Baby Step # 1 – $1000 Emergency Fund
To understand the concept of the $1000 Emergency Fund check out this video.
(Really… Watch the video. I know it’s kind of weird but you’ll get it later.)
An emergency fund is like the toilet in the video and is for those unexpected events in life that you can’t plan for. Events that are going to happen and generally stink when they do: the loss of a job, a water heater springing a leak, a faulty car transmission, and the list goes on and on. It’s not a matter of IF these events will happen; it’s simply a matter of WHEN they will happen.
Someone has fabricated a myth that says, “once you become a Christian your life will be all better and you won’t have any more problems.” Jesus says that’s a lie. In John 16:33 it says, “I have told you these things, so that in me you may have peace. In this world you will have trouble. But take heart! I have overcome the world.” In this world you will have trouble… That’s in red in my Bible… and red is used to indicate the words of Jesus. Since Jesus is so very clear about warning believers that in this world you will have trouble, why wouldn’t you make a plan to deal with the problems before they happen?
That’s why we install a toilet in our financial plan. Bad things happen!!! Maybe Bad Things is too strong a term. Lets say things we don’t like happen… things we would rather avoid happen… things that we don’t want to deal with happen… maybe just IT HAPPENS… and when IT HAPPENS it usually stinks and we want IT to go away. That is exactly what our emergency fund is designed to take care of.
Just like the toilet in the video, your emergency fund is attached to your cash flow. You open the valve on your wall(et) and funds flow into the tank until the float valve cuts them off at $1000. Then that $1000 just sits there and waits for an emergency to happen.
Since it’s called an EMERGENCY FUND…. it’s important to define an emergency.
An emergency is an UNEXPECTED EVENT THAT YOU CAN’T PLAN FOR. You go to work and when you get home the water heater in the garage has ruptured and drained water all over the garage… You try to start the car and the starter is out… There is an out-of-town family emergency and you need to buy plane tickets to get there quickly. Those would probably qualify as emergencies. If you have a bad day at work and get caught in heavy traffic on the way home, walk in the door and say, “I’m not fixing dinner tonight and if we don’t buy pizza there is going to be an emergency!” That is NOT an emergency that is funded from the emergency fund. The pizza would come out of a food budget of some sort. (We’ll talk about that in future posts.)
Here is the beautiful part of having a toilet installed in your financial plan. You knew unexpected things WERE GOING TO HAPPEN. You had a plan to deal with the unexpected things that WERE GOING TO HAPPEN. So when you get home and find the broken water heater, you push the lever and release the $500 that it is going to take to replace the water heater. That’s it. You had a plan and you worked your plan. The most awesome part of having an emergency fund is it removes the stress of trying to figure out how to fix the urgent problems of life. Before the emergency fund, if the car broke, you had the problem of a broke car, the problem of funding the repair of the broke car, and the emotional stress of life being out of control. After establishing an emergency fund, you still have the problem of a broke car but you already have a plan to get rid of the problem and that in itself removes the stress because life isn’t out of control. You spend the $500 and you just fix the car!!!
But you’re not done yet. When you released the $500, it left the tank half empty. The float valve went down and opened up the valve on your wall(et) so that funds could flow back into the tank until the float valve cuts them off at $1000. Then that $1000 just sits there and waits for an emergency to happen. It is very important to refill the emergency fund tank as soon as possible after an emergency because you never know when another emergency will happen. The only thing that you can be sure of is ANOTHER EMERGENCY WILL HAPPEN.
$1000 will get you through a lot of emergencies that happen. However, $1000 is just your starter emergency fund. We’ll use it while we’re working on your overall financial fitness. Once we get your fitness level up, we’ll work on getting three to six months of expenses into your emergency fund. With this advanced emergency fund we’ll install a complete septic system into your financial plan that takes care of the times when a BIG IT HAPPENS happens. With three to six months of expenses saved, even the loss of a job or a medical expense doesn’t have the kind of impact that it would without it. You don’t have to worry about how you are going to eat or if you are going to lose your house. You can focus on dealing with the IT without the emotion of being out of control.
For now, we’ll stick to the $1000 emergency fund and work on getting you out of debt using the debt snowball.
IMPORTANT: Do whatever it takes to get that $1000 for your emergency fund. Work some overtime… have a garage sale… get a second job… cancel a cable or other subscription… do what it takes to get the emergency fund fully funded. Fill the tank quickly. It’s amazing to me how few emergencies we have had in our personal life since we fully funded our emergency fund. Take the challenge and just do it. The emotional and financial peace you get from having the money there will absolutely amaze you.