Basics - What's an Emergency Fund?

Ask Dave Ramsey or Suze Orman and you will find different opinions on the quantity required in your emergency fund but both agree that you need one. So just what is it? Essentially it's accessible cash. This is money set aside not for wealth building but for things that come up. This is not spending money and should be kept in a separate account just to prevent you from overspending. This money is used for things that you do not have enough cash flow in your spending plan to cover. Good examples are insurance deductibles, furnace repairs, cars breaking down, etc. These things do happen but they are really hard to plan for and to someone who swims in credit card debt they are a constant source of worry. Those with an emergency fund do not have to worry as it's always there just in case.

Now let me set one thing straight. Some say that you need six months of household income while others eight months or even a year. I personally agree with all of those but you don't have the money to build this fund while still paying on debt. I happen to agree with Ramsey here in that his first step is to set aside $1000 dollars and then put every penny you have into paying down debt. Later you build up that $1000 into month’s worth of income. What I disagree with is that he calls both of these funds, your emergency fund interchangeably. I personally believe that the $1000 is you’re just in case fund and the several months' fund are for a true emergency. I personally chose to keep that $1000 in my regular bank's savings account so that I have readily available access. The true emergency fund is kept in an online bank which I can write a check against or use a debit card. I do NOT carry either of those around with me. Any true emergency can be easily covered with this account by stopping at home. Even if your car's transmission goes out, you can probably give them $500 down and pay the balance later, same goes for medical emergencies, etc.

So let me be very clear here, this does not mean that the just in case $1000 is not for emergencies. You will first try to cover the expense with monthly cash flow by robbing other portions of the monthly spending plan. Next if the emergency is too large to cover with cash flow, then utilize the $1000 and ultimately then into the large emergency fund. Beginning with your next paycheck, you would then begin refilling the $1000 bucket before paying down additional debt. To you Ramsey fans, the Just in Case $1000 is referred to as Baby Step One (or BS1). Think of it like this: Cash flow, then $1k, then Emergency Fund. One other thing to always keep in mind is to tell the business that you will be paying cash and ask if they offer a payment plan or discount based on that.