Having a small emergency fund while getting out of debt is critical. As I mentioned in other posts, one of the first steps to getting out of debt is not adding to it. Having a cash reserve, no matter how small, can make that step even easier.
Our $1,000 Emergency Fund
When we started thinking about our plan to get out of debt, we knew we had to save up some cash. Being a (mostly) big fan of Dave Ramsey, I knew that $1,000 was a good number to strive for. It’s what he recommends in his book and on his radio show. $1,000 is a relatively easy amount to save and would cover most financial emergencies. It took us a month to save for ours.
In my opinion, some individuals may need a slightly larger cash reserve while getting out of debt. Individuals who are learning of an impending layoff should be stockpiling cash. If you are in that category, you should also be paying only the minimum on your credit card (and other debt). Cash (savings) will be your friend when the layoff happens.
Emergency Fund to the Rescue
I am writing about emergency funds today to tell you about how ours saved us recently.
During the spring of 2009, I worked for the Department of Labor on an independent contractor basis. In other words, they paid me straight cash and didn’t withhold any taxes from me. It’s nice getting more cash upfront but it’s a pain when tax time rolls around. You have to constantly be aware of your tax situation and how much you anticipate owing at the end of the year. Back in August, I paid $1,500 in estimated taxes and figured that would cover my income. Well, I was wrong.
I started calculating what our tax refund would be the other day and noticed that it was looking like we were going to owe. Working for a certain financial branch of the federal government, I am held to a little higher standard when it comes to taxes. If we would owe on April 15th, our return would be examined a little closer than normal. So, to make sure we paid enough in, I depleted the emergency fund and sent all $1,000 to the US Treasury. Hopefully my calculation was wrong and we can get some of that money back. I guess it’s better to be safe than sorry.
Even though we had to deplete our account, it feels GREAT knowing that we didn’t have to rely on credit cards to get us out of the mess.
So, this little emergency is going to set us back a little. We still anticipate paying on debt this month however, it won’t be as much as originally planned. We want to get the emergency fund back up to $1,000 quickly.
What has your emergency fund saved you from?