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Is a $1,000 Emergency Fund Enough?

All right—so you’ve decided to take your financial future to the next level and start an emergency fund. Woo-hoo!

Having an emergency fund is an essential part of managing your money. But not everyone is super interested in building a solid money foundation. The fact is, nearly 40% of households can’t afford to pay cash for $400 emergency!1

So, how much should you have in your emergency fund, anyway? Here’s the deal: If you have debt (any kind of debt other than a mortgage) a $1,000 emergency fund is all you need.

Oh, the horror! (Cue the thunder, lightning and dramatic chipmunk.)

It’s controversial, we know. But here’s our case for why a $1,000 emergency fund is enough—for now.

What Is an Emergency Fund? 

An emergency fund is cash you’ve set aside to cover unexpected expenses—and only unexpected expenses! It’s a financial 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 something crazy falls in your lap and you have an emergency fund tucked away, a money crisis becomes just an annoying inconvenience. You pay cash and move on with your life. It 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 have any debt other than a mortgage, then you just need a $1,000 emergency fund—aka a starter emergency fund. We call this Baby Step 1. It’s the first piece of your money journey, so don’t skip over it.

That starter emergency fund sets you up to begin paying off your debt—that’s Baby Step 2. With some cash in the bank, you won’t have to go deeper into debt when an emergency strikes. Then, later on down the road, once you’re out of debt (except for your mortgage), you’ll beef up that emergency savings to cover three to six months of expenses—that’s Baby Step 3.

Now, this doesn’t mean you need three to six months of income sitting in your savings. Nope. A fully funded emergency fund gives you enough savings to pay for three to six months of expenses if your income suddenly disappeared. So, check your budget or your bank statements to see how much you’d need to cover your Four Walls (food, utilities, housing and transportation) for at least three months—six months if your job is unstable.

Imagine what that would feel like—to be debt-free and have enough cash to weather just about any storm. See why an emergency fund is so important? It’s the first step in changing your whole financial outlook!

Why a $1,000 Emergency Fund Is Enough 

Will a $1,000 emergency fund be enough to cover every emergency? Nope! But that’s why we call it a starter emergency fund. Remember, it’s setting you up to tackle a bigger goal—paying off your debt! A smaller emergency fund will light a fire underneath you and keep you motivated 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 with just $1,000 in your emergency fund. That would be pretty scary. But the point here is not to be in debt that long.

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 hard you’re willing to work at it, you could knock that out fast.

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 (you can live without avocado toast for a few months—trust us). You’ll be living with gazelle intensity. The deeper your passion and the deeper the cut in your lifestyle, the faster you’ll get that debt out of your life—and start building your fully funded emergency fund!

When a $1,000 Emergency Fund Won’t be Enough 

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.

Here’s when you should pause the Baby Step you’re working on and pile up as much cash as you can:

  • When you’re expecting a baby. Once your bundle of joy is born and everyone is home and healthy, you can start working on your Baby Steps again.
  • When you know you’re about to lose income. If you’ve been told you’ll be laid off soon or your company is eliminating your role, prepare by saving as much as you can. Once you’ve landed your new job, pick right back up where you left off!

Take It One Step at a Time!

Hey, we get it—asking people to keep only $1,000 in their savings isn’t a popular opinion. And that’s okay. But guess what? It does work. That $1,000 emergency fund will 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 the process might make you feel. Lean into that awkward feeling and let that light the fire under you so you can pay off your debt even faster. Get gazelle intense!

But first things first: You’ve got to take those goals one step at a time. Learn how to do just that by taking Financial Peace University. This nine-lesson course teaches you how to walk the Baby Steps, create (and maintain) your budget, pay off debt, save money, and more. 

Remember, this stuff works. So get started today. 

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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