$1000 Emergency Fund – Why It Works for Us


Ever since graduating college, I had been obsessed with having at least $10,000 in the bank.  I figured it was a good enough of an emergency fund to cover any “emergencies” that were not long-term job loss.  The problem was that I (and then we, once we were married) would either hesitate to dip into this money for “emergencies” and instead put it on a credit card or we would use the cash for something that we deemed important.  But looking back, none of those items were really that important, let alone emergencies.  Saving money is important, but make sure you are doing it for the right reasons and with the right mindset.

An emergency fund can be something largely debated. Her points about how the size of your emergency fund can help you make perfect sense!

Last year we made the decision to step out of our comfort zone and follow the advice of Dave Ramsey about saving money.  He suggests to start out your financial journey by saving $1000 as a mini emergency fund and then putting all other extra cash towards paying off all debt, except your mortgage.  These are also known as Baby Steps #1 and #2.  He also suggests stopping all contributions towards retirement and other investments until you are debt free as well.  As much as that made us nervous to think about what would happen if we needed more than $1000 in cash, we decided to go for it!

This does not mean that we did not have any reservations about trusting the process. I think there are a few questions that anyone would have before adopting this savings plan.  And while I would agree that this plan is not going to work for everyone, let alone appeal to everyone, I think that for most people with stable jobs and a decent income, you can get by with a $1000 emergency fund for a couple years.  Read on to see what I have to say about the questions that arose before we took on the challenge.

What would we do if we came up against a true emergency?

Our family is blessed in that my husband has an extremely stable job.  Working for the government definitely has its perks and so we are not too concerned about job loss being one of the emergencies we might run into.  I think we would have a little more cash saved up if his job was less stable.  That being said, there are very few other things that I would consider true emergencies.

House repairs can usually be delayed enough to save up some cash or if there is a catastrophic event, you should be covered through home or renter’s insurance.

While I would definitely consider medical events as emergencies, we have a Health Savings Account (HSA) that my husband’s employer contributes to as well as us (on a very small level) in order to ensure we can meet our deductible for the year.

You really have to take into account your job and financial situation when thinking about this question, but I think as long as you are smart about setting yourself up with safeguards (insurance) then you can do it!

What happens if we need to save up money for a large (and necessary) expense such as having a child?

We are currently in the process of doing this!  One thing that I was a little surprised at, but also love about Dave Ramsey is that he believes that you should start a family or expand your family whenever feels right to you.  Cost should not be a factor.  He recommends stockpiling cash until the “event” has passed and everyone is healthy and safe and then if you have any cash leftover, throw it all at your debt.

Our next baby girl is due in March and we are currently saving any extra cash to cover the birth.  If we have any left over, it will go straight to debt – which is where it would have gone anyways, just a few months late!

You can do this for other expenses or potential expenses such as a possible job loss, a big move, a large house repair, etc.

How could it be financially responsible to have so little cash readily available in an emergency fund?

If you, like me, have thousands of dollars in debt, then who are we to claim ourselves as financially responsible in the first place?  Sounds a little harsh, but once I came to that realization about my own family, it made sense.  Changing the course of your financial future requires sacrifice and a mental shift.

Yes, you might have to pay a little more attention to your money and where it is being spent, but isn’t it worth it in the long run?  Having less of a cushion, whether it be with cash or with credit cards, forces you to become creative and ignites a spark in you to achieve your goals and get rid of the debt!

Okay, I am on board with not saving more cash, but stopping retirement savings sounds crazy to me!

This is one that we did not jump right on board with.  Since my husband gets a match from his employer, it seems like a no-brainer to keep contributing.  However, if you think about the math behind it, your mind might be changed.  We were putting about $350 a month (the minimum for the match) into retirement.  The interest just on our credit card is a little over $100 a month.  And we have student loans on top of that!  What is the point of putting money into an account that probably won’t even accrue as much interest IN ONE YEAR as you are paying on your debt IN ONE MONTH?  Once we thought about it that way, retirement savings stopped completely.  Don’t forget, the balance in your account will keep earning interest.  It is not a total loss AND it is only for a short period of time.

We are a little over a year into making the switch and I am happy to say that we still only have $1000 (and it is all there) in savings, we DID have some major repairs to make to our house (but we figured out how to pay cash for them), and we have not had to rely on credit cards to bail us out.

I believe that the major reason we have been able to be successful is due to the mental shift that takes place when you know you have less money to fall back on.  We are more aware of expenses that might be coming up, we try to stay one step ahead of any potential house or car repairs so that we have a little time to plan for them before they become an emergency, we sacrifice discretionary expenses when needed to cover small emergencies, and we keep reminding ourselves that it is not forever.

Keep in mind, that while Dave Ramsey does fully support this method, it is not intended to be a long-term situation.  He expects that the average person should be able to pay off their debts in just a few years – I believe he only recommends following this path if you can do it in less than five years.

This is something that we really have to be mindful of this year.  We are one year down and less debt is paid off than we would like (although it is still more than we would have paid off just doing minimum payments).  Like I said, this is not meant to be a permanent lifestyle, so that is why we set some financial goals for the year, including paying off at least two student loans.  Setting a specific goal is more helpful than just saying “pay down debt”.

Are you trying to pay off debt?  Do you think you could handle only having $1,000 in savings?

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