The Total Money Makeover: Finish the Emergency Fund

This is the seventh of twelve parts of a “book club” reading and discussion of Dave Ramsey’s The Total Money Makeover, where this book on debt reduction is teased apart and looked at in detail. This entry covers the eighth chapter, finishing on page 150. The next entry, covering the ninth chapter, will appear on Saturday.

ttmmI’m a big believer in the unpredictability of life (in fact, this unpredictability is a major theme in my upcoming book). Life deals you things you don’t expect all the time, from small (like an unexpected wet diaper on your way out the door) to big (a sudden death of a close relative) and from good (finding a $100 bill in a parking lot) to bad (breaking your big toe after dropping something heavy on it).

Yet, even given that hugely unpredictable nature in life, most people do not have an emergency fund. Many of those who do only have a tiny fund. What happens to them if they lose their job and can’t get another one for a year? What happens if their child is invited to go to a very prestigious music school? What happens if one of them falls down a flight of stairs and has to spend six months in a wheelchair?

The solution to all of these things is a big, fat emergency fund. A big healthy wad of cash in the bank makes all of these problems easily bearable. For Ramsey, this is the next step after your debt snowball is done and all you’re left with is a mortgage – get a big chunk of change in the bank for those rainy days.

How Big?
One big point of contention about emergency funds is how big they should be. Dave offers his opinion on page 133:

A fully funded emergency fund covers three to six months of expense. What would it take for you to live three to six months if you lost your income?

I think it’s key here to point out that by “you,” the quote most likely refers to the full spending of a household – if it doesn’t, then you might be building an emergency fund that’s too small.

Three to six months? Think about how much you spend each month, then multiply that by, say, five. That’s quite a serious chunk of change. For us, it would probably be somewhere in the ballpark of $20,000, with almost half of that being our mortgage and homeowners’ insurance.

Is it enough? I think you have to look at it from the perspective that no amount will cover every possibility that could happen. Instead, you should be seeking an amount that’s large enough to cover every doomsday scenario you can reasonably think of. Consider the people around you and their most desperate moments. How much would they have needed in those situations?

Easy to Access
Dave basically argues for a savings account on page 137:

Keep your emergency fund in something that is liquid. Liquid is a money term that means easy to get into with no penalties. If you would hesitate to use the fund because of the penalties you’ll incur to get it, you have it in the wrong place.

That basically means a savings account. It’s accessible at any time without penalty and it doesn’t fluctuate in value.

Obviously, you want it to be as safe as possible. This eliminates stocks – they’re inherently risky and fluctuate too much. The value of bonds can fluctuate, too, though not nearly as strongly. You don’t want to lose your balance once it’s invested.

At the same time, you want to be able to get at it without a penalty of any kind. Dave argues that this is a black mark against certificates of deposits. I disagree with that. With some careful planning, you can use certificates of deposit in a “ladder” system and never have to crack one. I like this idea because it helps you get a better rate of return and it’s a psychological barrier that keeps you from digging into it.

Dave points towards money market accounts, another little hint that this book was written prior to 2008. Money market accounts might have great returns sometimes, but they’re not as safe as FDIC-insured savings account. Even better, if you hunt around, you can find FDIC-insured savings accounts that have a nicer return than pretty much any money market account and come with the insurance.

Three Months? Six Months? In the Middle?
The entire point of an emergency fund is to absorb risk, and some families are simply more at risk than others. On page 139:

For example, if you earn straight commission or are self-employed, you should use the six months rule. If you are single or you are a one-income married household, you should use the six-month rule because a job loss in your situation is a 100 percent cut in household income. If your job situation is unstable or there are chronic medical problems in the family, you, too, should lean toward the six month rule.

Personally, I feel as though children are a significant risk addition to one’s life. An adult can go out there and get a job. A three year old can’t do the same – they’re wholly dependent on the adult. Thus, if you have kids, I’d lean strongly towards a bigger fund.

