Don’t touch your emergency fund, unless you are truly having an emergency! The third step in Dave Ramsey’s plan for getting your financial life in shape is a fully funded emergency fund. The definition of a fully funded emergency fund is 3 to 6 months worth of expenses in an easily accessible account.
Why Do You Need a Full Emergency Fund?
Some people believe that having a small emergency fund of $1000 or so is enough, as long as they have assets like a 401k to tap into if they run into trouble. The problem with that way of thinking is that a 401k isn’t easy to access in a true emergency.
My family found out about the importance of a large emergency fund a few years back when my husband lost his job. Twice. We had about 1 month worth of expenses in our emergency fund, so money was really tight. In addition, my husband had to take some less than ideal jobs to make sure we had food on the table.
When you have 3 to 6 months of expenses tucked away, you have the freedom to wait for a good job. You have the freedom to quit a job that’s sucking the life out of you, because you know you can survive until you find a new one. You have the security of knowing you can pay high deductibles for medical issues if the need arises.
You don’t want to be tapping into your 401k to pay for an unexpected surgery or hospital stay.
What is a Fully Funded Emergency Fund?
It’s not 3 to 6 months of your salary. It’s 3 to 6 months of expenses. When you lose your job or come up against another kind of emergency, you should be able to cut a lot of expenses from your monthly budget.
If you bring home $5000 a month, but can live on $3000, then use $3000 a month as a basis for determining the amount of your emergency fund.
Deciding whether to fund your emergency fund for three months, six months, or somewhere in between can get tricky. If you’re a single person with no children, a stable job, and a rented apartment, you’re probably safe with three months worth of expenses.
If you’re the sole breadwinner for a family of four, with a mortgage and an unstable job in sales, you’re going to want to have six months of expenses in the bank. Trust me on this one.
Where Should You Park Your Emergency Fund?
You want your emergency fund to be easily accessible. I prefer to keep my emergency fund in my 360 savings account. It fetches a decent interest rate, and I have it attached to my checking account for easy access via a quick transfer on the computer and an ATM card.
Dave Ramsey suggests keeping your emergency fund in a money market account, which would also be acceptable. The main point is that your money should be accessible to you as soon as you need it, without penalty.
Though some people suggest that using a HELOC for an emergency fund is a good idea, I don’t like it. When you’re in the midst of an emergency, I don’t like the idea of taking on more debt. I also think that it’s psychologically more difficult to spend cash that you’ve worked really hard to save, rather than a line of credit, where all you have to do is sign on the dotted line. And that’s a good thing when you don’t have a large cash flow.
You don’t want to look at your emergency fund as an endless supply of cash for your need to redecorate the house. You want your attitude to be one of hating to spend the money in any event, but a true emergency.
What Constitutes an Emergency?
Well, it’s not a new flat screen TV. And it’s not a new wardrobe, because your old wardrobe is out of style. And it’s not a $1000 stroller for your baby.
A true emergency is something that interferes with your life, your health, or your ability to pay the bills. Hospital stays, disability, and loss of a job are all true emergencies.
If you aren’t having a true emergency, DON’T TOUCH YOUR EMERGENCY FUND!!!
Here are all of the articles about Dave Ramsey’s Baby Steps:
- Overview at Cash Money Life
- Step 0 – No More Debt at Debt Free Revolution and Single Guy Money
- Step 1 – $1000.00 Emergency Fund at Gather Little By Little
- Step 2 – Pay off all debt using the Debt Snowball at I’ve Paid For This Twice Already
- Step 3 – 3 to 6 months of expenses in savings right here!
- Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement at The Dough Roller
- Step 5 – College funding for children at at My Two Dollars
- Step 6 – Pay off your mortgage at Moolanomy
- Step 7 – Build wealth and give! at Plonkee Money
- Series Wrap Up at I’ve Paid For This Twice Already and Being Frugal
What do you think about emergency funds? Do you have one? How much is enough? Where do you park yours?