Yesterday at I’ve Paid For This Twice Already, Jaimie posted about why she has a $1000 emergency fund. She encouraged her readers to post about their emergency funds, too. So here’s my story.
Dave Ramsey’s Baby Step #1 is saving a $1000 emergency fund. After you’ve saved $1000 for emergencies, you are free to pay down your debt with gazelle-like intensity.
Mary Hunt advocates saving a $10,000 emergency fund before attacking the debt with everything you’ve got. Her reasoning is that you need 3-6 months worth of money in the bank to take care of even the most expensive emergencies, so you won’t be tempted to reach for the credit card when a small emergency strikes.
I can see both sides of the issue, and I take the middle ground. Right now my husband and I have an emergency fund of around $2500. That’s down from $5000 before my husband lost his job. We have a couple of reasons for wanting a medium sized emergency fund.
First, my husbands career is in a very unstable field. There’s no such thing as job security in sales. And we’ve learned that several times over this year. That coupled with the fact that I’m a stay-at-home mom means that our financial situation is always precarious. We need at least a month’s worth of expenses in the bank for emergencies, in the event that my husband is without work. That will give us something to live on while we’re waiting for the unemployment checks to kick in.
We don’t feel we need the whole $10,000 in the bank, because we are both really resourceful and not afraid to work a wide variety of menial jobs to keep afloat during tough times. There’s almost always work out there, if you’re willing to do the work, so we’re not afraid of being completely without income for long periods of time.
The other reason that we need an emergency fund that’s greater than $1000 is that neither my husband nor I have a huge risk tolerance. We’re committed to not using our credit cards anymore. But if our emergency fund was only $1000, both of us would be worried that we would need to use credit to bail us out of an emergency.
In the end, I agree with Jaimie in that the amount of emergency fund you need is highly personal. If you’re in a stable career and have a high risk tolerance, $1000 may be enough. If you have a low risk tolerance and you’re in a field where job security is non-existent, saving a full 6 months worth of expenses would be the prudent thing to do.
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I'm just an average mom, trying to live a frugal life and get out of debt. I write about things that have (and haven't) worked to improve my family's financial situation. What works for me may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
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