A man asked Dave Ramsey if $1,000 is enough for an emergency fund in 2023 – his answer drew much laughter and applause. Here’s why
It’s been 20 years since Dave Ramsey’s book The Total Money Makeover recommended that Americans start an emergency fund with $1,000. However, that doesn’t mean the figure was meant to be the be all and end all – for now or even then.
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Asked about this threshold number by an audience member on a recent episode of his eponymous show, Ramsey replied, “$1,000 wasn’t enough in 2003.”
As the audience clapped and cracked, Ramsey continued: “It was never designed to be enough. It’s enough to keep the little things from kicking your butt off the debt-getting cart.”
At one point, Ramsey recommended using every bit of savings to pay down debt (still a good idea if high-interest credit cards are killing your bank account. But this strategy caused some Americans to lose hope, leading him to $1,000 tweak as a safety valve for small emergencies on your way to debt freedom.
“So [the $1,000 savings] need not be adjusted, because it would never be enough.”
The question is: What is enough for an American’s emergency fund, qualitatively or quantitatively? The financial guru gave his answer later during the show. Based on his advice, here’s what you can find on your way to getting financially clean.
Use monthly expenses as an emergency fund barometer
If you’re following Ramsey’s “baby steps” to pay off debt, he also suggests taking a break to set aside money for the unexpected. To calculate your emergency fund needs, first look at your monthly expenses for the past three to six months and come up with your average spending.
Collecting these statistics can help you avoid becoming a statistic. As of 2021, the Federal Reserve reported that 32% of Americans could not cover even a $400 emergency expense without borrowing money or selling something. So calculating your average monthly expenses can give you financial clarity in case of an emergency.
Consider job stability and income volatility
Those in volatile fields or positions — independent contractors or commission workers, for example — know that income can shift without warning. In such cases, emergency funds should cover a longer time horizon that entails job or income loss, or a lack of financial stability.
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A study by the JPMorgan Chase Institute found that, on average, families experience large fluctuations in income nearly five months of the year. If your income is unstable or your job uncertain, a good rule of thumb is to plan for three months of emergency savings for every 10% of income volatility.
Consider the range of risk factors
Beyond job insecurity come personal ones involving health, relatives, car repairs and home maintenance, for one. The danger comes when you are forced to pay these off with high-interest loans and credit cards, which can easily double or triple the initial load.
Households with low liquid savings and high debt in relation to income will of course be hit harder when pitfalls at home turn into financial pitfalls. So the more assets you own and liabilities you have, the more you need to save.
In the end, it’s all about being prepared. Take a cue from Dave Ramsey, who would no doubt approve of trading a $1,000 benchmark to trade on million dollar advice.
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This article provides information only and should not be construed as advice. It is supplied without warranty of any kind.