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Let’s talk about emergency funds. It’s a big topic in the PF world. Most experts agree. You have to have one. And you know why too. We all know that if you are ever to be financially stable without worry about falling back into credit card or personal loan debt, an emergency fund is necessary. Got it?
But what about when you are in tons of debt (like me)? Should you really be putting money into a rainy day fund when it could go to paying off high-interest debt? I say YES. A lot of people disagree on this point, and they all have valid reasons, but like I said above… without a decent emergency fund, you’ll fall right back into debt when something goes awry. And trust me. Something always goes awry.
Let me give you an example: Right before our wedding, Mike and I cleared out our tiny bit of savings (about a thousand dollars) to pay the final little expenses due. We didn’t foresee any bad luck happening in the future, and we knew we would receive a decent chunk of money in gifts for our wedding.
It wasn’t a month after our wedding that Mike got into a car accident. Thankfully, no people were hurt. Unfortunately, the Jetta was not so lucky. Enter $500 deductible. Thank the Lord we were able to pad our emergency fund back up to about $1000 right after the wedding because we had to immediately pull out $500 to pay for car repairs (which ended up coming to something like $8000. DO NOT DRIVE WITHOUT CAR INSURANCE PEOPLE! It’s a life saver when you need it!).
Of course, it was frustrating because it killed what little fund we had going, but imagine if we had blown all our wedding cash on a honeymoon or something rather than resupplying our emergency fund at all? We would have had to put that deductible on a credit card, adding to our already enormous debt. This is the kind of stuff that happens all the time. You never see it coming, and it will knock the wind out of your sails in a matter of seconds.
Emergencies range from pet bills, doctor bills, car repairs to lost careers. They are swift and without forgiveness. If you aren’t prepared, you are S. O. L. So please… build at least a $1000 emergency fund while paying off debt. That’s what Dave Ramsey recommends. Suze Orman recommends 8 months worth of living expenses in your fund, but that doesn’t seem realistic to me when you’re in the midst of serious debt pay-off.
Our Emergency Fund Plan
As for us, our current emergency fund is right around $1000, but we still “pay ourselves first” every month and working towards building it up little by little. We’re not paying ourselves the recommended 10% of our income, but we are consistently adding to this fund to prepare for the future. I’m sure that when we choose to buy another car, a small down payment and money for sales tax, registration and fees, etc. will come from this fund.
Even though those things aren’t emergencies, our emergency fund is the only liquid savings we have to our name. It’s kind of our… anything we NEED to spend money on that costs a lot fund. Notice how I said need, not want. That’s the key. Your emergency fund will never grow if you use it as an excuse to buy all your frivilous wants.
Eventually, we’d love to see our liquid savings/emergency fund hit $100,000. It’s a nice round number and would give us stability if one of us lost a job or we needed to purchase something large, like a vehicle. We want to get to the point where we can make purchases on expensive items, like cars, completely outright rather than with financing. We want to afford weekend getaways and vacations. Of course, $100k is a lot of money and will take years for us to build, but it’s not an impossible goal if we work hard and save.
As for now, we’re shooting for $5,000. That is a huge goal for us right now and hitting that point will be a big, celebratory milestone. I dream of the day!
What are your thoughts on emergency funds?