An Emergency Fund Is More than Just Money

photo by chrisbb

This is a guest post from The Happy Rock @ The Happy Rock, a personal finance blog dedicated to changing our behaviors to change our wealth.  You can subscribe to his feed here.

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.


  1. I’ve just recently played with the idea of having a fully funded 6 months worth of bills in our e-fund. It’s very exciting (and strange) to think about not having to put money in there anymore. We’ve been working at it for almost 4 years. I can’t imagine actually being done with it.

  2. When I think about my own emergency fund, I feel the exact same way. My number one thing is peace of mind and freedom. It puts my mind into a millionaire’s mindset, “I don’t need this job, I can walk away right now if I want to.” It’s amazing what that kind of perspective can do for one’s life. All hail to the emergency fund!

  3. Ever since I established my emergency fund, I have had peace of mind knowing I have money stashed away and will not have to rely on credit cards in case of emergency.

  4. I totally agree with this article. An emergency fund serves a lot of purposes. I’m happy that I have one. It gives me a sense of security and peace. I know that if something comes up, I can handle it.

    When I lost my home to a tornado, it was very reassuring to know that I had some money in the bank! I hope others will learn from this and start their own funds.

  5. Like you my wife and I saved the $1000 emergency fund, and then 6 months of expenses. I think that gave us an amazing feeling of being free from the chains of having to rely on credit when emergencies happened, and especially for my wife, a new found sense of security – knowing that we could pay for things that came up.

    This spring my wife had a life threatening blood clot, and was in the hospital for three weeks. Without that emergency fund we would have been struggling to pay her medical bills. (Without health insurance we would have been in the poorhouse – 250k in medical bills – but that’s another post for another day)

    Great post!

  6. I’m in favor of emergency funds, for all of the reasons listed. But here’s a situation I’ve never seen mentioned on any financial blog. What if you want to/need to attend an unexpected funeral of a loved one who lives in another State? What if you want to attend a good friends’ wedding in another State. You will want a plane ticket and fast. Do you have $ in your emergency fund for that, so that you wouldn’t need to put it on your charge? Plus car rental, etc.

  7. @Sandy: I certainly think attending the funeral of a loved one out-of-state qualifies as a proper use of the emergency fund. Not sure about the wedding. I’d probably try to save and cash flow attending the wedding out of my paychecks, with the assumption you would know about it well in advance. Good questions!

  8. I just made my first deposit of $530 into my emergency fund this morning. I have been walking around proud as a peacock all morning. I thought to myself, “Who can I tell that will be proud of me?….FRUGAL DAD OF COURSE!” What a thrill to see today’s post and be able to say, “Yeah, emergency fund…I have one of those.” 🙂

  9. @Lauren: I am very proud of you! That’s awesome! You have just taken the first step towards putting distance between you and the edge. I bet you sleep better tonight knowing that $530 is there just in case.

  10. Great article and I feel the same way. We still have our small emergency fund of $1K in cash, and we have almost a year’s worth of living expenses in a money market. The feeling is wonderful knowing that we can weather any storm that might hit us. Once you have that money, then I have found we have almost no true emergencies anymore. We still have things happen like repairs. but we can usually cash them on a monthly basis. We rarely ever have to dip into our emergency fund.

    The other greatest feeling in the world is not having any debt and not a house note. We can do so much more with our money now that we aren’t tied down to debt. I love being able to buy new things with cash since it’s mine from the minute I purchase it. No more sleepless nights worrying about how the bills will get paid. I love your blog.

  11. I agree with everything stated in this article. We finally took the step to split the savings we had been building into an emergency fund and general savings. It felt really good to be able to do that. We are now contributing to both. I will feel more comfortable as the general savings grows to further prevent ever needing to touch the emergency fund.

  12. I love your articles – great topics, advice and nicely written!
    We just started an emergency fund and last month saved $1135 to get it rolling! Now we save 10%, use 60% to pay off debts and live off the remaining 30% of our income. We make $98K (2007); have a little mortgage payment, no car debt, no cc debt, no kids, but $127K in student loan debt (that we have been diligently working to pay off). Before I started reading your articles we were pay towards our debts and not saving a penny. Now we feel secure still paying towards our debts and saving at the same time incase of an emergency.
    A way I found to extra-fund our savings is with ‘unexpected money’. Recently my company started paying my personal cell phone bill (instead of issuing a company cell phone). Since I have budged to pay my cell phone all along I took the extra check from my employer and stashed it way into our savings – that’s an extra $68 a month!!

