More or Less?

Dear Dave,

When, if ever, should your baby emergency fund be more than $1,000? Is there ever a scenario in which it should be less?

Sue

Dear Sue,

I always recommend that people who make $20,000 a year or less start out with a baby emergency fund of $500. Almost anyone can scrimp and save up $500 in a short amount of time, and this makes it easier for folks who don't make a lot of money to have a safety net in place.

Is there a scenario where the baby emergency fund should be more than $1,000? I guess if you were stuck in a situation where you had $200,000 in debt and made $60,000 a year, you might want to ratchet that amount up to $2,000 or $3,000. The reason? It's going to take you several years to dig your way out, and that means you're taking a chance on several years worth of emergencies!

If you've got a really unstable situation - like there's a good chance you might lose your job - or an emergency already pending, you should delay starting the Baby Steps and pile up a bunch of cash. In a case like that, it just wouldn't make sense to start a financial overhaul and be sitting there with only $1,000 in the bank. If there's a nasty storm coming, you need to work, work, work to get ready, and make sure you've got the biggest umbrella you can get!

Then, after you get past the bad stuff, you can push "play" on your Total Money Makeover. That's when you'd pull your savings back down to $1,000 and go into attack mode on your debt!

-Dave

davesays.com

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