My thoughts about personal finance have evolved and changed over time, but one thing has stayed consistent: I don’t think $1K is enough for an emergency fund.
Saving an emergency fund was the first things we did when we started paying back our debt. It was the move that made the most sense: the emergency fund created a cushion in our budget that helped us avoid accumulating more debt when unexpected situations arose.
But when I saving, I quickly realized there are very different opinions about the “right” amount to have in your account when you’re in debt.
One popular idea is to have a $1K emergency fund while you pay back debt. I get the logic: keeping your emergency fund small means more money is available to pay off debt. More money to debt means you pay off the debt faster. Makes sense, right?
Maybe for some. But I never bought into the idea that $1K is enough for an emergency fund. I didn’t believe it at the start of our journey and I still don’t believe it today.
Here’s why.
The purpose of an emergency fund
In one of my first posts about emergency funds, this is how I explained the purpose of an emergency fund:
The Merriam-Webster dictionary defines emergency as an unforeseen combination of circumstances or the resulting state that calls for immediate action or an urgent need for assistance or relief.
The #debtfreecommunity on Instagram often refers to these circumstances as a visit from Murphy.
For those unfamiliar with the old adage, Murphy’s Law is simple: anything that can go wrong, will go wrong.
An unexpected bill. An expensive car repair. A sudden illness. A visit from Murphy looks different for everyone. What they have in common is they often come at the worst possible time.
Your emergency fund is what helps you navigate those Murphy visits without completely obliterating you’re finances.
Why $1K is not enough for an emergency fund
It’s long been my position that $1K is not enough for an emergency fund — generally, but especially if you’re in debt.
There are several reasons I believe this, but here are the three main ones, illustrated with examples.
Emergencies are often expensive
It’s time to service your car. When you call to book the appointment for the oil change, you mention the noise you’ve been hearing lately and ask if they can check into that for you.
A couple hours later, the mechanic calls — and informs you about your busted strut. Struts are important; they help support the weight of your vehicle and absorb impact when you’re driving. Driving with a busted strut is very dangerous.
Repairing a strut is expensive…which is unfortunate, because for best results, they need to be repaired in pairs.
You also need new tires (not a surprise), a new gasket (also not surprising) and to fix up a small exhaust leak.
Even with the lower-than-average labour, your final bill is $1,700.
If you’ve only put aside $1K in your emergency fund, you won’t have enough to afford the work necessary to keep the car safe.
The thing with emergencies is that they don’t really care about how much money you’ve set aside. And in a world where costs are rising in just about every area…well, $1K doesn’t get your very far.
Emergencies are often time sensitive
You’re in the kitchen, washing dishes in the double sink. It’s something you do every night, nothing special about this. You’re working away, scrubbing, looking out the window when your partner suddenly yells at your to stop. They sound panicked. You turn to figure out why they’re so worked up.
And you notice water pouring in from the dishwasher.
The strange part: you’ve never used the dishwasher. It came with the house, but it’s so old even the inspector suggested not turning it out. And yet, the water is coming in.
It takes several hours of work and several phone calls to get the situation under control. It’s the weekend, so rates for plumbers are higher than normal. Thankfully, a friend comes over the cap the line so you can bring a plumber in on Monday instead.
The plumber comes, fixes everything up — and while the situation was definitely stressful (and could have been way worse), you don’t worry about the surprise $200 bill. You have that cash and then some in your emergency fund. No scrambling required.
Emergencies often require cash — or more debt
You’re doing a load of laundry. You add the detergent, load the machine, set it and head upstairs to get on with the rest of your day.
The cycle starts. Some time passes. Then you notice it.
A burning smell.
You follow the smell down to the basement and it quickly becomes evident where that burning smell is coming from: the washing machine. The cycle is almost over. When it ends, you notice the rubber rim around the drum has basically melted.
Yikes! Bigger yikes: turns out the machine is a very old model which has been discontinued and you can’t get a replacement part. Not having a washing machine at home isn’t going to fly so you hop online to find a new one, settling on a moderately-priced model.
