We Get It
First things first. To be clear, we completely understand that Dave Ramsey (and others) recommend $1,000 as only a Starter Emergency Fund and that you'll eventually increase it to 3-6 months worth of living expenses. Eventually. That doesn't mean we agree with them. $1,000 isn't adequate for an emergency fund, even as a starter, because it's an arbitrary number that doesn't consider individual circumstances. Without a proper analysis, no amount is adequate.
Ramsey and his Personalities even acknowledge that $1,000 is not enough, yet continue to sell it as a quasi-panacea while you work through Baby Step 2. Their logic seems solid at first, especially when you hear it forcefully and repeatedly, but when you apply critical thinking and consider your individual circumstances, you'll see just how flawed it is. Having an answer for everything and yelling at people doesn't necessarily mean the answer is right. Don't confuse truth with overenthusiastic opinion. A $1,000 SEF is only an opinion and should be considered as one of many options, not an absolute.
Dave Ramsey Says "Don't Have More than $1,000" ...Or Does He?
Many times I've said to members of the official Ramsey Facebook communities that you can and should have more than $1,000 in your SEF. I gave very sound logic why, but they nearly lost their minds because I dared challenge Dave Ramsey's decree. Community members who agreed with me and dismissed the $1,000 SEF as antiquated and inadequate also got chastised.
Even after I proved, with no fewer than three video clips, that Ramsey himself had said it's ok to have more than $1,000 in some situations, the moderators still insisted that it's not a principle he teaches and that people should have only $1,000. In other words, they feel you're not smart enough to decide what's best for yourself. If you think you need more than $1,000, then you have to get permission from Dave Ramsey himself. That's some of the most moronic advice that comes from Ramsey Solutions.
If you maintain only $1,000 as your SEF because you believe it will sustain you through several years of debt repayment and establishing your Full Emergency Fund (FEF), then you'll likely operate at high risk during that period. We recommend that you build your emergency fund by starting with about $1,000 but then quickly increasing it to one month worth of expenses, then three, and so forth. This incremental build-up is a better way to ensure you incur less risk throughout your debt repayment process rather than relying on a paltry $1,000 to carry you for a year or more.
You must do a thorough risk analysis before establishing your Starter Emergency Fund (SEF). Critical thinking, knowledge, and sound decision-making are uncompromising principles that we adhere to. Living with $1,000 for a few months is quite different than relying on it for two years. This is ultimately your decision and life, so choose wisely.
Belittling Those who Object to $1,000 Being Enough
This clip makes me cringe every time I listen to it because Ramsey dismisses the caller's legitimate concerns, but I think it's important for you to listen and hear some of the illogical statements Ramsey makes regarding the $1,000 SEF, not to mention his condescending attitude. I've bookmarked it on the part where he tells the caller, "It's more than you've got now!" in response to her husband's concern that $1,000 isn't very much for an emergency fund. Although Ramsey's statement is true, it's vacuously true and he also uses it as a thought terminating cliché to stop further discussion that might poke holes in his argument.
Ramsey later tells the caller,"It's not there to make you comfortable; it's there to make you uncomfortable." That's asinine. You wouldn't ride without a seatbelt because the psychological discomfort it causes will make you arrive at your destination faster. You wouldn't accept a dentist only filling two of your four cavities because he declares, "It's more than you've got now." Your SEF is there to catch smaller emergencies while you pay off debt. Having too little in it will cause more problems than it solves.
Don't Try to Fix Past Mistakes with New Mistakes
Never accept financial celebrities' advice to keep only $1,000 as your SEF because you've never had an emergency fund before. Ramsey even admits, ""It's not designed to be enough." If that's true (and it is) then it's a poor design and he should fix it. You should fix it.
Your past actions should not restrict your options in your current decision-making process. We learn from mistakes, ours and others'; therefore, we incorporate those lessons into our decision-making. Removing viable options based on past mistakes can lead to less-than-ideal decisions. Living without an emergency fund for years doesn't suddenly make $1,000 the solution. A $1,000 SEF is still inadequate despite your past mistakes. Knowledge of the situation, past and present, allows you to determine that perhaps more than $1,000 fixes the mistake of going without an emergency fund for so many years.
Don't try to fix past mistakes with new mistakes.
Why the Debate?
But why is there even such a debate within the Ramsey communities regarding the Starter Emergency Fund amount? It's because many of his followers believe him to be infallible and follow his word to the letter. They lack critical reasoning. Others who know better follow the intent of his word and adapt his concepts to fit their situations. Better yet, they research many different systems and adopt what's best for their situation. The Stone Money Foundations emphasize the latter through critical thinking, knowledge, and sound decision-making.
People need to understand that $1,000 is and always has been an arbitrary number. Besides, it was recommended back in the early 90s, so considering inflation alone should indicate it's far less than it used to be. Ramsey also recommends only $500 for people with lower income, which is even more problematic. Lower income doesn't mean cheaper emergencies. In fact, it probably means larger costs for emergencies considering deductibles may be higher (in order to save money up front by having lower premiums).
What is the Right Amount for Your Starter Emergency Fund?
Your SEF is designed to be a small amount you set aside to catch the less-severe emergencies in your life. It isn't going to cover a house fire or extended job loss. Things like a minor car accident, water heater failure, pipe leak in your house, or broken windshield could all be handled with a SEF of $1,000 to $2,000 depending on your insurance deductibles and any secondary cleanup needed for leaking water in the house or car. A SEF of only $1,000 may in fact cover these emergencies. If you do the analysis and determine it's enough and that your risk is acceptable, then fund your SEF with $1,000 and move on to debt repayment. If not, develop a plan to incrementally increase your Emergency Fund as you pay off debt.
To determine what's enough, do a risk analysis as we discussed in a separate post, looking at the probability and severity of loss of all the major items and sub-items you own--car, motorcycle, appliances, roof, plumbing, laptop computer, lawnmower--everything you can think of. How old are these items? How likely are they to fail while you're paying off debt? Factor in your insurance deductible for those items and you'll have a good idea of how much you need in your SEF. Also determine whether a replacement is necessary. For example, if your lawnmower breaks, could you pay someone to mow your lawn during the season and purchase a new mower next year? You have to figure these things out.
Conclusion
Facebook groups that are more relaxed in their approach to personal finance are great places to discuss this topic further. You'll find that members outside the Ramsey communities support the more-than-$1000 SEF. Many have experienced situations where having only $1,000 caused them problems. They resorted to credit use (which isn't by itself wrong if part of the plan) or felt the full impact of the situation. You won't hear about this in the Ramsey communities because it gets censored.
We wanted to introduce you to our philosophy on the concept of a Starter Emergency Fund and why the $1,000 that Ramsey and other financial celebrities recommend is inadequate. You have to make your own decisions based on critical thinking, not blindly following financial celebrities.