HELP! I Had To Use My Emergency Fund!

emergency fund

Even The Best Plan Has Snags

Having a baby emergency fund is an essential part of starting a healthy financial plan.  It gives you some wiggle room in order to handle what life throws at you (mainly the little things), while paying off your debt with gazelle intensity.  If you have no debt, then you should have 3/6 months of savings in your fully funded emergency fund.  Life happens at the most inconvenient time, but if you have an emergency fund, it’s not so stressful.  Needless to say, when that time comes you will need to know what to do to adjust your financial plan in order to recover.

I often get contacted about what to do when someone has to use their emergency fund, or by no fault of their own incurs new debt unexpectedly.  I will answer this question assuming that you are working The Total Money Makeover by Dave Ramsey, which I endorse and highly recommend.  The Total Money Makeover consists of 7 baby steps, located below, as well as in the right sidebar of this blog.

Dave Ramsey’s Baby Steps
(I have provided a few links in Dave’s baby steps.  Those links are my method to give you more options depending on your ability or motivation, while allowing you to still follow Dave’s core plan.)

Baby Step 1 – Save $1,000 for baby emergency fund. ($500 if you make less than $20,000)
Baby Step 2 – Pay off all debt except for your mortgage using the debt snowball.
Baby Step 3 – Fully fund your emergency fund by saving 3/6 months of expenses.
Baby Step 4 – Invest 15% of your income for retirement.
Baby Step 5 – Save for college.
Baby Step 6 – Pay off mortgage.
Baby Step 7 – Build wealth and GIVE!

The basic rule of thumb is that if you are working the baby steps and find that you have a setback, you would stop what you are doing in the current baby step and replenish the baby step that was affected.  Then you would return to the baby step you were on before the interruption.

For instance, if you:

Are on baby step 2, but have an unexpected emergency that uses $500 of your emergency fund, you would STOP paying down your debt to get it back to $1,000.
Are on baby step 3, and end up with an unexpected debt that you can’t pay in full, you would STOP funding your fully funded emergency fund, and pay off that debt until it is gone.
Are on baby step 4 and up, and end up needing to use some of your 3/6 months of savings, you stop what you are  doing, and go back to get that fully funded again.

Avoid Using Your Emergency Fund IF Possible

It is important to know that your emergency fund should only be used for emergencies.  Sounds easy enough right?  You would be surprised at how many people admit that sometimes Christmas Day is used as justification to dip into savings.  Dave Ramsey points out that Christmas actually falls on the same day each year, so it shouldn’t be an emergency since you know it is coming.  I must say we too, have been guilty of not saving for Christmas, which can definitely cramp your December budget.  Try to plan for irregular expenses to help cut down on budget fatigue.

Start a separate type of savings, usually called a sinking fund, to plan for other items such as car insurance renewal, Christmas gifts, birthdays, vacation, etc.  We use a local savings account for sinking funds, and have our emergency fund in an ING Online Savings Account.  You would budget for each sinking fund expense by figuring out how much you need to come up with, and divide it by how many months you have until it is due.  Create a category in your monthly budget to fund each irregular expense.  I have created a worksheet on the EOD Deluxe Budget 2.0 that allows you to keep up with your sinking funds.  Budgeting for irregular expenses will save you stress and many headaches!

About Brad Chaffee

5 Responses to “HELP! I Had To Use My Emergency Fund!”

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  1. Shawanda says:

    Heard about your work over at Budgets Are Sexy. I love Dave Ramsey. Until I started listening to his podcast I was dead set on paying off my student loans in 2020. That gazelle intensity stuff works. People thought I was crazy.

    I guess I’m in between baby steps 3 and 4: saving up a 20% down payment for a house. My employer doesn’t match 401(k) contributions.

    Any way…emergency funds, sinking funds, love them all. I don’t have to worry about setting up a sinking fund for Christmas, birthdays, etc. I’ve expressed to family and friends that they won’t be receiving any gifts from me. Not because I can’t afford it, but because I have more important things to spend my money on…ME. Just kidding – kind of. They know I love ’em. 🙂

    • Brad Chaffee says:

      @Shawanda – I am with ya on the student loan stuff. Those things hang around forever! When we payed off one of the $2,000 ones, it had an expected payoff date of 2018. FOR $2,000!! That is CRAZY! They want you to take that long that’s for sure.

      Good job on saving that 20% for the down payment. Are you going to consider a 15 year fixed rate instead of the 30. I have some numbers that could convince you to. Let me know if you’re interested. For now let’s just say that you would save a TON of money.

      I like your style. To be honest with you I think that Christmas has become something that is OUT OF CONTROL! We usually just buy gifts for the children in the family. Wanna know what BUGS me EVERY year Shawanda? Last minute Christmas parties that you’re told you need to by a $20 gift without any vote of your own. I love to GIVE GIVE GIVE but I would rather do it on my terms, not because some manager thought everyone should or wanted to participate. LOL I like homemade gifts and spending time with my family. That’s the best!

      Thanks for stopping by and I hope you stick around!

  2. Kellen says:

    I feel like gifts were fun when you are a kid and you desperately want some toy. Giving gifts to grownups is tough though, because I feel like most of us just buy ourselves what we want.

    Last year, my sister came to visit for Christmas, and then left all the gifts we gave her behind in her old bedroom here. Maybe I’ll just box those up again for her this year?

    • Brad Chaffee says:

      I generally only buy gifts for the kids in the family with exception to our parents, and even then the gifts are nothing fancy. I would TOTALLY re-gift those gifts this year. LOL

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