months worth of expenses. The best part about it is after we've paid off our consumer debt it's only going to take us a few months to fully fund our emergency fund. I will sleep much better at night knowing we have $10,000 in the bank instead of $1,000.
Hopefully you now understand the purpose of the $1,000 emergency fund but you may be wondering how to fund it because in your current financial situation you don't have much left over after paying your bills. Here's a few ideas to help you fund your $1,00 emergency fund:
- Sell old textbooks on half.com
- Sell instead of buy stuff on eBay
- Sell stuff on Craigslist
- Try to drive less so you won't spend as much on gas
- Get a part time job
- Ask for extra hours/overtime at work
- Ask for a raise and tell your boss exactly what you'll do with the raise
- Lower the amount you put into your 401(k)
- For Christmas / Birthday ask for cash and explain why you want the cash
- Have a garage sale or sell stuff at the local flea market
- Mow yards
- Skip Friday night out with the boys/girls and put that money aside
- Take that jar of spare change to the bank and deposit it into your savings account
- Quit eating out so much. Cook at home and take left overs to work for lunch the next day.
- Question every purchase. Do you really need to buy this item right now?
- If you are paying extra on any bills only pay the minimum on them until your fund is established
- Getting a tax refund? Use that to fund your emergency fund
- Find a quarter on the sidewalk? Use that
I'm sure there's plenty of other good ways to fund it but you get the idea. Good luck getting your fund started. If you've come up with a creative way of funding your $1,000 emergency fund leave me a comment and tell me about it.
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