The Purpose and Magic of an Emergency Fund

3369405130_861cb2a743_qI’m a huge Dave Ramsey fan. I read The Total Money Makeover last year and it was like I’d been hit by a bolt of lightning. I immediately purchased copies for several friends and family members and started putting his plan into action.

One of the first steps in TMM is to start an emergency fund of $1,000. Luckily, I already had this amount (and a little extra) in a savings account thanks to the 52 Week Money Challenge.  I just hadn’t been thinking of it as an emergency fund.

Despite having this money sitting there, when an emergency came up like a big car repair or medical bill, I pulled out a credit card thinking that’s why I had them.

Following Dave’s advice, I no longer use credit cards. Instead when a big, unbudgeted expense occurs, I first ask if we can cash flow it? Cash flowing an expense means, instead of touching my emergency fund or using a credit card, can I cut back on some other budget line items this month to cover the expense? Can we forego eating out this week, spend less at the grocery store, or not purchase something else I was planning on buying this month? So far, the answer has always been yes.

This Is Where The Magic Happens

What I’ve found to be the magic of an emergency fund is, once you have the money there, you’re better aware of what an ’emergency’ actually is. When a credit card was my emergency fund, an emergency could be an auto repair or a medical bill, or it could be ‘needing’ a new dress for an event this weekend or needing to book a hotel room for a vacation.

Now that my emergency fund is in place and I know that if  touch that money, everything else is on hold until I replenish it, I will do anything to avoid using it!

Being willing to delay pleasure for a greater result is a sign of maturity. – Dave Ramsey

If you’ve been relying on credit cards for your emergency fund, take them out of your wallet and hide them somewhere right now. (Dave would tell you to cut them up, but I’ll admit I had a hard time with that one at first, too.) If you don’t have an emergency fund, start one today! The 52 Week Money Challenge is a great place to start, or just put aside as much as you can each month until you’ve saved $1,000. If you don’t already have a savings account set up, a Capital One 360 account is a good option. I initially set up my savings account with them because they have no monthly fees, pay better interest rates than the bigger brick-and-mortar banks, and I could easily set up automatic weekly transfers from my outside checking account to Capital One. I liked them so much, I’ve since moved all of our family’s banking to Capital One.  What are you waiting for?

Photo credit: frankleleon via Flickr CC

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