After living through the year that was 2020, it seems like everyone wants to sing the praises of having an emergency fund. And that’s smart. Having an emergency fund is an essential part of managing your money—so important that we even dedicated not one but two of our 7 Baby Steps to it and have talked about it for over 25 years.
But how much emergency fund money should you have? Here’s the deal: If you’re still paying off debt, your emergency fund should only have $1,000 in it. Oh, the horror! It’s controversial, we know. But here’s our case for why $1,000 is enough to see you through.
What Is an Emergency Fund?
It sounds high and mighty (and maybe a little intimidating), but when it all boils down to it, an emergency fund is just a buffer between you and life. It’s the safety net that has your back when an emergency finds you—think the car transmission going out, needing a root canal or, say, a global pandemic happening out of the blue.
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See, when you have something crazy fall in your lap and you have an emergency fund tucked away, a money crisis becomes just an annoying inconvenience. A little bump in the road. Something you can take care of right away and then move on with your life—since you have the money to cover it. Having an emergency fund changes your whole attitude.
How Much Should I Have in My Emergency Fund?
We hit on this a little earlier, but let’s dive in more—if you’re still paying off debt (not including your house), then you only need to have $1,000 in your starter emergency fund. We call this Baby Step 1. It’s the first piece of your money journey, so don’t skip over it. You need that foundation before you can go forward to crush your other money goals.
Later down the road, once you’re out of debt, you’ll beef up that emergency savings to cover 3–6 months of expenses. We call that your fully funded emergency fund—that’s Baby Step 3.
Now, that doesn’t mean you need 3–6 months of income sitting in your savings—nope. That just means you need to look at your budget and see how much money you need to live for 3–6 months if your income suddenly disappeared. So, add up all the necessities (shelter, food, transportation, normal bills) and then see how much money you’d need to cover all of that for 3–6 months. The amount will look different for everyone, but think about how much money you need to totally survive for 3–6 months and that’ll be your goal amount.
Why $1,000 Is Enough
We know not every emergency is going to be less than $1,000, but that’s why this thing is called your starter emergency fund. The point of this is to light a fire underneath you. Having only $1,000 sitting there should ignite your drive to pay off that debt even faster. Because here’s the idea: You don’t want to spend 10 years in Baby Step 2 paying off your debt. Yeah, having only $1,000 in your emergency fund while you’re paying off debt for 10 years would be pretty scary—but the point here is not to be in debt that long. And that’s why you don’t need a huge emergency savings.
Let’s say you have $50,000 in debt but $23,000 sitting pretty in your savings account. You should take $22,000 out of your savings and toss that at your debt. Then you’d have $1,000 in your emergency fund and only $28,000 of debt left to pay off! Depending on your income and how much you want to bust your back, you could knock that out fast.
Now, we know taking your savings down to almost nil is terrifying. But believe it or not, it’s really good that it makes you nervous, because that will keep you motivated. That’s the gasoline on the fire that’s going to make you passionate about getting your money act together.
Before you know it, you’ll be picking up extra gigs like mowing lawns, selling all the junk from your storage unit, and making lifestyle sacrifices you never thought you would. The deeper your passion, the deeper the cut in your lifestyle, which is going to speed up the process and get that debt out of your life ASAP. You want that debt gone fast so you can get back to beefing up your emergency fund.
Wait—Are There Any Exceptions Here?
Okay, let’s talk about the exceptions to the rule. Yep, there will be times when you’re about to go into a storm (you can see it coming) and you know you’ll need more than $1,000 to cover you. These are the times when you need to pause the Baby Step you’re working on.
Here are the two times when you’d do that: when you’re expecting a baby and when you know you’re about to lose income (like if you’ve been told you’ll be laid off soon or the company is eliminating your role). If either of those things are on the horizon for you, then you need to buckle down, pause whatever baby step you’re on, and pile up as much cash as you can.
Take It One Step at a Time!
Hey, we get it—asking people to keep only $1,000 in their savings isn’t going to be a popular opinion. And that’s okay. But guess what? It does work. That $1,000 emergency fund will be enough to have your back while you hustle to pay off your debt as quick as you can. The Baby Steps work, so stick with them—no matter how uncomfortable it might make you feel. Lean into that awkward feeling and let that spur you on to pay off your debt even faster.
But first things first, you’ve got to take those goals in stride one step at a time. And with Ramsey+, you’ll get the tools and the teachings you need to do just that! It’s packed with money courses like Financial Peace University, the premium version of our EveryDollar budgeting app, and even our new goal tracker, the BabySteps app. Get access to all of it with a free trial of Ramsey+.