A mini emergency fund is crucial to your financial stability, especially when it is the only thing keeping you from reaching for a credit card.
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Dave Ramsey and I agree that the first step for financial security is to save up a mini emergency fund. He recommends saving $1000, which is where we disagree. As far as I can tell, he’s been saying $1000 is enough since he first came out with his Baby Steps program… in the 1990s.
Now it’s 2020. $1000 in 1990 is now worth $1991.43 – nearly double! Think back on the true emergencies you’ve experienced (where you may have had to reach for a credit card)
- car repairs
- new tires
- appliance repair or purchasing a replacement
- unexpected medical bills (especially if a prompt payment discount is offered)
How many of those were $1000 or less? For my family, we may be able to purchase tires (but we have a savings fund set up for them); everything else is likely more. We spent $1800 in repairs for two of our vehicles in July this year. That’s with my husband doing nearly all the labor himself!
$1000 does not go far enough, especially when you’re in a tight financial spot to begin with. Yes, it is an easier amount to save. Yes, it is a nice number to focus on. But $1000 is not enough for most emergencies.
How much should your mini emergency fund be?
Your emergency fund balance depends on your family size. Feel free to save more than this, but at a minimum I recommend:
My family of 4 therefore has a mini emergency fund of $2500 (500 + 4×500). If you’re a single person, you would save $1000 (500 + 500). I know I just said $1000 isn’t enough, but a single person should have an easier time adapting to more expensive emergencies. A partner and/or children make it much harder to make bigger sacrifices when needed.
If I can’t pay my bills, how do I save?
Carefully and strategically, is the answer. The easiest way to save over a thousand dollars is to set aside any lump sum you receive, such as a tax refund or work bonus.
If you’re not expecting a lump sum anytime soon, consider selling things from around the house. Facebook Marketplace is a good option, especially since it allows you to arrange contactless pickup now. You can also list items in specified local or national exchange groups on Facebook. These groups can be helpful for selling specialty items, such as adaptive equipment/clothing, cloth diapers, or other baby items. Craigslist is another option, but I haven’t checked it out in ages. Consider the local newspaper classifieds for larger items, such as vehicles, ATVs, snowmobiles.
This article has more tips for selling on Facebook Marketplace. It’s important to list good quality photos, provide a detailed description of the item, and price appropriately. If you don’t have interest right away, drop the price. Remember that you can renew a listing that doesn’t sell after a week or so, but by then you may be out of luck without a drastic price cut. Also consider the timing of your sale – winter clothes will sell more quickly in November than in March.
Hopefully at the beginning of your journey you still have valuable items to sell off. If you’re serious about financial security, this step could hurt. Sell electronics, musical instruments, gaming systems, sports equipment, camping gear, furniture, or hunting gear. Baby clothes and gear are another good option, especially if you bundle the clothes by size.
Another option is to reduce your retirement contributions, assuming you are currently contributing. I am not saying to STOP retirement contributions, however. Financial Security Step 2b is about saving for retirement. Reducing your contributions can free up some cash though, which will also come in handy when you begin paying down debt. The important thing is to only reduce your contributions to the level of your employer contribution (if applicable). If you do not have an employer match, continue contributing at least $50 a month.
Say you currently contribute 5%, which is $500 a month. Your employer will match up to 3%. If you drop your contributions to 3%, that gives you an extra $200 a month ($500 – $300), which can go toward your emergency fund savings now and debt payoff later.
The next logical step is to make more money. This could mean requesting overtime or additional shifts. Get a second job on the weekend; during the pandemic, this could be a work-from-home customer service job or other online work. Start working a side gig – Uber, Lyft, Uber Eats, Instacart, and Shipt are all options. If you or your family is at higher risk for COVID, consider carefully. No matter what you choose, please be safe.
Finally, cut obviously unnecessary expenses. Reduce the number of meals you eat out. Look at cheaper phone plans, cut cable, or reduce the number of subscriptions you have. Look for recurring charges on your accounts, and evaluate if you want that Fab Fit Fun box or financial security more.
Be ruthless… including gifts. I’m not saying “become the Grinch,” but you can usually spend less on gifts. This year, we’re only buying for our nieces and nephews, not our siblings and parents. Our girls will only get a few gifts from us. Older kids will likely be disappointed, so this is a good time to open up a dialogue about your family’s financial goals.
How to save:
- a tax refund
- a work bonus
- sell things
- reduce retirement contributions to employer match level
- work overtime or additional shifts
- get a second job
- work a side gig
- cut obvious expenses – eating out, subscriptions, and gifts
Other things to think about
Keep your mini emergency fund in a savings account that has online access. This will allow you to transfer the funds to your checking account when you need them. If you’re worried about the temptation to spend the money on wants, make the money harder to get to. Put it in a different bank, make your partner’s login the one that shows this account, or make a pact with your partner that you both have to agree before spending any of your mini emergency fund.
Make rules for what you can spend your emergency fund on, and write them down. Use the Emergency Fund Tracker printable to stay accountable. These should be expenses that are not recurring, could be unexpected, and often involve a repair or replacement. Down the road you’ll set up savings funds for these kind of repairs, but for now it’s ok to use your mini emergency fund.
If anyone in your family has experienced job loss or is likely to, save as much as you can. When you’re more stable, you can use the excess to pay off debt, but it’s better to have more cash on hand during times of uncertainty.
When you do spend some of the emergency fund, replenish it ASAP. This could mean selling something additional, working more, or pausing your debt payoff to put that money toward the mini emergency fund. Keep it full as much as you can.
Now is also the time to start considering radical changes. Can you reduce your mortgage or rent by refinancing, selling, or moving? Can you cut your transportation expense by ending a vehicle lease, selling a car, or buying a more fuel efficient beater?