If you’ve done any reading in personal finance, the idea of an emergency fund isn’t new to you. Having money set aside for a rainy day is not a new concept.
Ever since we were first married and started budgeting, we had had an emergency fund. When an “emergency” came up, in most cases, we were able to pull money from other sources and not use our emergency fund. We wouldn’t let ourselves touch that money except in absolute emergencies.
In the spring of 2013, I first read Dave Ramsey’s Total Money Makeover. The first of his “Baby Steps” is, not surprisingly, an emergency fund. Before diving into attacking your debts, Dave recommends putting aside $1,000 in a “baby emergency fund.” He says that most people who follow his program and are “gazelle intense” will get out of debt in 18-20 months.
Upon deciding to get serious about our student loan payback, we had an emergency fund of just over $6,000. The idea of cutting it down to $1,000 made us (especially me) very uncomfortable.
Here are a few of the reasons why we decided against a $1,000 “baby emergency fund”.
- We knew that $130,000+ of debt would take us longer than the average 18 to 20 months to pay off with an income of $39,000, even with our intense payback plan.
- We have a high deductible health insurance plan, which means that all of our health expenses are out of pocket. Our deductible is $7,500, so we wanted to have somewhere near that much available in case it’s needed, though we are generally very healthy. Our policy doesn’t comply with new insurance laws, so it will be interesting to see how things change. Update: How our insurance situation has changed under the ACA and then it changed again.
- We have kids. When we were single or without children, we could fly by the seat of our pants much more easily. Now that we have a family to take care of, we (I) need a little more security.
- We are not done having kids. We are not putting off growing our family because we have student loans. I imagine we will have at least one more little one while we are paying back debt. Of course, having a child isn’t an emergency, as you have 8 months or so to plan for it, but knowing that in the next year or so we will be using all of our deductible to have a baby, we may as well hold on to what we have already saved.
We decided to keep the $6,000 we had in our emergency fund rather than contribute $5,000 of it to our debt payoff. We have already paid a couple doctor’s visits and $1,000 of a root canal (more to come) from our emergency fund and are down to $4,700. In the new year, we will build our emergency fund back up.
How about you?
- Do you have an emergency fund?
- If you are paying off debt right now, are you going with the standard $1,000 Baby Emergency Fund?