Emergency Savings Account. How much is needed?
I recently talked to a friend about an unexpected car repair he was facing for $900, and he was going to tap his savings account or home equity line of credit for the bill. My friend is a great saver and does live a very frugal lifestyle, but life happens, and this car repair caught him by surprise. Many great finance and budget coaches talk about an emergency savings account that is used for unexpected expenses. A flat tire, cracked radiator, broken dishwasher or temporary loss of job, are all examples where an emergency savings account would be helpful. If you are one of the few who have a savings account in the U.S. or even an emergency savings account, you are way ahead of the curve. Most Americans carry over $9,000 in debt and have very little in savings. I would think that if you dug a little into the data, you would find the $9,000 in debt paid for many emergency repairs.
My wife and I had no savings for the first few years of our marriage; and spent every dime on debt repayment and living expenses. I had always read that the goal for each person, should be 3-6 months of living expenses in an emergency account. That’s a ton of money for the average family. If you make $40,000 a year, you should have saved between $10,000 and $20,000 in emergency savings. Who can do this? Well, if you are like many Americans, you can’t yet.
Many experts recommend that you start somewhere. My wife and I started putting aside $50-$100 a month until we reached $5,000 for an emergency account. We were living in an apartment in San Francisco and only had one car. Not a lot of emergency expenses then. Now, we have many. With a house, two kids, two dogs, and two vehicles, comes a lot of emergency expenses. Start with a few dollars and build something, anything. If you can’t save $50-$100 a month, cut something out of your budget. This may take some work, but you can do it. I’ve cut out lot’s of things from our families budget in the past. Starbucks, dry cleaning, movies, dvd rentals, and hair cuts. Have your wife cut your hair, and you could save $200-$300 a year.
If you are just starting out, set a goal of $1,000 for your emergency savings account. You will be excited the next time you can use your cash, rather than a credit card for life’s emergencies.
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lulugal11 Said:
Hey whatever you can put into your savings is good. I started my emergency fund putting only $1 a month. Yes, just $1. This was at a time I was a student and making about $450 a month. So $1 was all I could afford.
I slowly increased that amount over the months and worked up to a hefty $7 a month.
My emergency savings grew slower than most people, but hey it was still growing and I was getting lovely interest from ING so it was all good.
I think you just need to get into the mindset of savings and it will work out. A lot of people who say they have no savings are just afraid because they see people talking about putting $300 a month in savings but they do not have that amount to set aside.
They don’t realize that they can start with just $1 and no one will judge them. The $1 builds up a mentality of savings and then it becomes easier to save. Good that you and your wife were able to work on it together because the support really helps.
Posted on June 27th, 2008
Kacie Said:
Absolutely! Without even a little bit of savings, one little thing can just wipe you out.
My husband and I have been married for a little over a year. For the first half of our marriage, we aggressively paid off our credit cards. Now, we’re building a six-month emergency fund.
With every dollar we add, I feel a little more secure.
If folks get really intense about achieving a goal, be it getting out of debt or building up savings, they’ll be surprised at how fast you can make the money fly!
Posted on July 3rd, 2008
Scott Said:
@lulugal Starting is the hardest part. I thank you for sharing your ideas.
@Kacie A 6 month emergency account would be fantastic to have. That would cover most emergencies and then some.
Posted on July 8th, 2008
Mary Said:
We follow Dave Ramsey but my husband did not agree with only having 1K in an emergency fund while we paid off our consumer debt. At first I balked, but after an expensive car repair, he won me over.
His advice is to have enough to cover a major car repair plus the heating system on your home (if you are a home owner.) I think everyone has to tweak this for their own circumstances. 1K would have been enough when we were in college but once you have kids, cars and a home, things get more serious.
For us, 5K was the minimum until we paid off our consumer debt. It saved our necks several times.
Posted on September 23rd, 2008
laura k Said:
I agree that an emergency fund is essential, but I’m not sure a broken dishwasher qualifies as an “emergency.” How about washing dishes by hand until you can save up enough to buy a new dishwasher? It might use a little extra water, but you can make it a family event, and in the long run, isn’t spending time together as a family what matters?
Posted on July 1st, 2009