I have heard and read many arguments and points of view about why a $1000 Starter Emergency Fund or Dave Ramsey’s Baby Step 1 is insufficient.
The thought of having only $1000 in savings while trying to pay off thousands and thousands of dollars in debt is really scary. To be honest, I was terrified! What if something goes wrong? What if I have an emergency that costs more than what I have in my savings account? My Financial Peace University Coordinator explained to me that it was an incentive to try to pay off the debt quickly… and I agree.
Many people do not have a savings account or have very little in savings and rely heavily on their credit cards and personal loans to cover emergencies (and some non emergencies) and have trouble paying it off. This is how a lot of us got into debt (not counting student loans). So being able to save $1000 (or $500 for those who make $20K or less a year) is a huge achievement and the first step to financial freedom for many.
For me, the Starter Emergency Fund is like a fire extinguisher that helps to get some control over an emergency before it becomes too big to handle. My starter emergency fund was very helpful when my car suddenly broke down and it cost me a little over $900 to get it fixed… yikes! I now have a separate sinking fund to cover car emergencies.
While you have your emergency fund and you start tackling your debt, you can also save for other things that aren’t emergencies. There may also be times you would need to slow down on your debt payment (paying just the minimum) if you need to save up for something rather quickly. This is what many people call Storm Mode. For example you might get word that your company is considering laying people off, or you might be unsure of your future with the company for any other reason. This would be time to stock pile money just in case.
You might also go into Stork Mode when you are having a baby! Put those extra payments towards saving for the birth expenses and any expenses that come with having a new bundle of joy. Having this cash will allow you to cash flow any expenses that would come your way and not go further into debt.
So, the $1000 Starter Emergency Fund does not prevent you from saving for other things when the need arises. What you don’t want to do is have money just sitting in an account when you could use that money to pay off your debt and finally be debt-free