I also think that six months isn’t necessarily the maximum. If all of your household income comes from freelancing, you have three kids, and there may be health issues in your future, six months probably isn’t enough. I’d have more than that – a year’s worth, perhaps?

We have about ten months’ worth of purely liquid cash sitting there for emergency purposes right now. That’s an amount that feels right for us, with the majority of our household income coming from freelancing and two children under the age of four.

Is Everybody on Board?
One issue I see readers writing to me about time and time again is the question of what to do when their partner isn’t on board with the financial changes they want to make. Dave hits on this a bit on page 142:

I don’t suggest you clean out your savings [down to $1,000 in order to pay off debt] if everyone isn’t having a Total Money Makeover.

I go further than that: if you’re in a relationship and your partner is not on board with making financial change, you’re wasting your time with it. Their actions will undermine everything you do and you’ll find yourself constantly at odds and angry with each other without making a drop of additional progress. That’s a dangerous recipe, right there.

If your partner is not on board with making some real financial changes, your focus shouldn’t be on charging full steam ahead without your partner. Instead, your focus should be on talking through your situation with your partner. You’ve got to understand where they’re coming from. Just pushing what you want won’t cut the mustard here – they’ll just see you as pushy and you’ll make negative progress, or you’ll get an act that makes it look like they’re on board when they’re really not.

Talk about your money. You’ve got to, or none of this will work.

Women and Men?
Are women more suited to have emergency funds than men? On page 144:

God wired ladies better on this subject than He did us. Their nature causes them to gravitate toward the emergency fund. Somewhere down inside the typical lady is a “security gland,” and when financial stress enters the scene, that gland will spasm.

The argument here is that by their very nature, women are more likely to see the value in an emergency fund than men. Men tend to be task-oriented, while women tend to be process- and security-oriented.

I think there’s actually something to this. I’m all in favor of gender equality, but different does not mean unequal. Different means that each side has traits that are beneficial. Guys are better at focusing in, at breaking down barriers. Women are better at planning and cooperation, at building fortresses of safety. Different attitudes are useful in different situations.

I see this in my own marriage. I’m far better with specific objectives with my children. I thrive on having a series of tasks to do or a game to play or something like that. My wife, on the other hand, seems to thrive more on nurturing. She holds them and is patient when they’re hurt, where I’m much more likely to look for how to solve the problem. When Joe bumps his knee, my wife is more likely to hold him while I go searching for a Band-Aid.

The emergency fund is definitely in her court, not mine. I see the value of it and I contribute to it, but it’s clearly more a part of her elemental nature.

Why Do All This?
If the future is so unpredictable, why waste our lives right now putting so much effort into scrimping and saving and planning for that future? On page 146:

What used to be a huge, life-altering event will become a mere inconvenience. When you are debt-free and aggressively investing to become wealthy, taking a few months off from investing will put a new engine in a car. When I say the emergency fund is Murphy-repellent, that is only partially correct. The reality is that Murphy doesn’t visit as much, but when he does we hardly notice his presence.

A big emergency fund means that the bad events in that unpredictable future don’t wipe away all of the good things you have in your life.

Without an emergency fund, a job loss means panic. It means scrambling madly for work – any work. It means you might lose your home or your car. It’s scary.

With an emergency fund, you can roll with the punches. You can patiently dig for the right job. You can even give your dreams of freelancing a shot right now – after all, you’ve got time.

Without an emergency fund, a dead car means panic. It means you have to throw yourself further in debt, with even more monthly payments than before.

With an emergency fund, you just make the call and fix the problem. No big debts. No monthly payments. Just smooth sailing.

You’re left with unexpected events – but only the good kind.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Saturday, we’ll tackle the ninth chapter – Maximize Retirement Investing.

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  1. chzplz says:

    Jesus. I was happy when I managed to get to 3 months in my emergency fund. Guess I gotta keep saving…

  2. Min says:

    Money Market ACCOUNTS are different from Money Market FUNDS. Funds aren’t FDIC insured, while accounts are. I believe MMAs tend to be slightly more restrictive than savings accounts.

