Okay, I’m saying it and yes, I feel kind of bad about it. A $1,000 isn’t enough and Dave Ramsey is wrong. Hear me out. I love Dave Ramsey. My family is 100% debt-free and is in a way better spot financially because I picked up his book, The Total Money Makeover 7 years ago. But even back then, in 2013, I didn’t agree with Dave on his first Baby Step – save $1,000 in a Starter Emergency Fund.
In fact, we saved $2,500 before we started on Baby Step 2. For us it made sense. We were a family of 3 with a baby on the way. We were starting at exactly ZERO because a few months before we decided to become debt-free, my husband had fallen out of a 2-story window at work and shattered his wrist. Long story short, we didn’t know that my husband’s employer didn’t have Workman’s Comp Insurance and our insurance company at the time threw the claim out because it was a work-related injury. That meant we were on the hook to pay for my husband’s surgery. That wiped out our savings account.
So, zero is where we were starting and we knew from that incident how fast money can go. So we wanted to start off with a bigger Emergency Fund than Dave recommends.
Why Dave Recommends a $1,000
Dave Ramsey recommends starting with a $1,000 in an Emergency Fund because 1) most people don’t even have that much in savings (and we were one of them) and 2) a $1,000 is a much easier number to start with than say $5,000. And I agree with Dave here. I agree that it’s easier to save $1,000 quickly than $5,000 especially if you’ve been unsuccessful in the past with saving money.
Dave’s other point is that you get the $1,000 saved up fast, then you move on to Baby Step 2 which is to pay off all your consumer debts, and then you’ll have the extra room to save up more money in Baby Step 3. Again, I don’t disagree with his logic here. The less burden on your household income you have the fast you can save money. This is true. However, I still don’t agree that $1,000 is enough.
Why I Disagree with Dave
I think this whole COVID-19 craziness has taught all of us the importance of having a savings account. And I think many of us are very aware that a $1,000 isn’t even enough to cover the average mortgage payment in the United States. 25 Years ago, when Dave first wrote his book, $1,000 may have been enough. I was honestly too young to know, but I can tell you that in today’s world, a $1,000 is what most folks spend at the grocery store for a month.
It isn’t enough to survive a true emergency which is the whole point of an Emergency Fund. This is why I recommend saving up a Starter Emergency Fund of at least 3 months worth of expenses. And I’m not like Dave’s followers where I’m going to tell you to follow certain steps exactly or you’re somehow going to fail. Instead, I believe in living a real life on a budget. That is the very core of my message – not just a tagline.
You can do this however you like but you must follow through. Don’t allow the permission to go at your own speed be an excuse to not take action. You must still take action on this – no one else can do it for you. Only you can do this.
How to Save Up Your Starter Emergency Fund
Alright so let’s get down to the brass tax and figure out what your Starter Emergency Fund should be. Here’s the thing, if you decide that $1,000 in your Starter Emergency Fund is what you want, then, by all means, you do you. But please go through this formula and look at the numbers. Don’t just dismiss this exercise because it’s important that you get real with your money.
Alright friend, here’s what you’re going to do. First, you need to do an honest to God spending review. You need to know where in the world your money has been going up to this point. You need to pull your last THREE MONTHS worth of bank statements. So wherever you spend money from – checking account, credit cards, etc. You need to pull up the last three months’ worth of expenses.
Don’t fight me on the three-month thing. You need to know on average where and how your household spends money. And looking at just one month isn’t going to tell you very much. To better explain this process, this is a video I did years ago for my students in my Real Life Money Plan course:
Once you know exactly how much you’ve spent for the last three months, you can now move on to figuring out how much your Starter Emergency Fund should be.
The Starter Emergency Fund Formula
Alright, so looking at your expenses from the last three months you need to decide which expenses are “bare bones” expenses. So these are the expenses that are essential to your family’s survival. Things like your mortgage/rent, utilities, groceries (not eating out – actual groceries), transportation costs for getting to and from work. Once you know your monthly average of these costs, you then need to plug them into the formula below.
Average Total Monthly Cost of “Bare Bones” Expenses X 3 = Your Total 3-Month Starter Emergency Fund Goal Amount
Now that you know your Goal Amount, you can now look over all that spending data you complied and determine where in that spending data you can reduce or eliminate. No, it’s not fun making these kinds of decisions to reduce or eliminate our expenses but by doing so, you can create more room in your budget to save money.
Don’t Play the Victim
Okay, so this may seem kind of mean but I have to say it. Do not play the victim of your life. You are in control over you. No, you can’t control your spouse or your kids or anyone else. But you can control you and how money flows in and out of your hands. If you’re caught in the paycheck-to-paycheck cycle do NOT tell yourself that it’s impossible to save money. My family was caught in that same cycle and it is completely possible to break free.
You first have to stop telling yourself that your circumstances define you because they don’t. There are millions of Americans without jobs right now so your situation isn’t just unique to you. A lot of folks are stuck in strange, crazy, and scary situations. The best thing you can do is to get real with how you’ve been using money. Accept where you’ve made mistakes and work to fix those mistakes. Make building up and saving your Emergency Fund priority over anything else – no random bored shopping on Amazon.
That Emergency Fund is and will save you if/when you lose your job, the economy tanks, your HVAC system fails on a 95-degree day. Your Emergency Fund is your safety net and many Americans have gone into this COVID-19 crisis without one or with only a $1,000 one in place. $1,000 isn’t enough my friends. Let’s beef up those Emergency Funds so we can all survive and make it to the other side of this thing.
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