It’s no secret that I utilize the Ramsey principles in my financial coaching. Though I have my own method of walking people through The Baby Steps, I use the basic concepts because they are Biblical and proven by irrefutable data. Basically, I use it because IT WORKS! 

Why do I bring this up? There has been a lot of criticism of these methods recently, because the plan launched in the book “Total Money Makeover” in 2003. That might feel like yesterday for a lot of us, but that was 20 years ago! People have been considering whether or not Ramsey’s plan works in a modern setting. Specifically, people are questioning if a $1,000 emergency fund is enough—after all, it’s two decades since the number was set. 

So, I’ve dedicated this post today to answering that question. How could a $1,000 emergency fund be enough in 2023?

Is a $1,000 Emergency Fund Enough in 2023?

The short answer? Absolutely not. However, it’s a bit more complex than that. You see, $1,000 wasn’t enough back in 2003 either. This small emergency fund is not meant to sustain your family long-term. It’s not meant to get you through job loss or a roof replacement. It’s supposed to keep you focused on your budget. 

What does that mean? Well, small bumps in the road can be really discouraging. Alternator goes out on the car. Two teeth need to be pulled STAT. Your work computer dies. These things are not included in your month-to-month budget, but they’re also not something you can pay for by “shuffling stuff around.” You need some extra money to fall back on! That way, you can maintain your budget even if a small emergency comes up, which is great for keeping good habits and fixing your eyes on your future goals. 

Does the $1,000 still scare you? Good! It should scare you just a little. Knowing you don’t have a significant savings should drive you to finish your debt snowball fast! Most people complete it in about 18 months, which isn’t too long to have a small emergency fund. The faster you go, the quicker you get to Baby Step 3 where you can grow that savings to 3-6 months of expenses. You just gotta keep moving! 

What about inflation?

I hear this often. Though inflation is high, and your budget has probably taken a hit, it’s not as severe as it seems. When you take into account the average person’s income in 2023, the inflation is a lot less alarming. So, yes, though things are more expensive than they were twenty years ago, you’re making a lot more too! Inflation should not change your savings goals. 

Are there special circumstances?

If you make less than $20,000 a year, $500 may be sufficient for your starter emergency fund. Are there other circumstances where more or less may be necessary—possibly! However, I caution you to start making “exceptions” to the plan, because it’s easy to let it spiral out of control. 

Soon enough, you’ll decide car loans don’t count as debt, a 30-year mortgage is no big deal, and a credit card must remain in your wallet. The exception-train is a hard one to stop once it gets rolling! The best thing you can do is consult with a financial coach about your circumstances and full financial picture. They can give you the best advice and keep you from making excuses. 

What happens if you encounter an emergency over $1,000?

In that 18 months you’re racing to get out of debt, will there be an emergency that costs you more than $1,000? There definitely could be! If this happens, you need to go back to minimum payments on your debt, take on all the extra work you can, and stack up cash as quickly as possible to pay it off that very month.

If it’s something that you have to pay for immediately (like if your car is sitting on the side of the road or sewage is backing up into your basement), you may need to get creative! Do what ever you can to NOT surrender to debt!

Can a credit card be an extra emergency fund?

That’s a big NO. Though a credit card may seem like a safety net, it’s not. When you “pay” for something with debt, you don’t really pay for it. So, by nature, it’s not an emergency fund! It’s not a “fund” at all. Plus, if you have a credit card and $1,000 emergency fund, it’ll be hard to convince yourself to pay with cash instead of swiping the card the first time an emergency comes up.

If your emergency is on a credit card, it’ll delay your journey through Baby Step 2, and it’ll cost you way more in the long run. Use your $1,000 emergency fund, and if something else comes up, we’ll get to work. And, remember, if you pay down your debt fast, hopefully you can finish your debt snowball before an emergency! (Learn more about why you should cut-up your credit cards HERE.)

When will I get a real emergency fund? 

If you’re following the Baby Steps, you’ll start building up a true emergency fund after your debt is paid off completely. This is Baby Step 3. In this step, you’ll have no debt payments to drag you down, so you can stack up cash quickly. You’ll save 3-6 months of expenses and finally have the true peace you should have with a real emergency fund. 

A $1,000 emergency fund isn’t enough, it never was!

Though the $1,000 emergency fund isn’t enough to cover big emergencies, it’s enough to keep you focused on your debt-free goals and cover smaller unexpected expenses. It’s an essential part of the Baby Step process that allows you to stay on budget and continually drive forward, no matter what happens! 

If all this talk about Baby Steps and financial goals is new to you, schedule a free call with me. We can discuss your situation and come up with the best financial plan with you. And, if you hire me for coaching, I can help you every step of the way!