As you may have read in the previous post, life happens. Our fully loaded emergency fund, which was three to six months of expenses, was washed away by a job loss and the economic impact of a global pandemic. While it hurt to see the fund drained, it served its purpose and got us through our roughest storm yet. Like the old saying goes, “two steps forward, one step back.” In our scenario, it was more like two giant steps back, one itsy-bitsy step forward - the baby emergency fund.
Silver Lining Lessons' Guide to the Baby Emergency Fund
What is it? The baby emergency fund is generally known as step one of Dave Ramsey’s debt payoff plan. After meeting the minimum necessities, it is the bare amount of savings you should have before aggressively paying off your debt. It is also just common sense - have a safety net for life’s little disasters.
What qualifies as an emergency? The emergency fund is used to pay for little surprises. Things like auto repairs, medical bills, unexpected expenses, unscheduled events and bills you may have forgotten.
Examples: Your child wakes up with a high fever and needs to see the pediatrician, who runs tests and finds an ear infection. You now have a co-pay, pharmacy bill and extra time off work that were not expected. Surprise! Oh, remember that time you were driving to work listening to your favorite morning radio show, and you felt an abrupt pull to the right? Flat tire on the inside lane of the interstate at rush hour. That tow bill, tire replacement, and fender repair (and extra blood pressure medicine!) were definitely not in the budget.
Why is it important? It is important to have an emergency fund so you won’t go further into debt when life happens, as it inevitably will. We want to move forward, not backslide by funding emergencies with credit cards, creating even more unwanted debt. You can count on the unexpected pediatrician and pharmacy bills and the freaky flat tire incidents. The goal is to now allow these disturbances to send you into a financial tailspin.
Showers along the way. While we all want our debt payoff plan to flow smoothly, rain showers will pop up here and there, even when the financial forecast looks clear. You know those days you watch the news before you leave the house, and the weather person predicts a beautiful day, not a cloud in sight, only to find yourself caught in a thunderstorm as you pull up at the grocery store. Whether or not you have an umbrella on hand can make a world of difference. For example, within the first three months of our journey, we were drenched with the following:
Auto Repair: $225
Dental Bill: $185
Medical Bill: $310
You must expect and account for these little surprises. Was it extremely frustrating to experience rain so quickly into our journey? Of course it was, but our emergency fund, our umbrella, kept us dry and protected us. Nobody likes soggy socks, especially not at the start of a long trip!
How much do I need? While the concept of a baby emergency fund is simple, determining the amount before testing your debt payoff strategy isn’t as easy. Here are a few of the recommended amounts from various financial experts:
Bare Minimum: $500
Dave Ramsey: $1,000
Income Based: Higher income, higher emergency fund. For example, you should have $1,000 for every $25,000 in household income.
Family Size: You should allocate a specified amount for each member of your household. For example, $500 per person.
Emotional Minimum: To me, this is the most important criteria and often the most overlooked. It is the amount you feel you need before you can become emotionally invested in your debt payoff. In other words, the amount you need to sleep at night. For some, this may be $500, but for others, it could be $5,000. The path to debt payoff will be long and hard, but it will be much worse if you are tired from the start.
What we chose and why. For us, it was a combination of family size and emotional minimum. While we determined our emotional minimum was $2,000, we felt that allotting $1,000 per family member (four members, so $4,000) was a safe amount. It would allow us to take a few hits along the way and still sleep easy while we replenished our fund and continued moving forward. While this may be a little too high, we plan to reevaluate after six months, but for the time being, it is what we needed to kick-start our journey. As you can see, following the bare minimum strategy would have left us short, and Dave Ramsey’s recommendation would have left us tired.
The major takeaway. This is your journey. These amounts are not set in stone and are not always weatherproof. Sometimes when it rains, it really pours. Other times, the rainy day just grabs your attention and reminds you to always bring your umbrella. Whatever amount gets you moving forward is all that matters. For now, we are baby stepping over puddles, but one day we will be high stepping under sunny skies.