The $1000 Emergency Fund

Last week I gave a quick overview of the Baby Steps. Before you start, you have to be current with everyone. Since I didn’t have that particular problem (I got really, really close, though) I can’t give you any advice there.

I can talk about the subsequent steps.

Baby Step 1 is your starter emergency fund of $1000. Do this as quickly as you can, because it’s the thing that keeps you from going backwards in “the plan.” The idea is to put this money into a money-market account with check writing privileges and no minimum balance. Bankrate.com has a good tool for finding them. I keep three checks for this account behind the checks for my regular checking account.

I would avoid accounts that only allow debit card purchases. This account should be inconvenient to use and a debit card is really convenient. You don’t want to “accidentally” spend your emergency fund on something that’s not an emergency. I started off with a savings account at the same bank I had my checking account with and I bought an XBOX off eBay using my emergency fund about two months into the plan. I simply jumped online, transferred the funds, and hit “Buy it now!”

Don’t do that. I shouldn’t have and almost immediately I felt guilty about it. The next day I opened a money-market account with a bank in Utah (I still have the XBOX and use it daily, FWIW). I can get my money out one of two ways: Electronic transfer that takes 3-5 business days or writing a check. Another thing that will help keep you from accidentally spending this money is that you are only allowed to make 3 withdrawals per month from this type of account.

Now, a lot of people think that $1000 is just not enough for an emergency fund. I found that in the 2.5 years I had that little tiny account, I was able to cover every emergency I had with that fund. The only exception was when I bought a $1500 vehicle after my previous one left parts of the transmission on the highway. In that case, I had to wait until my next payday to get the extra $500 and I bummed rides to work from co-workers/roommates until then. I could have gotten by with an $800 car (and later I did just that, but that’s another story).

The entire purpose of the emergency fund is so that you can cancel all of your credit cards. ALL OF THEM. Once I got my emergency fund in place, I never used another credit card again. Ever.

If you think you need to keep a Visa with a $2000 limit on it “for emergencies,” then simply put $2000 in your emergency fund instead. If you’re married and have kids, your spouse might insist on even more. It’s probably unnecessary to keep more than $2000-$3000 in this emergency fund, with two notable exceptions:

1. You reasonably expect a coming disaster, such as a job loss or medically necessary surgery.
2. You are about to have a child. (Not expecting to get pregnant, mind you, but actually pregnant or approved for an adoption you started before all of this. Knowing a due date is a good indicator for whether this applies to you.)

In both of these cases you put everything you can into your emergency fund. This is true for all stages of the plan. We are on Baby Step 4, but we are piling up cash for when lilwizard shows up at the end of February. When these things no longer become an issue (your job stabilized, you’re back to work after the surgery, or mom and baby are home from the hospital with no complications), you continue with the plan.

Again, I know $1000 does not sound like enough to some people. Even $4000 might not sound like enough. Trust me, it is.

The coolest thing in the world will happen to you the first time you use your emergency fund. You feel empowered. The first time I used my emergency fund was when my radiator blew up during a radiator flush. Two hours later, I wrote a check for $300. I literally cried because I realized I had the money to cover this unexpected expense. It was awesome.