People tend to latch on to the wisdom of the most prominent experts in any field. In the case of personal finance, the most famous expert is probably Dave Ramsey. One of his key pieces of advice is to save $1,000 in an emergency fund before paying off any high-interest debt.
That’s good advice, but some people end up taking it the wrong way. They assume that $1,000 is the most they need to save, rather than a baseline. For some people, that might be enough – for others, it’s not even close.
The amount you need depends entirely on your personal circumstances. Here are some examples of when $1,000 is adequate, when it falls short, and how to make the best use of what you have.
When $1,000 Is Enough
Many experts recommend saving three months’ worth of expenses in their emergency fund, but not everyone can afford that. For people who have high credit card debt or low incomes, $1,000 might be all they can save without compromising other priorities.
That amount is enough to cover most emergencies, like a sudden repair on your car, a trip to urgent care or an emergency vet visit. $1,000 will probably cover the bill in each of those cases, and possibly with some money left over.
When it comes to saving for an emergency, the goal should be to minimize the long-term damage an unexpected expense can inflict on your finances. Even a small emergency fund will save you from the worst-case emergency scenarios – borrowing money from friends or family, taking out a payday loan or pawning off an important possession.
When $1,000 Isn’t Enough
If you have kids, are the sole provider of your family, are self-employed or own a home, $1,000 probably isn’t going to cut it. As anyone with a mortgage knows, the water heater doesn’t care how much you have in your emergency fund when it decides to break.
Self-employed people need more than $1,000 in an emergency fund because their business income can be sporadic and inconsistent. Having an insufficient amount saved can mean taking on jobs that don’t align with your business, or even being forced back into a traditional job to make ends meet.
Similarly, if you work on commission and your salary depends on how many sales you make, $1,000 might be inadequate. Any time you have inconsistent or variable income, you need to try for three to six month’s worth of expenses.
Parents should also try to have a more robust savings account. When you have other people relying on your income, the potential for an emergency expense increases substantially. You don’t want to be stuck choosing between paying a medical bill and putting food on the table.
If you have pets, especially those who are older or have chronic health problems, I’d recommend having at $2000-$3000 in your emergency fund. Some vet offices only accept cash and require payment before performing an operation, so easily-accessible funds are a must.
When I was paying off my student loans, the first thing I did was save up three months worth of expenses in an emergency fund. I was a newspaper reporter and knew that the industry was volatile. Layoffs can happen at any time, and I wanted to be prepared for that possibility.
As much as I wanted to chip away at my loan balance, I knew doing so without a solid financial foundation was just asking for trouble. I didn’t want to borrow money from my parents or take on even more debt if my career took a downturn.
Once I decided to pay off my student loans in three years, I was tempted to put my emergency fund toward that goal. But as appealing as that was, I’m glad I resisted the temptation.
If you’re paying off a lot of debt and still have extenuating circumstances, like kids or an unstable job, don’t raid your emergency fund to reach the finish line faster. Reaching your financial goals is like climbing a mountain, and an emergency fund is like your first aid kit. Sure, you may not need it – but do you really want to take that chance?
How to Stretch Your Emergency Fund
If you only have $1,000 and suffer a significant emergency, like job loss or emergency surgery, there are a few basic strategies you can employ. For those with federal student loans, you can call and put your loans in deferment or forbearance until you get settled.
You can also switch to an income-based repayment plan, which could reduce your payments to $0. If you have private student loans, call the provider and ask what your options are.
Utility companies sometimes provide emergency assistance if you call and ask. Even landlords can be understanding about delaying rent in times of crisis. Make sure to call and ask before you miss a payment. That will show you’re trying to be responsible and considerate.
Where to Store your Emergency Fund
The whole point of an emergency fund is ease of access. Whether you have $500 or $5,000 in your savings, you should keep your emergency fund in the same place.
Most experts recommend using a savings account separate from your checking account. That way you won’t be tempted to spend the money on day-to-day items or splurges. A savings account is liquid enough for easy access during times of need, and is also FDIC-insured so the funds won’t lose any principal. If you shop around, you can find a savings account that offers 2% interest.
Some people hate the idea of letting their emergency fund languish in a savings account, where it might earn a paltry $20 for the whole year, but that’s the price you pay for accessibility and stability. If you invest those funds in the stock market, you could risk losing the money when you need it most.
CDs or bonds are also not the right place for your emergency fund. Most of those require that you keep your money locked up for a certain amount of time. An emergency fund needs to be accessed within a few days without paying extra penalties.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or view of Intuit Inc, Mint or any affiliated organization. This blog post does not constitute, and should not be considered a substitute for legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Debt Free After Three.