Even a Small Emergency Fund Can Bail You Out

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?

17 thoughts on “Even a Small Emergency Fund Can Bail You Out

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  2. stacy

    this past year our emergency fund paid for braces. who knew that braces are put on 10 year olds and that they can actually completely change the shape of your mouth before the age of 12. we had anticipated braces in the future, but did not see this coming so early (hint to all of you who have young children). we are already saving for the seven year old.

  3. Susanne

    Last year, we worked very hard to put money into what we saw as a long-term savings account. We amassed about $7000 – quite an accomplishment for us. A number of short-term emergency expenses cropped up at the end of 2009. We didn’t anticipate them, but thanks to our savings, we were able to pay for all of them and still have about $1500 left over. I’m disappointed that the money we worked so hard to stockpile is no longer there, but at least we didn’t have to pay for anything on credit. (Kind of reminded me of one of the early scenes in the movie “Up” – if you haven’t seen it, I recommend it. It’s not really about money, but it definitely examines the tug-of-war between taking risks in life and playing it safe.)

    1. Adam Post author

      Not paying for it on credit is a huge accomplishment. Like I mentioned before, not adding to debt has been crucial to our success.

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    1. Adam Post author

      Thanks Ken! We’re glad it helped us out too. I think we may be able to get about half of it back from a refund and save the other $500 pretty quick. It will be there for out next emergency too!

  6. Rich | Life Compass

    Ten years ago, we bought a used Dodge Grand Caravan. I wish the person we bought it from had told us to increase our emergency fund right then and there. That model was notorious for bad transmissions. It was already on transmission #2 when we bought it. Then we put in #3 within a year. Gratefully, we had most of the money we needed. But at the time, it was a struggle to replenish the fund.

  7. No Debt Guy

    I have often wondered if having an emergency fund is the best way to pay off debt or is it counter productive?

    For example if you are carrying at credit card balance of $2,500 and have $2,500 in your emergency fund you would be better off paying off your credit card and rebuilding your emergency fund.

    What if you have an emergency? You can still take a cash advance from your credit card and you are no further ahead.

    This does take some serious discipline, but you will save interest costs.

    I am curious on others opinions.

    1. Adam Post author

      You know, I wanted to reply to you when I first read this but I got side tracked.

      My opinion is that the emergency fund helps you get acclimated to spending with cash and not credit. If you rely on you credit card for those emergencies, I think the term emergency may have a different meaning than if you have to use the cash to pay for it. I may be writing a post on this soon as this comment sparked my interest.

  8. JMK

    I’m with you No Debt Guy. I currently don’t have a designated emergency fund and don’t intend to create one. Having said that I have to add that it probably makes a lot of sense in certain circumstances. If you live to the full limit of your income and have an unstable job situation, you should have several months of expenses set aside so an unexpect loss of income or large unforseeable expense doesn’t cause a major problem.
    We have an enormous line of credit (set up when we were building our home and ordering materials). It sits with a zero balance and the rate is currently 2.5% should we need to use it. Our credit card is used for EVERYTHING possible and paid off WEEKLY when I balance up the actuals against the spending plan. I want every possible flight mile, and have never paid interest on the card.
    So on the one hand we have a lot of available credit should an expense come up which couldn’t be covered with the cash in our account. On the other hand the biggest reason we don’t bother with the “emergency” fund is that we intentionally cut our costs so that we live on about 55% of our take home pay, which is the reason there is always unallocated cash accumulating. In addition, we have a detailed spending plan which is always projected out 12 months into the future and includes both our regular weekly/monthly household expenses, but also recurring annual expenses. This for us is the key. We rarely have something come up that was truly a surprise, and we are never running so close to the line that most emergencies can’t be funded by the excess in the account (or throw it on the line of credit temporarily and paid off with the excess income in a couple of weeks). Every week where there is no emergency (which is 99.9999% of the time) I skim off the excess cash not needed to cover the regular bills and either make an extra mortgage payment, contribute to our retirement funds, or leave it there to build up for a few weeks if we’re planning to travel or sense an upcoming unanticipated expense.
    I figure there are very few big surprises that are actually surprises and cannot be forseen and properly planned for in your budget. I budget for summer and snow tires every 3 years for both vehicles. If we blow a tire unexpectely before that, $200 isn’t going to cause a big problem. If we have a major house/car related insurance claim, the deductable can easily be covered by the excess from a week, or two at worst. I plan every year for the annual May vetrenarian bill, school photos in the fall, car tags on our birthdays, gifts in Nov/Ded, regular oil changes, etc. These are not surprises or emergencies. They happen every year. If they aren’t addressed in the budget then they might feel like a surprise.
    Living in Canada, I don’t plan for unforseen medical expenses. Some dental work isn’t covered by our plans, so an accident would requiring implants or similar would require funding from our weekly excess but other than that if I’m in a car accident or develop a serious condition, our health care covers everything and there won’t be bills that drive me into bankruptcy. It’s important to have disability/income insurance in place to cover lost income but the actual medical costs aren’t an issue.

    In the past 2 years the only major expenses I can think of which might have been covered by an emergency fund were an airline ticket for an out of town funeral, and replacing our dishwasher earlier than planned when it suddenly started leaking through a previously undetected rust hole forming inside. To cover my flight I skipped the extra mortgage payment I was planning to do that week. For the dishwasher we did dishes by hand for 3 weeks while we comparison shopped for the new machine and let the weekly excess build up. Bought the new machine with cash. Emergency over.

    Sorry this was so long. I guess my feeling is that an emergency fund would be essential if basic expenses require every cent that’s coming in, or you don’t consciously plan for the things that are predictable and therefore aren’t ready for them. Neither of those situations applies here so having money sitting around “just in case” and not being put to work would bother me. I figure if you are paying down consumer debts and have an emergency it just goes back on then card. Yes it’s annoying to run the balance back up, but if there’s no emergency then you’ve been getting the balance down faster without letting savings sit around waiting for a problem.

  9. Ken

    I have 2 emergency funds, the first is for real 911 type emergencies, lose of employment, hurricane etc.

    My second emergency fund is what I refer to as my “What Life Throws At You” fund, auto or home repairs etc. Last Sunday my wife walked in the door and stated ‘I think the water heater is leaking’. I checked it out and sure enough is was leaking from the bottom of the tank. Next day, I had a new water heater installed, paid cash !! No Pain, thanks to my ‘ What Life Throws At You’ account.

  10. Alice

    My emergency fund has saved me when my hours have been cut at work during slow season (January and February) as I work as a waitress. When I go to graduate school to improve my employment chances, my emergency fund will be there in case some unexpected expenses come up. Even though I am paying off debt, I sleep easier knowing I have SOME money in the bank since my income is so erratic. Yes I could send my $2k to my credit card but then I would lose sleep knowing that if I didn’t make enough one month or had more expenses than usual I would have to use my credit card again. And I vowed to never charge anything again that I can’t pay off straight away.

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