Setting up your emergency fund Part 1
Setting up an emergency fund is a big factor in getting on your path to financial freedom. This is one of the few things that any of the personal finance gurus will agree on; that you must have an emergency fund setup. I’ve actually been told that I should do this for a very long time. I never did listen until the last couple of weeks. On my deployment overseas one of the sergeants that I had became good friends with was a big follower of Dave Ramsey and he was stressing to everyone that would listen to setup an emergency fund. I never did listen and it got me deeper into debt because I did not listen.
What is the point of an emergency fund? The entire point of starting your emergency fund is to have money set aside for unexpected expenses. The point of having this money set aside is so that you don’t have to put those unexpected expenses on a credit card or take out a loan. After all we are trying to get rid of our debt and become financially free.
The big question is how much should your initial emergency fun be? This is where those gurus tend to start disagreeing. The following are some of the recommendations for starting points.
- $1000 immediately – This is recommended by Dave Ramsey. He recommends making your minimum payments on everything else until you have built up that amount. Obviously this is not going to cover major expenses if you were to have some sort of major medical expense, extended job loss, etc. It is however enough to cover most emergencies.
- 3-6 months of expenses – This starting point will take much longer to accumulate, that much is obvious. However having a starting point of 3-6 months of expenses saved up will help a lot more should you have unexpected medical expenses, or extended job loss.
- Less then $1000 - This is only recommended if your budget is extremely tight and it would take you several months to even get to $1000. So whether you can only put $250, $500, or $750 into an emergency to start with it is better then nothing.
I personally am going to go with the $1000. I feel that this will be enough for me should an emergency arise. You need to look at your own situation for how much to start with. Are you married? Do you have kids? Are you the only one with an income in your household? Remember though, that this is just a short term emergency fund that will be added to later after you get all, or a large majority of your debt paid off.
Now what constitutes an emergency? Really it can be anything from car repairs that were unexpected, medical bills, short term job loss, etc. It is not to be used for buy the newest and greatest electronics, vacations, or buying something that you think you need to have right now. Remember this is to help stop putting expenses on credit cards.