So far on the budget makeover we have figured out how we relate to money, got our monthly bills lined up, and estimated other monthly expenses. Next on the budget makeover list is to start saving for an emergency fund. What is an emergency fund?
According to Dave Ramsey, “An emergency fund is a rainy day fund, an umbrella. It is for those unexpected events in life: a job loss, an unexpected pregnancy, a car transmission going out, and so on.” It is your safety net for when things go wrong, which they will, we just don’t know when and how costly they will be. Since we know they’re inevitable, we need to start saving for them now rather than later.
How much money should be in your emergency fund? You want to try to save up $1000 for an emergency fund as soon as you can. This will provide you a small safety net in case something happens. Ramsey recommends funding your emergency fund with $1000 even before paying off credit card debt or other loans or debts that need to be paid off.
Once you have saved $1000 for an emergency fund, work on attacking the debt snowball you may have accumulated. To do this, pay off your smallest debts first. As you pay off small debts, take those monthly payments and start applying them against larger and larger debts until you have conquered them all! After you have destroyed your debt snowball, you want to build an emergency fund. A fully funded emergency fund is 3-6 months of your personal expenses set aside in a savings or money market account.
When Jeff and I first began getting on track with our money, we saved aside $1000 as quickly as we could. It was hard to do because there were so many other things we wanted to do with that money. It was new for us to save for something, but not really know what that something was.
After saving up $1000 for our emergency fund, we paid off my car which was the only debt we still had besides our mortgage. After all of our debt was gone (besides our mortgage), we started saving up for 3 months worth of personal expenses for our emergency fund. In December of 2010 we met our goal and had fully funded our emergency fund to a little over 3 months of personal expenses. What a good feeling it was for us! It was so reassuring to know we had a decent amount of money in a savings account for any large unexpected expenses.
We didn’t have to wait long for disaster to strike. The arrival of spring brought with it warm weather and we started to notice our air conditioning wasn’t keeping up. Long story short, we had to replace our air conditioning unit and furnace which ended up costing us $7000! Ouch!
Lucky for us we had a fully funded emergency fund and a tax refund. Although it was not fun saying goodbye to a large portion of the emergency fund we had worked so hard to build, it was a relief to not take out a loan or try to figure out how we would get the money to pay for a new unit. Instead of fretting about it, we just paid for it…with cash. What could’ve been a huge financial stressor for our marriage was reduced to an inconvenience because we had the money and it wasn’t earmarked for anything else.
I’m happy to say we already got our emergency fund fully funded again (always replenish if you dip into it!) to where it was before the mishap. I feel a huge weight lifted off our shoulders again! If only we could avoid disaster for a while, it would be nice to be able to make some home renovations…ha!