A man asked Dave Ramsey if $1,000 would be enough for an emergency fund in 2023 – his answer drew lots of laughter and applause. Here’s why
It’s been 20 years since Dave Ramsey, in his book The Total Money Makeover, recommended that Americans set up an emergency fund with $1,000. However, that doesn’t mean the character was meant to be the be-all and end-all — for now or even then.
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When asked about this threshold by a viewer on a recent episode of his eponymous show, Ramsey replied, “$1,000 wasn’t enough in 2003.”
As the audience clapped and went wild, Ramsey continued, “It was never designed to be enough. It’s enough to prevent the little things from paving your way out of the debt crisis.”
At one point, Ramsey recommended using any savings to pay off debt (still a good idea if high-yield credit cards are killing your bank account). However, this strategy caused some Americans to lose hope, leading him to do this $1,000 tweak as a safety valve for small emergencies on the road to debt freedom.
“So [the $1,000 savings] doesn’t need to be adjusted because it should never be enough.”
The question is: What is enough, qualitatively or quantitatively, for an American’s emergency fund? The finance guru gave his answer later during the show. Based on his advice, here’s what you can learn on the path to financially clean people.
Use monthly expenses as a barometer for emergency funds
If you’re following Ramsey’s “small steps” to paying off debt, he also recommends taking a break and putting money aside for the unexpected. To calculate your emergency fund needs, first look at your monthly expenses for the past three to six months and determine your average spend.
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Collecting this stat might help you avoid becoming a stat. In 2021, the Federal Reserve reported that 32% of Americans couldn’t even cover a $400 emergency expense without borrowing or selling. Calculating your average monthly expenses can give you financial clarity in an emergency.
Consider job stability and income volatility
Those in volatile fields or positions—for example, independent contractors or commissioners—know that earnings can change without warning. In such cases, emergency funds should cover a longer time horizon that accounts for job or income losses or a lack of financial stability.
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A study by the JPMorgan Chase Institute found that, on average, families experience wide swings in income for nearly five months a year. If your income fluctuates or your job is uncertain, a good rule of thumb is to plan for three months of emergency savings for every 10% of the income fluctuation.
Assess the range of risk factors
In addition to professional insecurities, there are personal insecurities affecting things like health, family, car repairs, and home maintenance. The danger comes when you’re forced to pay them off with high-interest loans and credit cards that can easily double or triple the initial amount.
Households with little liquid savings and high debt-to-income ratios are naturally hit harder when domestic pitfalls become financial ones. The more possessions you own and the responsibilities you have, the more you need to save.
In the end, it all comes down to being prepared. Take Dave Ramsey as an example, who would no doubt advocate trading on a $1,000 benchmark to act on a million dollar advice.
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This article is for informational purposes only and should not be taken as advice. The provision is made without any guarantee.