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5 Reasons Why $1,000 Isn’t Enough in your Starter Emergency Fund

The first step of the Dave Ramsey Wealth Building Plan is Baby Step 1. This step is saving $1,000 as quickly as you can for your ‘starter’ emergency fund. Baby Step 1 assumes that you have cut up all of your credit cards, so you are solely relying on a cash emergency fund. The minimal savings amount of $1,000 is to light a proverbial fire under your butt. 

If you want more in savings, Dave says to pay off debt in a ‘gazelle intense,’ fashion or as fast as humanly possible, so you can move on to Baby Step 3 or 3-6 months of living expenses.

As the debt free community on social media has grown, this ‘starter’ emergency fund has become a contested part of the famous Dave Ramsey plan. Now with our current global crisis, baby step 1 seems to be under a microscope.

The 2020 world events that we are facing have been a lesson for people that $1,000 isn’t enough of an emergency fund. People have discovered the utility behind a 3-6 month emergency fund kept in a high-yield savings account.

This not only goes for families, but also companies. I know mine and my husband’s company both thought they were going to be fine. Then, as this started carrying on longer than we thought it would, they realized “Oh crap we don’t have enough in savings and have to make cuts,” Those cuts included layoffs, pay cuts and defunding 401k matches. 

I know that I’ll get pushback on the ‘$1,000 isn’t enough” argument. I know $1,000 is a lot of money for those of you just starting out on this journey or those of you who do not make a significant income. 

I’ve been there. When I first started this channel, I was making about $35k a year. For those of you in this camp, your 3-6 month emergency fund is going to be much lower than people with higher incomes and higher bills. 

I’m not here to bash Dave Ramsey or his fervent followers. I am here to give you my personal view on emergency funds and why I do things differently than the Baby Step Plan.

Here are 5 Reasons Why $1,000 Isn’t Enough in your Starter Saving Fund.

Rent and mortgage costs are higher now than they ever have been

Average cost of rent in US: 

• “The national average rent in February 2020 was $1,468, up 3.2% compared to the same time last year.”

• “The most expensive apartments are in Manhattan, $4,208 per month, while the lowest rents are in Wichita, KS, $665 per month.”

• “The housing market was strong in February but will likely be affected by the COVID-19 pandemic. The economy still stands to benefit from ultraslow rates. Homeowners are refinancing while renters are seeing normalized rent growth which reduces their monthly payments and allows them to spend in other areas. We haven’t seen the impact of the COVID-19 pandemic in official data yet, as February employment growth was very strong, jobless claims did not increase and rent growth continued its steady increase. However, the coming weeks and months will likely come with employment cuts and a slowdown in trade.”

Average cost of a mortgage in US (2019)

“The average monthly mortgage payment in the United States is $1029*.”

This payment eats up 14.84% of the typical homeowners’ monthly income. That may seem low, but we are looking at homeowners specifically — and homeowners tend to have much higher incomes than the general population, as we note later in this piece. When you add in other housing costs such as property taxes, association dues, utilities and maintenance costs, the median cost of housing jumps to $1,491 for homeowners with a mortgage.

When you take into account that rent and mortgage payments are well over $1,000 now, the starter amount doesn’t make much sense if you lose your job or have another unexpected expense come up. $1,000 doesn’t even cover one bill.

Take into account Inflation – US Inflation Calculator

No surprise, but the cost of living in 1980 is not the same as it is in 2020. That’s why there’s a ‘Big Mac Index’ which is a ‘fun’ way to look at inflation and it’s direct effects on product cost.

“….your $1.80 Big Mac from 1986 costs only $2.43(in 2017) 

Once you inflation-adjust the price of the Big Mac, the $2.43 price is some 22% higher than the 1986 price. In other words, because of inflation, everything is costing more to purchase.”

Learn how this calculator works. The US Inflation Calculator uses the latest US government CPI data published on March 11, 2020 to adjust for inflation and calculate the cumulative inflation rate through February 2020. The U.S. Labor Department’s Bureau of Labor Statistics will release the Consumer Price Index (CPI) with inflation data for March on April 10, 2020. (See a chart of recent inflation rates.)

