How to build (and why to have) a $1,000 emergency fund
Dave Ramsey of Financial Peace University is one of the most well-known personal finance teachers these days, and the basics of his program are well known.
The first step is to build a $1,000 emergency fund. And while that seems like an obvious step, it’s incredibly difficult for some people to understand.
GoBankingRates.com has a piece from Jennifer Calonia that explains the “why” of setting up this cash cushion before you start the debt paydown plan that is the key component of Ramsey’s program. And here’s her experience:
Last year, I admittedly tried to take the fast-track approach to Dave Ramsey’s debt plan by skipping straight to step two, because — hello — my problem is paying down my debt, not saving money.
At the time, I had about $900 in extra funds each month after paying bills (hooray for no mortgage payments!) and only had about $100 in my savings account. I was on a mission to cross off $5,000 in credit card debt from my name, and I succeeded after about seven months of devoting all of my discretionary funds to get to zero.
Two months later, however, I regretted it. My 16-year-old car, which I heavily relied on for my daily commute of 66 miles, gave out on me. I still only had a $100 emergency savings fund instead of the $1,000 I could have easily had if I just stuck with step one of Dave Ramsey’s debt management plan.
Jennifer offers a few ideas on how to cut expenses in order to build up the cash cushion. If are looking for other ways to cut costs, I have a huge collection of budget-cutting ideas in my Downsized Budget series.
But I do have another idea for the emergency fund that’s applicable to this time of year and it won’t require “giving up” or “cutting back”:
When your Christmas cash or year-end bonus arrives, don’t assume that entire amount is available for you to spend on fun. Put some of it toward savings, and then you can spend the rest.