  13. Long time lurker, first time poster…

    Emergency funds are so important for all the reasons the author suggested. I’m in the 25-30 age group, and so few people in my age group have savings at all, much less for 6 months . I think having an emergency savings that is relatively liquid is hugely important.

    As Sandy alluded to, make sure you define what an “emergency” is as you’re building the fund- this will eliminate some confusion!

  14. While the importance of an emergency fund cannot be overstated, I wouldn’t put more than 6 months worth of expenses into such an account.

    Once you have 6 months, I’d recommend funding an investment account to get higher returns. Your money market account or high interest savings accounts may earn 3-5% but that hardly keeps up with inflation these days.

  15. @All – I have to say that the FrugalDad community is awesome. It is amazing to see so many others relating to the beauty that is an emergency fund. To those that are still working on getting out of debt and establishing full emergency keep digging, it is worth it!

    @Writer’s Coin – I agree, being able to walk away from a job is freeing!

    @John – Avoiding debt is the e-funds main purpose and it does it quite well.

    @Jeff – A tornado! That is the epitome of an unexpected occurrence! Glad you had an e-fund.

    @Hiedi – That is a great accomplishment! It does feel better to save than pay off debt.

    @Ashley – You are so close, I bet you can feel it! Your cash flow will open back up when you are done.

    @Pete – I am sure it was a stressful time and I am glad you guys were in a situation not to have to worry about money while going through it.

    @Sandy – I think Frugal Dad pretty much covered it. An unexpected death and travel is an emergency. Since you usually know about a wedding well in advance you have a few options :
    1. Save and pay cash
    2. Respectfully don’t go, being honest about finances isn’t a bad thing if it comes to it
    3. Use and emergency fund as a last resort. Basically you are going into debt, you just have to pay yourself back if that helps.

    @Lauren – Awesome! Capture that feeling and success and use to spur your towards financial freedom.

    @Bonnie – Wow, no debt!! You have done amazing things. I can’t wait to get there, we just have the house left. I can’t wait to see the day when my whole paycheck is mine to do whatever I want with it.

    @Holland – Living off 30% of your income is quite a feat when most of the world is living off 100%. 127k is quit a mountain, but with your habits it will be gone in no time!

  16. Thank you for this wonderful guest post. I think the freedom aspect is most appealing.

  17. I just started an emergency fund this month. So far I have $165 in it. Most of that was funded from selling things I no longer need. It’s been hard not to put that money on my debt, but I’m trying to be mindful that I need an emergency fund just as much as I need to pay down my debt.

    I also have 2 other savings funds outside of my retirement savings, where I am saving $30/pay towards buying out a friends car lease in 4 yrs time, and I have another act where I save $25/pay towards re-decorating my house. I’m saving now for new counter tops and flooring for my kitchen. It feels good to pay cash for it.

  18. “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.”

    Hmm, I’m not sure that quitting your job qualifies as ’emergency’ – unless maybe you are ordered to do something illegal or dangerous. For most people, though, this is more the role of a ‘freedom fund’, the next step after the emergency fund. 🙂

  19. @Another – Nice move starting an explicit emergency fund.

    @Melaniesd – Sounds like you are starting some great habits. The emergency fund and those habits will set you up for big things.

    @Frugal Bachelor – I agree that quitting a job isn’t necessarily a good use of the e-fund, but having an e-fund makes it possible to even consider taking a leap like that. If you knew you wanted to change jobs, I would probably build up the e-fund more than normal to make sure the transition went OK.

    @Andy – Wow that is quite a big e-fund before debt. The reason the $1000 is a good number is because of the interest and pain that the debt causes. I personally would try and budget for bigger things that you know might happen, or keep a larger e-fund(3k-4kor so) if your income is shaky , but I might consider dumping the rest into your debt. The e-fund gets built up quickly with the cash from having no debt. Thanks for sharing!

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