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Emergency Fund: How Much Should You Save While In Debt

How big should your emergency fund be while you're in debt
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There’s something incredibly disconcerting about completing a zero-based budget and then sending all of your extra cash towards your debt.

It’s not that repaying debt is uncomfortable.  It’s the fact that you’re not saving money anymore.  Even though you’re making incredible financial progress, every time you purge your bank account in the name of debt payments…it feels like you jumped out of a plane without a parachute.

Your ability to save an emergency fund will be critical to your ability to get out of debt for good.  But, the question is… how much of an emergency fund do you need?

Dave Ramsey fans will tell you that $1,000 is the magic number.  Personally, I think you need to look at your monthly expenses to develop your goal.  So, who’s right?

Technically… neither of us.  Your emergency fund is a huge part of your personal finance plan.  The best thing about personal finance is that it’s just that… personal!

Let’s find out exactly how much of an emergency fund you need!

What is an Emergency Fund?

An emergency fund is liquid cash that is set aside to be used during  a catastrophic life event.  It’s not to be used for anything other than that.

Consider your emergency fund your financial safety net.  It’s going to protect you while you’re paying off debt in hyper speed.

Emergencies could be a job loss, major home repairs, major vehicle repairs, or illness.  The money will cover an event that you didn’t have time to plan and save for.

It’s not the “lets get pizza tonight fund”.  The money isn’t meant to be invested or placed anywhere you have to wait to gain access to it.

We kept our emergency fund in a general savings account attached to our checking account.  I liked that we had the ability to quickly transfer the money should we need it.

There is also some risk with the ease of access.  It will make dipping into it very easy and increase your risk for spending money you shouldn’t.  So, put the money somewhere safe yet protected from your bad spending habits (if you have them).

Why You Need an Emergency Fund

When we began paying off our $109,000 of consumer debt, I constantly felt nervous.  I bought what Dave was selling and our savings account only had $1,000 in it.  I never felt that $1,000 could cover a big emergency and I was constantly fearful for what could happen.  It was borderline debilitating.

I’m sure it works for some, but it didn’t work for us.  An emergency fund is your parachute and it needs to be big enough to break your fall.  That money will prevent you from accruing additional debt while you’re trying to become debt free.

Like I said before, there is something disconcerting about sending all of your extra money toward debt.  If something bad happens that prevents you from working and you don’t have any cash saved, how long can you pay your bills?

Bill collectors really don’t care if you owe $100,000 or $20,000.  You owe and they will come.  Sure, if you began your debt free journey with $100,000 in debt you’d be pumped to only owe $20,000.

That’s great progress, but you still owe… and they want their money.

Your emergency fund will allow you continue to pay your bills while you recover from whatever disaster occurred.  It will prevent you from massive financial failure.

Additionally, your emergency fund will give you confidence.  It will allow you to focus on getting out of debt.  When we had $1,000 saved, I never felt secure.  I always felt like something was going to happen and I wouldn’t have any enough money to cover the cost.

What does an emergency cost?

  • A vehicle transmission averages around $1,800 to $3,400.
  • A new roof averages $3.50 -$5.50/sq ft.  So you could repair about 280 sq ft without any other charges
  • New tires average $525 to $725 (hooray!)
  • A night in the hospital averages a little over $1,800
  • The average plumber charges $45 to $200 an hour
  • The average electrician charges $50 to $100 an hour
  • Mortgage payments in the US average $1,015 a month

As you can see… $1,000 doesn’t cover very many emergencies and crap happens.  You absolutely need an emergency fund to catch you, should life knock you down.

How Much Should You Save?

How big should your emergency fund be
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If you relied only on the advice from book-selling financial “experts”, you’d be left in a state of confusion…

Dave Ramsey will tell you that you only need $1,000 because you need to be wildly intense with your debt payoff plan, and Suze Orman will scream that the sky is falling and you need 12 months worth of expenses to even begin to feel a teeny tiny bit secure.

Talk about polar opposite ends of the spectrum… So, who do you listen to?

Neither.  It’s not that they’re wrong.  It’s the fact they’re trying to paint a detailed picture with a paint sprayer.  You can’t be that broad when it comes to discussing personal finance.

