If you’re smart, and you are since you’re reading Beating Broke, you’ve got an emergency fund. But just how much do you have in your emergency fund? And how much should you have in that fund?
Ramseyan thought: Start with a goal of $1000 and then after your bills are paid off, move it up to cover at least 6 months of expenses. This is the current plan that my wife and I are using. We built up our intitial fund of $1000 and have been letting it sit in our e-trade savings. It’s just under $1050 at the moment and growing at about $2-$3 a month. Nothing big, but much more than we ever had before.
Some will say that Ramsey is a little off on this thinking. Many people, my wife and I included, couldn’t even make it a month on $1000. Those same people would suggest that you build up a 1 month expenses emergency fund at the minimum. They may be right.
The key here, is that we’re discussing personal finances. It’s personal. When my wife and I decided to take the reins and take control of our personal finances, we didn’t have an emergency fund at all. We had just completed reading Dave Ramsey’s Total Money Makeover, so we followed (are following) his baby steps plan to get ourselves out of the hole. We’re Beating Broke. (Do you like how I slipped that in there? 😉 )
The Beating Broke thought: Because we’re talking about personal finances, it’s important for you to gauge your risk and build an emergency fund that is appropriate. Certain things will raise the risk of an emergency. If you’re driving an old car, for instance, the risk of a breakdown is higher than if you were driving a newer car. If you’re health is a little worse than average, the risk of you having a medical emergency could also be higher.
The higher your emergency risk, the larger your emergency fund should be. I suggest starting with at least $1000. It’s a good number, and for many, it’s more than what you already have. If you can continue to grow that emergency fund without derailing your excess debt payoffs, do so. Continue to build it until it is at least 3 months expenses. In the end, shoot for a constant emergency fund of at least 6 months expenses. Try to keep it to no more than 12 months though.
Why no more than 12 months? Because you’re likely keeping it in a high-yield savings. The 3-4% that they are currently paying is good, but you can do better elsewhere. If you’ve already got 12 months of expenses in the bank, you can take any excesses and do much better through investments that will get you a higher return. Presumably anyways. History would say so, and it usually doesn’t lie.
Most importantly, you must have an emergency fund. If you don’t then this whole article is pointless. It will give you a peace of mind that you’ve been missing and make it easier to pay off your debt.
As usual, the advice here is merely that of a lowly personal finance blogger and not that of a financial professional. Before making any big money moves, you should consult a professional.