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If you remember from yesterday’s introduction, I mentioned that my fiancé and I have a $1,000 emergency fund in cash in a savings account. If you are six figures in debt, why would you want $1,000 in the bank just to sit there when you could use that to pay down some debts?
The Secret to Financial Success: Momentum
When people tell you how to get more mileage out of your gas tank, one of the first things they tell you is to not make any really sudden movements: don’t speed up too quickly, and don’t brake so hard. Try to keep it steady. There’s a reason for that: speeding up and slowing down burns more gas than maintaining your speed. That’s because the good ol’ force of inertia keeps you going.
Force of inertia: an object in motion stays in motion unless acted on by another object or force.
That same law of physics dominates the world of personal finance. When you get momentum going, life is good and things start getting paid off. But then your license plate renewal notice comes in the mail. Or your refrigerator breaks down. Or you come down with strep throat and you need to get a prescription filled.
Sudden emergencies pop up all the time, and it only takes a little one to completely derail your entire spending plan. Then you need to burn all that energy trying to get back on track because you stopped paying down your debts to take care of that one new bill and eventually you lose all motivation to even bother. “What’s the point, every time we get ahead something else comes up! We’ll never make it!”
FALSE.
You’re not making it because you’re not preparing yourself. An emergency fund is a tool that you can rely on in these situations. Hey, you are using this budget to plan for your long-term future, right? So why don’t you use it to plan your short-term future, too?
How much?
Because we are following Dave Ramsey’s plan, we went with $1,000. But you can do whatever you want. Many people do $500. Figure out what would be a good lump sum of money you could keep in an account just for quick emergencies while you work through your debts. This number can be different for everybody. If you’re out of debt and living large, a good rule of thumb from pretty much anybody in the financial world is to have 3-6 months’ worth of income in your emergency fund – at that point, it is there to prepare you for sudden unemployment.
“But what’s $1,000 going to cover, anyways? That’s not going to pay for any REAL emergency!”
This is a very common critique of the idea, and it’s one that my fiancé and I got from loved ones early on. That’s like carrying Band-Aids in your purse and somebody saying, “Well, that’s not going to help you when your leg gets chopped off!” Right, but we’re preparing for the more common papercuts here.
My attitude towards this statement is, “Hey, if an emergency pops up that costs more than $1,000, chances are I’ve got bigger things to worry about than just money!”
Most maintenance-type car repairs can be done for under $1,000. Minor medical bills can be paid for with $1,000. You can get a killer new refrigerator for a few hundred bucks. These are the financial “papercuts” that we’re preparing for here. You can take these problems in total stride, knowing you don’t have to change a thing – keep paying your debts, because you have the money to cover it. That’s what it’s there for.
What it’s NOT for
Gifts (and I was guilty of dipping into it for that – I promised I wouldn’t do that again), groceries, gas, rent, credit card bills, etc. This is for EMERGENCIES. When you go to the store to buy Band-Aids, you don’t plop down your health insurance card to pay for it, do you? And if you do, please tell me where this wonderful coverage is!
Back to the car analogy: most of us are living financial lives riding the tails of the car in front of us. Once that car brakes, we either need to stop hard and waste a ton of gas or crash head-on into it. Having a small emergency fund increases your following distance – now you have room to brake a little slower and you can keep your momentum going (and you can avoid that crash!)
Tom is an entrepreneur and freelance writer, working out of his apartment full-time, or wherever he feels like taking his laptop. He doesn't take long European vacations or blogs on the beach. He's an Average Joe that took control of his life. He wants you to do the same.
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