Your specific life situation should dictate the size of your emergency fund.

Are you single, renting, and have few personal and financial responsibilities?  Or… are you married, have children, a home, and some major life responsibilities?

Your emergency fund should reflect both your life situation and how comfortable you are with risk.

How Much Did We Save?

When we started our debt free journey, we tried only keeping $1,000 in our emergency fund.  It did nothing but cause me anxiety.  I constantly felt like something was going to happen and we would end up having to use the credit cards we just paid off to cover the costs.

This discomfort caused us to start and stop our debt snowball a few times and added a lot of time on to our quest for financial freedom.

Eventually we decided to keep $10,000 in our emergency fund.  It felt right to us because we owned a home and had over $100,000 in consumer debt. $100,000 in debt cost quite a bit every month, and $1,000 wouldn’t even cover us for a month.  It just wan’t enough to protect us.

I knew that we would be tackling that debt for a while and any number of emergencies could occur during what felt like an eternity.

Once we had $10,000 in our emergency fund, we felt confident and secure.  It allowed us to focus entirely on our debt.  That was OUR number.  Yours might be more or less.  It doesn’t matter and it won’t add any time on to your quest for debt freedom (we’ll cover that later).

Can Your Emergency Fund Be Too Big?

Can you save too much money before you start your debt free journey?  No, absolutely not.   Your emergency fund cannot be too big.  At least, not right now.

Let’s say you know your emergency fund should be $10,000 and it’ll take you 6 months to save this up.  Did you lose 6 months of debt free progress?  Negative ghost rider, you sure didn’t.

Here’s why.  You’re just front loading your debt free journey.  Once your final debt balance is under $10,000 you can use your emergency fund to pay it off.  Boom, debt freedom!

I know. I know… You’re screaming “that’s not an emergency”.  You’re right, it’s not… but, you’ll be able to quickly save your true emergency fund once your debt free.

Your risk level is much lower at this point in your financial life.  You’re talking about a few months to reestablish an emergency fund compared to a few years.  Sure, the shit can hit the fan in a month.  Hell, it can happen in the next 5 minutes.  The general risk of it is much lower though as time is shortened.

Don’t fear saving too much money right now.  The money isn’t going anywhere and you can use it later to make one last big debt snowball payment.  Win-Win.

How Should I Save My First Emergency Fund?

Saving money for the first time can be really hard.  Most likely, you have a few bad spending habits.  It’s totally fine, I used to be the same way.  I would spend money before I even thought about earning it.

The first step to saving your emergency fund is auditing your previous 3 months of spending.  Most banks have a website and they make it pretty simple to export your previous statements to excel.

Export each month individually to excel and filter your spending into a few categories.  Here are a few examples to get you started.

  • Groceries
  • Gas
  • Housing
  • Utilities
  • Insurance
  • Dining Out
  • Monthly Subscriptions
  • I Have No Idea Why I Bought That

Once you have an idea where your money has been going, Step 2 is looking for areas to cut out immediately.  I would start with monthly subscriptions, dining out, and working to lower my utility bills.

We were able to save over $500 a month by making 5 changes.  We looked at our insurance, cable, cell phone bills, our grocery bill, and the type of dog food we purchased.

You might laugh, but our dogs eat a lot and we were able to buy quality grain-free food at Tractor Supply.

If you don’t feel you’re able to cut any monthly expenses, consider trying a no spend challenge.  By recalibrating your spending, you’ll find a lot of money that had been quietly leaking out each month.

This extra cash can be sent toward your emergency fund.

The money you free up each month will go towards building your emergency fund.  Once fully loaded, it’ll be transitioned towards paying off debt.

What If You Can’t Find Extra Money?

how big should your emergency fund be
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Not everyone has the ability to free up hundreds of dollars a month.  If your budget is already operating on a razor-thin margin and you can’t locate extra cash to save, it’s time to increase your income.

This isn’t an enjoyable thing to hear. I recognize that, but increasing your income will help you rapidly build your emergency fund.

There are a lot of opportunities to make money working for yourself now.

