Saving Money Little by Little: #3 - Emergency Fund

In light of Sunday's hospital visit, I figured today would be a good day to talk about the hub's and I's Emergency Fund.

When talking about getting out of debt, it seems a little backwards to actually start saving money towards an Emergency Fund before you start putting money towards debt. There is, however, a really good reason to build an Emergency Fund first and this is why:

If, while you are fighting to get out of debt, you run into an emergency that costs more than have money to pay, you will have to go into even more debt to cover that emergency. The last thing you want to do as you're paying off current debt is to incur more debt because of an unforeseen circumstance.

If you have an emergency that you must go into debt to pay for, you will then have to pay interest on whatever that amount of debt is. Paying for an emergency in full through your Emergency Fund is how you can avoid that interest accruing debt, saving you money in the long run.

If you're familiar with Dave Ramsey and his principles for taking control of your finances, creating an Emergency Fund is actually his first step (of seven) for getting out of debt.

Dave Ramsey's suggested Emergency Fund is in the amount of $1000.

The hubs and I set aside $1000 for an Emergency Fund probably three years ago and we've never have to take money out of it, that is, until now. We will use the money we have in our Emergency Fund to pay for the ambulance and hospital expenses associated with taking Abilene to the ER on Sunday.

Setting aside $1000 (or whatever amount you decide) for an Emergency Fund when you could be using that $1000 to pay off a loan can be a hard pill to swallow. It's tempting to want to use that money right away towards getting out of debt BUT, in reality, there is a low probability of actually having to use that Emergency Fund. Like I said, I think the hubs and I created our Emergency Fund three years ago (we've had it so long that I don't even remember exactly how long we've had it) and, until now, we've never had to use it. So, once it's there, odds are that it will be there for a while and you never have to worry about having money for an emergency (barring that the expenses aren't more than $1000). After you have your Emergency Fund set aside, you can go hog wild funneling as much money as you can possibly save into all of your debts. It's a safety buffer that, I believe, is a wise choice to make.

Now that the hubs and I have actually been in a situation where we need to use the Emergency Fund, I cannot tell you how relieving it is to know that we already have that money set aside. We are blessed to have very good insurance through Brad's job and, because of the money we've already set aside, I don't anticipate ending the month in a negative balance because of any medical bills.

After all the bills have been paid, we'll take what we've saved at the end of the month for the next couple of months and devote it to building our Emergency Fund back up to $1000 for the next (hopefully never, but let's be realistic) unforeseen circumstance.

After we got out of debt, the hubs and I worked to set aside funds for other unforeseen or foreseen circumstances (funds that Dave Ramsey also suggests to have) like:

• 3 Months Worth of the Hubs Salary - This is set aside in case the hubs were to lose his job. If he were, we would have at least three months of his paycheck to live off of while we figured out a new source of income. For you, this amount would simply depend on what your income is each month.
• Car Repair Fund - The hubs and I have also set aside a certain amount for major car repairs. Any repair that costs more than $50 comes out of this account as opposed to our paycheck. Anything under $50, we consider basic car maintenance and that cost will come out of our monthly expenses.
• New Car Fund - The hubs and I have only ever paid cash for our vehicles. With a baby on the way, we know that we will need to get a bigger vehicle in the near future. This fund has been set up so that we can start saving money towards that new vehicle (that is, new to us - I don't think we'll ever buy a brand new car off the lot but that's for a different post). The hubs and I have not set a maximum amount on this fund because we are always trying to save more. Obviously, the more money we have saved, the more options we have in buying a new vehicle.

I most certainly hope that the bills associated with Sunday's emergency aren't more than $1000 but, in the event that they are, we have money saved in the above mentioned funds that we could use so that we don't have to go into debt to pay what we owe the hospital. It may take a few months to build those funds back up but we will still be debt free as we do it. Thank you, Lord!

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