photo by chrisbb
Most financial plans include some amount of cash savings to help get you through life’s unexpected events. 2 of the first three steps of the Dave Ramsey baby steps revolve around the emergency fund. I know Frugal Dad has already covered what an emergency fund is, but I want to share what having an emergency fund has meant to me.
First let me share a little bit about my background. My wife and I followed a slightly modified Dave Ramsey plan as we got rid of $70,000 in 4 years. We had the initial $1,000 in the bank quickly and luckily never had to use it during our debt elimination. Building up 3-6 months expenses took what seemed like an eternity, but since that time we have never looked back.
Now that you know relevant history, let’s explore seven things that our $1,000 and fully funded emergency funds ‘bought’ us:
- Protection - First and foremost a cash savings is designed to be a buffer so that you can avoid debt when bad/unexpected circumstances show up at your door step. With a cash savings you can avoid using the credit card for things like unexpected car or home repairs. It can tide you over in the event of a job loss or income shortage. Frugal Dad just recently shared about the importance of his emergency fund and how it protected them against a few unexpected expenses. We were lucky, since the only time we had to dip into our emergency fund was when our second adoption happened quicker than we had planned, but we were able to quickly replenish it since we had a hefty cash flow from not having any debt.
- Success - The idea behind the $1,000 mini-emergency fund that Dave Ramsey recommends is not only to create a little barrier to keep you out of debt, but also to get your positive energy flowing by being successful at saving. When people realize that they can meet a small goal and be successful they begin to have faith that they can conquer larger goals. I can also attest that getting a full 6 months expenses in the bank was the point at which I finally felt my finances were a success.
- Lower Stress - It is amazing how much having protection that will carry you through most of life’s curve balls reduces the amount of energy that you spend thinking about your finances. Worry starts to melt away and is replaced by a sense of security.
- Freedom - With 6 months expenses in the bank a whole new realm of possibilities opens up. You can now consider taking a leap and quitting the job that you hate or by cutting back some hours to pursue a side business or volunteering. You have the freedom to invest more for the future without sacrificing the present. Things that were impossible just months or years earlier now seem a lot more feasible after accomplishing a fully funded emergency fund. Your financial system now frees you to focus your energy on things that are more important than money.
- Motivation - The motivation is driven by the removal of stress and the reclaimed mental energy. You can now turn your attention towards goals and opportunities that excite you, rather than being caught up in just making sure your financial house of cards doesn’t crumble.
- Giving - Instead of feeling like you need to cling to ever dollar, you can begin to loosen your grip on those precious dollar bills. Instead of clenched fists, you can great life with open hands ready to accept what comes your way and give back to those around you.
- Passive Income - Finally, 3-4% interest on 6 months expenses isn’t going to help you quite your day job, but there is something quite satisfying about collecting almost $400 a year in passive income that adds another layer of satisfaction to having an emergency fund.
I can honestly attest that having a fully funded emergency fund marked an amazing switch in focus for my life. I suspect those of us with fully funded emergency funds have had similar experiences. Hopefully those that are just getting started and those that are in the midst of their debt elimination can use this list as inspiration. It really is as great as it sounds.