Some ideas include:

  • Uber/Lyft
  • Virtual Assistant
  • Selling items on EBay/Craigslist/Facebook Market Place/ Let It Go
  • Freelance Work
  • Dog Walking/Dog Sitting
  • Baby Sitting/Nanny

Taking on a true second job is also an option, even if it’s not the most enjoyable option.  It’s a short term fix to jump start your financial freedom.

Final Word

Saving an appropriate emergency fund for your specific life situation is a wildly important part of your debt free journey.  The money sitting there idle in your savings account is powerful.  It represents protection from unfortunate circumstances.

Your emergency fund will give you peace of mind as you spend years throwing every available penny at your debt.  I didn’t realize it at the time, but our emergency fund was one of the most important items in our debt free tool box.

Without it, we would have surely failed.

How much of any emergency fund are you saving, and why?  Let us know in the comments!

9 thoughts on “Emergency Fund: How Much Should You Save While In Debt

  1. I never kept an emergency fund. I applied for and kept open a line of credit, and then I always focused on having diversified income streams (even when I had a job, I always paid attention to job openings, nurtured my network, answered recruiter calls, etc). I recognize that a line of credit may not work for a person who doesn’t have access to credit or who may be tempted to run it up, but that worked for us very well. I used our LOC to float my small business in the early days, to start our real estate portfolio, and yes, to cover expense swings.

    1. That’s certainly a viable option for some. Personally, after we paid off our debt, I’ve been hesitant to use it again. Have you needed to dip into that yet?

      1. Yes, I dip into it often, then pay it back. We first used a HELOC for the down payment on our first rental property investment. We have used our HELOC for other real estate investments as well. I also used it to cover living expenses when my coaching business was very new (it’s now 11 years old) until it was making a stream I could count on. On an ad hoc basis, I’ve used the HELOC to cover an unexpected tax bill.

        I always prioritize paying off the HELOC as quickly as possible, which is why I don’t mind running it up when I need it. We have other debt but these are related to our real estate rentals, so the rental income goes to that debt, and then my income goes toward the HELOC.

  2. Oh man, this is an amazing read…as always.

    We have been all over the map on emergency funds. We used to settle in at $10k, like you. Once we started paying off student loans and moved into an apartment, I felt we could tolerate a tighter emergency fund, so we dropped down to $5k.

    We save money each month for our sweet precious and spoiled daughter, so eventually, that got up high enough that I was like “umm…maybe that’s our emergency fund?” It was liquid cash in a savings account that was earmarked for her. However, it was still our money. And if we had an emergency, it was money we were going to use.

    Now that student loans are paid off, as you well know from our guest post, we are building up a 6-month emergency fund. Likely it will be a front-loaded mortgage snowball payment in the future, as you describe, but that’s how we roll.

    Point of all of this rambling – our emergency fund has been fluid to fit our needs over time. Precisely what you describe so well in this article. Love it a ton!!

    1. You’re making me blush! I like the concept of a fluid fund. Life changes, right? Our emergency fund should as well! Thanks for reading!!

  3. Take one credit card with zero balance on it. Put it in an envelope, seal it, and write “ONLY OPEN IN CASE OF A UHMERJUNCY”*. Then carry on paying your debt to the max and not paying interest needlessly to carry your water in 2 buckets.

    Why you so stressed?

    * It only works if you spell it exactly as I did.

  4. Most of the time that my ex-husband and I were getting out of debt, we were on disability (me) and unemployment (him). As a consequence, we didn’t have to save a EF, because we knew we couldn’t lose either one (this was back when Obama extended unemployment to two years).

    So we were in a very unique, weirdly privileged position (despite low income) to not need an EF because our basics (rent, food, utilities) would always be covered. It was far from optimal — we both would’ve preferred to work — but it helped us pay down our debt much more quickly than if we’d had to save for the possibility of needing to cover rent or other essentials. We also didn’t have a car, so that was a huge set of expenses we never had to worry about.

    These days, I want to get my EF up to $10,000, but I’m not in a huge hurry because my regular savings account is healthy too. And I withdraw money for unexpected expenses from that first. So I guess I have two EFs?

    1. It sounds like you have a sinking fund account and you’re saving an EF? As long as you’ve got cash for a rainy day, you’re doing awesome!

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