In 1980 an item that cost $1 would now cost $3.14

In 1990 an item that cost $1 would now cost $1.98

In 2000 an item that cost $1 would now cost $1.52

In 2010 an item that cost $1 would now cost $1.19

In 2015 an item that cost $1 would now cost $1.09

“Higher food, shelter, vehicle, medical care and clothing prices drove up the U.S. cost of living in February, data released March 11 by the government showed, although lower gasoline prices helped in checking some of the overall inflation pressures.”

In other words, $1,000 does not buy you the same amount of groceries, gas, electricity, etc. that it did when Dave Ramsey created the Baby Steps. This must be taken into account when you are saving for an initial emergency fund.

Take into account the size of your family

So maybe $1,000 is enough if you are a single person living with a roommate. You have lower bills and only have yourself to worry about with less responsibility than say a family of 4.

If you have a family with car payments, a mortgage, and mouths to feed– $1,000 simply won’t be enough of a buffer for when life happens and trust me, life will happen. 


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Are you in a volatile job position?

Do you operate on an irregular income? You need more than $1,000. 

Do you own your own business? You need more than $1,000.

Do you work off of commission? You need more than $1,000.

Basically, if you don’t have a steady paycheck, you’re going to need more of a buffer since you can’t rely on a set amount of money coming in each month.

Take Into account your debt

Your minimum debt payments need to be taken into account when you decide how much of an emergency fund you need.

Prioritize debts that will have severe consequences if you don’t pay at least the minimum amount. 

• Car payment is first, as transportation is a necessity, followed by student loans and IRS bills due to their harsh late policies and penalties

If $1,000 isn’t enough, what is the right amount? Glad you asked, friend! I suggest starting with at least one months worth of expenses. That way, if a true emergency hits, you have at least one month to figure things out without panicking and making rash financial decisions.

This can also be the start to your sinking funds for general car and house maintenance. I recommend having at least $1k in your emergency fund dedicated to those two categories kept in a high-yield savings account. Inevitably, you will have to use money for auto or home repairs. 

From there, build to six months and then a full years worth of expenses. Saving money is never a bad idea and will not derail your debt payoff journey in the long run.

After everything has settled down and we are past this global crisis, start building up your emergency fund to a full year. Set a goal that every year you add 1-2 months worth of expenses to your emergency fund. 

Maybe split your extra money in half. If you have an extra $500 at the end of the month, put $250 towards your debt payment method and the other $250 towards your emergency fund. 

Get one month ahead, break that paycheck to paycheck cycle. I have a video on how to get 1 month ahead on your bills that I will link in the description box. 

I’ve never been disappointed that I saved $50 instead of putting it on debt. I’ve always needed that money in some way, shape or form. 

Ways to save money:

Here at Freedom In A Budget, I am all about saving money! Here are some of the EASY ways that I save money:

• Fetch Rewards is a free grocery savings app that rewards you just for snapping pictures of your receipts. That’s really it. Free gift cards on groceries on thousands of products every day, no matter where you get your groceries. Just scan your receipts and get gift cards from places like Amazon, Starbucks, Target, Ulta, Applebees. Use code QHKBH to earn 2,000 points ($2)!

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• Rakuten/Ebates: Rakuten is my to go way to earn Cash Back from over 2,500 stores like Macy’s, Amazon, Sephora, Walmart and much more. Join Rakuten today for free, and you’ll get a $10 Cash Bonus to get you started! Every three months, you’ll get a Big Fat Check in the mail or a PayPal payment just for shopping. 

• CIT Bank offers high-yield savings accounts that provide a safe, secure way to grow your savings.

• M1 Finance is an easy to use brokerage platform that allows you to invest in Fractional Shares and auto reinvest!

• Webull Get 2 Free Stocks on WeBull when you deposit $100 (Valued up to $1400).

• Honey: Stop wasting money- Honey finds you the Internet’s best discount codes. 

• Budget Templates: Excel budget templates with pre-populated categories and formulas to keep you on track with hitting your financial goals.

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