That moderate price? $900.
It’s a “yikes” moment, yes. And you do charge it to your credit card. But that charge is covered quickly — because you have money in your emergency fund to cover it. You don’t have to add more debt…and you still have money left when you’re done.
How big should your emergency fund be?
What do the examples above have in common?
They all happened to us.
Over a span of about a month.
Yes. The $1,700 car bill, the $200 plumber visit (which could have been much, much worse) and the $900 washing machine replacement — these are all examples of things that happened to us from mid-July 2021 until about mid-August 2021. Understanding there is never a good time for any of these things to happen, the timing was terrible: we had just moved into the house and, on maternity leaves, my income is about half of what it usually is.
So believe me when I say I was glad to have a larger-than-$1K emergency fund.
Prior to my maternity leave, we maintained a $5K emergency fund. Understanding how my income would be impacted by my leave, I set out to double that. By the time my leave began, I had accomplished that goal.
Do you need a $10K emergency fund? Maybe…but maybe not. The size of your emergency fund will really depend on your individual circumstances. Is that a cop out answer? That’s not the intention, it’s just reality. The best thing you can do is assess your personal situation to find the right number for you.
What I can tell you is this: it’s unlikely that number is going to be $1K or less. Unfortunately, $1K just does not get your very far in the event of a real emergency.
Final Thoughts
A $1K emergency fund may seem like a good idea when you’re paying back debt, but unfortunately for many, $1K won’t go very far in an emergency situation or if you come up against multiple emergency situations in quick succession.
Saving a bigger emergency fund meant slower progress on paying back our debt, but I was glad to have the money there when I needed it. While you might not need a $10K emergency fund, I highly recommend assessing your current emergency fund and determining if it’s adequate to meet your needs.
Do you have an emergency fund?
Photo by Shopify Partners from Burst
$1,000 is clearly not big enough to handle a lot of common emergencies. But to be fair to Dave Ramsey who popularized the $1,000, he totally agrees. He admits it is not adequate but he feels there is a motive to his madness. Having a tiny emergency fund builds a sense of urgency to get out of debt faster because you know you aren’t prepared for trouble. And the urgency builds that gazelle intensity he believes is necessary. Whether that’s a good idea or not I don’t know but his system seems to have worked for a lot of people. But the people he helps are not the kind of money savvy person you are. I don’t think someone like you is ever going to do anything but win at money because you really get it. My personal preference is to have a whole year or more of expenses in easy to access liquid assets as soon as possible.
While I can definitely see his logic behind it, I think it’s the kind of logic that works…until it doesn’t, you know? What happens when you end up in trouble despite doing everything you can to avoid it? I look at our scenario this summer and I am SO grateful that we socked away the cash instead of sending it to student loans. Wiping those loans out will be nice…but having a working washing machine was a necessity, especially with the little one. I would suggest when it comes to emergency funds there needs to be consideration given for what safety nets a person can access. For example, one thing I see (that makes me so mad) in a lot of “I paid off debt really fast!” stories is that often the writer is able to live rent-free at home. That person likely does not need a big emergency fund…but someone who doesn’t have family who can bail them out might want to be a bit more prepared (we have always been in the latter category…hence the bigger emergency fund). That being said, you are definitely correct in saying his system has worked for a lot of people. I can’t deny that.
A year of liquid assets…that sounds amazing to me!
Whew this post gave me anxiety – that is a lot to go through in a short amount of time! I agree, 1K won’t cut it.
My emergency savings was actually how I was able to get my car. It’s a pre-used car in great shape, and we were in need of a speedy car that was cheap on gas.
Then we found out our heat pump was a goner just before the first snow of the year so my partner’s emergency savings is supplying a completely new system.
Emergency savings are a life saver.
Living through it would have given me anxiety…if not for our emergency fund. Did it suck spending SO much money in a short period of time? Sure. But it sucked less knowing we weren’t going to add more debt. Definitely a lifesaver!
Congrats on the wheels! And…the new, not-debt-funded heat pump!