  3. j says:

    Trent I think you are confusing money market account (MMA) with a money market fund. A money market account is essentially a savings account with a higher interest rate – you cannot lost anything in a money market account – it typically has restrictions as to how often you can withdraw from the account. Also, a money market account IS FDIC insured. A money market fund (MMF) is riskier, not insured, etc.

  4. Johanna says:

    I’d say what I think about Dave’s theory of “lady security glands,” but you’d probably classify it as negativity.

  5. Dan says:

    Ah, aire of Taleb’s Black Swan…unpredictability

    mix that with chaos theory…

    so which do you do, live for the now, or live for the “might never happen”

    ???

  6. bethh says:

    Trent, the bold text has gone WILD on the page. It’s hard to read right now!

  7. socialpanic says:

    That really brings it home for me. I recently went in for surgery on my big toe. The result of a diving board accident a few years back.

    Even with insurance, and the blessing of living with my folks, me and my girlfriend still went through threw over a thousand dollars in dr bills alone, and that is with insurance.

    God willing I am through the worst of it already but even with the insurance work provides something like this demands ready available funds, I shudder to think how things might be if this were an emergency that demanded immediate attention.

    When I do get back to work next month I am going to make it a point to double the emergency fund.

  8. Margaret says:

    Should someone have 3-6 months of savings (or however much they need)of gross or net income? I would think gross, if you needed to pay for things like COBRA, but am wondering what other people think?

  9. bethh says:

    I also wonder how unemployment insurance plays into an emergency fund. On the one hand, obviously it doesn’t help pay for a new washing machine, but losing a job is the only reason I’d really need so much money on hand.

    My expenses are low enough that I could squeak by on unemployment for as long as it lasts, but I am also working on building up my emergency fund.

  10. Torrey says:

    When my wife and I completed this step, it really felt like we’d accomplished something big. It was a lot of sacrifice and hard work.

    I totally agree with the point about if your significant other isn’t on the same page as you, it’s a waste of time. I’ve seen and heard too many instances where it’s like each partner’s going in a different direction. It’s so sad.

  11. stefanie says:

    Women and men are not naturally “wired” differently – they are brought up differently in terms of cultural and social expectations. That is why there are often many differences between men and women – because we are (implicitly most of the time) taught how to be different, not because we are born that way.

  12. Katie says:

    I am so glad I did not buy the book. I would throw it at the nearest person I did not like the moment I saw the gross generalization about men and women. Ramsey’s absolute language in that passage has just turned me off from reading anything of his. If you cannot just say that your assumptions come from your experience (as you did Trent) you should not put out such bold statements. As a woman, I really do not have an overwhelming urge to save – quite frankly I’d rather smash glass ceilings and see the male/female pay gap disappear (it’s still there – I *wish* it were not!). That’s NOT to say I don’t understand the value in the advice given. I just do not see why he threw that comment in there when it would obviously annoy some of his readers.

  13. bethany says:

    a quick note about gender: while some studies demonstrate this difference happens ON AVERAGE, it will not apply to every man or every woman. It’s a case of tendencies and likelihoods rather than biological predestination (I assume Dave’s talk about glands is not literal, though I don’t know).

    That is to say, it’s a useful generalization, but a person shouldn’t feel messed up if they don’t fit into it.

  14. Des says:

    I think Dave’s point isn’t so much to put gender differences in a box, but more that he is speaking to husbands that might be thinking they don’t need an emergency fund, when it would make their wives feel safer. Whether the difference it nurture or nature doesn’t really matter in a practical way here. If one partner needs 6 months of savings to feel safe, the other should respect that even if they could handle a bit more risk.

  15. ChrisB says:

    @ Stefanie (8): why can’t it be both? I certainly agree that there’s a “nurture” dimension, but it seems just as clear that there are *real* psychological (and other) differences between men and women at the “nature” level as well.

    That’s *not* to say that one is better than the other, which people often seem to think that this means… the way I see it, the differences actually serve to *complement* one another.

