When you begin with Dave Ramsey’s baby steps and you’re taking the steps to fulfill Baby Step 1 which is to have a $1000 Emergency fund, you’ll definitely find it challenging since you probably have lots of bills to clear. Doing this is an amazing feat seeing that numerous Americans are very vulnerable and they don’t have the financial capacity to make a $400 emergency payment.
Dave Ramsey regularly reiterates his opinion that people should create an emergency fund that can handle their emergency expenses. He believes that having an emergency fund affords you the opportunity to focus on paying your debt without having to seek credit anytime an unscheduled expense comes up.
The Purpose of Dave Ramsey’s Emergency Fund
Dave Ramsey is of the opinion that his emergency fund offers a great way for people to insure themselves, and he advises that it shouldn’t be considered as an investment strategy. He reiterated that an emergency fund will help to protect you from unexpected financially demanding situations. Dave believes that a robust emergency expense is one that can cater for 3-6 months of your monthly expenses. When an emergency fund reaches this milestone, Dave Ramsey calls it a fully-funded emergency fund.
What are the best ways to create a starter emergency fund?
Personally, I’ll advise that you start small. You can first save as little as 5$ daily and save it into an envelope or save it into a checking account. Just ensure that you’re not taking up any extra cost as a result of your means of saving.
It’s best to get religious by tracking your expenses and your income. For example, I’ll advise that you use an app with both the features of zero-based budgeting and a debt payoff planner to build your app.
Track Your Emergency Fund
You can easily get a tracking tool that can track the way money enters a designated savings account. This allows you have the right oversight over what’s going on in your savings account.
Save Vital Information about your emergency fund
If you’re manually recording the details on your savings account, then you will need to painstakingly save some information to help track your account. However, if you’re using an automated version, then updates will be automatically done.
Where Does Dave Ramsey Advise that you Keep Emergency Fund?
Dave Ramsey Recommended that emergency funds should be kept in an account that can easily access e.g., a money market account, an online bank account and a savings account. The ideal thing here is that you should be able to access the money when it’s needed.
Rachel Cruz advises that it’s best to keep the money in a separate account to ensure they don’t spend it. As such, she advises that you don’t keep the money in cash as you’ll be tempted to spend on non-emergency expenses.
When to Use Emergency Fund
Want to know when you should dip into your emergency fund? Dave Ramsey advises that you should ask these three intricate questions: is it urgent, necessary and unexpected? If the answer is yes, then you may justifiably use your emergency fund.
Is a $1,000 Starter Emergency Fund Enough?
It’s undoubtedly not enough, and this is where Dave and most personal finance experts like myself differ. However, Dave also mentioned in one of his recent articles that this will only help you start things out. He made the point that you’ll pay off your debt faster if you only save $1000 for a start, and I don’t agree with his point. My opinion is that your emergency fund should be created according to a certain percentage of your monthly income. Here’s why I hold that opinion:
- Things get pricier as the year goes by. As such, a $1000 twenty years ago obviously holds more value than that same amount now.
- In reality, it’s possible to earn a lot of money and your expenses match up to your income. As such, it’s in your best interest to have an emergency fund that aligns with a specific percentage of your income.
Understand Dave Ramsey’s Fully Funded 3-6 Month, Emergency Fund
Fortunately, Dave Ramsey didn’t only specify that you start with a $1,000 emergency fund. His Baby Step 3 recommends that you create an emergency fund that’s worth at least 3-6 months of your monthly expenses.
Dave explains that this emergency fund is one that’ll protect you against noteworthy life disasters are as unrepairable car damage or job loss. This type of emergency fund is very effective in preventing you from falling into debt.
How An Emergency Fund Can Protect You From Bankruptcy
Bankruptcy provides legal debt relief to those who cannot afford their debt. Many consumers file Chapter 7 or Chapter 13 bankruptcy. Often, many people who file bankruptcy may not have cash to cover their debts. You have to qualify for Chapter 7 bankruptcy by being under a certain income limit. If you have an emergency fund, you may not have to go down this path when financial hardship strikes.
How to Setup a 3-6 Month Emergency Fund
After exiting debt, you can then begin to channel most of your money towards building a robust emergency fund. You may just add this fund to your existing $1000 emergency fund that you created in Baby Step 1.