Here’s how the great Dave Ramsey says your emergency fund should be
Every person experiences an emergency at some point in their life – and some may even experience it quite often. That’s why saving money in an emergency fund is one of the best things you can do to reduce financial worries and decrease the likelihood of getting into debt.
An emergency can range from a job loss to an unexpected car repair, and it can turn into a financial disaster if you don’t have the money saved to deal with it. But how big does your emergency fund need to be to be ready for life’s costly surprises?
The answer to this question varies, but finance guru Dave Ramsey recommends starting with $ 1,000 before moving on to an even larger emergency fund. Read on to find out more and to see if you should listen to Ramsey’s advice.
Ramsey’s advice on emergency funds for those in debt
In case you haven’t heard of him, Ramsey is a well-known financial commentator who gives advice on developing a more stable financial life. He also created a course, Financial Peace University, offered nationwide. And he has a lot to say about emergency funds.
Ramsey recommends that everyone have an emergency fund. In fact, he recommends seven small steps to help people take control of their finances, and two of those steps are about saving for a rainy day.
Ramsey advises you to save an emergency “start-up” fund if you have a lot of consumer debt. He suggests saving $ 1,000 before you start working on a debt repayment plan. This start-up fund is intended to help you avoid falling back into debt once you start paying extra on your credit cards.
Once you’ve saved your initial $ 1,000, Ramsey suggests that you use your extra money for a “debt snowball.” This is a budgeting method that involves paying off your debt with the lowest balance first, then moving to the debt with the next lowest balance, and so on until all debts have been repaid.
Saving your emergency start-up fund before you take debt repayment seriously will ensure you have money to cover most unforeseen costs that arise. Without it, you could find yourself stuck in borrowing again in an emergency. It could make you a lot less motivated to keep working on debt relief.
Once you’re done paying off your debts – other than your mortgage if you have one – you’ll work on building a bigger savings account until you have a full emergency fund. funded.
How much does a full emergency fund cost?
After getting rid of all debt, Ramsey suggests that you should save a full emergency fund. It will take a little more money, however. In fact, you’ll need three to six months of living expenses saved, according to the popular finance guru.
Sure, that’s a pretty wide range – but Ramsey has some advice on how to decide where to fit in. For those with stable jobs in dual-income households, he believes that a three-month fund is usually sufficient, while single-income households and people with less stable sources of income, such as the self-employed, should consider saving the six months.
According to Ramsey, a chronic illness – yours or that of a family member – would also justify saving a larger emergency fund.
Should you listen to Dave Ramsey on your emergency fund?
Ramsey is just one voice among many, but his tips for saving a three to six month emergency fund are pretty common in the personal finance world. In fact, this is the advice most experts give.
Yet, in the end, it is your financial life that is at stake. If you decide that you are comfortable with a slightly smaller emergency fund because you have stable income and many backup plans to know where to get money in an emergency then this may be the right choice for you. On the contrary, if you want to be absolutely sure that you never have financial problems, then a larger fund may be better suited.
The important thing is to make a thoughtful decision on how much to set aside for unforeseen future expenses. That way, you can make the choice that is most likely to protect yourself when the going gets tough.