  16. m says:

    I have been thinking a lot about the emergency fund issue… I am both single *and* a freelancer, so the bigger the EF the better I sleep at night. Right now I have about 3-4 months worth of full expenses, although I am aiming for one year or so, which I should manage to achieve by the end of this year. Hopefully. I have no debts aside from my mortgage and I am actually owed about a year worth of income for my freelance work, but it’s been coming slowly…

    That said, being a woman doesn’t play any particular role in my need for an EF or its size. I have little patience for such gender generalisations. They are unnecessary — why not say simply that some *people* thrive on security, while other *people* are more willing to take risks?

  17. marta says:

    I have been thinking a lot about the emergency fund issue… I am both single *and* a freelancer, so the bigger the EF the better I sleep at night. Right now I have about 3-4 months worth of full expenses, although I am aiming for one year or so, which I should manage to achieve by the end of this year. Hopefully. I have no debts aside from my mortgage and I am actually owed about a year worth of income for my freelance work, but it’s been coming slowly…

    That said, being a woman doesn’t play any particular role in my need for an EF or its size. I have little patience for such gender generalisations. They are unnecessary — why not say simply that some *people* thrive on security, while other *people* are more willing to take risks?

  18. Nick says:

    This is a very bold post!

    Sorry… had to do it.

  19. sewingirl says:

    I also think that Dave tends to be very opinionated, not much grey in his world. I do like his books, although I think that he tends to discount as useless many things that people in the real world do to get by.. Case in point, my car died, there was no sense in putting another dime into it. But with only the $1000 emergency fund to draw from, you can’t buy anything approaching a reliable used car in this area, so we ended up with a small bank loan. Was I happy, NO, but I also can’t afford to put any more money into a cheap used car. We do what we have to.

  20. Jesse says:

    It’s interesting that all of the comments so far decrying the gender generalizations have been from women.

    Maybe because, in general, women take things more personally and are more likely to overreact?

    Just kidding…. mostly.

  21. jc says:

    stephanie, that’s a nice idea, but it doesn’t fit with any contemporary research on the subject. it’s no longer worth debating nature versus nature — on gender or any other subject — the task is to explore the complex interplay between the two.

  22. Kris says:

    Two comments:

    1) Doing a CD ladder system sound complex and not really worth the time for an emergency fund. If you have a $20k emergency fund, the only way you can get the highest rate of return if you investment at the highest threshold (thousands of dollar). It is less headache and hassle to put it in a money market fund, especially right now when you are talking about 1% interest (1% of 20,000 is only 200 bucks) and probably equal to the time you spent hunting for the best rates.

    2) FDIC insurance is not as safe as it is thought to be. If your bank goes BK, you may have to wait months to get your entire emergency fund back while everything is sorted through on the federal level. Also, money market funds from good mutual funds are also safe because every dollar you put in is represented by a dollar in securities although they can still go down. Our MM account and many others did not lose value at all during the crisis.

  23. Sa Co says:

    Good Post. My wife and I are pretty much there already. We are now knocking down student loans, and once those are gone, we will start taking out our mortgage. It definitely would be very difficult to do that, if we didn’t have such a large emergency fund.

  24. gerry says:

    sorry to say ladies, you are nurturers. you enjoy security, and low risk, my wife will attest to that. Maybe the women who have the problem with Ramsey’s generalizations may have been conditioned to ignore the nurturing aspect. I read the book and also took his financial peace university course. He is a loving man who greatly admires the strength of his wife. His generalization was meant to compliment women for their resilience and interdependence. He directed the generalization to the men that we should listen to our spouses intuition because of woman’s desire to seek financial security through an emergency fund. So before you generalize about his generalization, please read the book and seek to understand dave ramsey.

  25. I like the idea of having a 6 month emergency fund to play it safe. Also, it’s likely that if you do lose your job you’ll cut unnecessary expenses and the fund could last longer than that. Plus if you get severance and unemployment you’ll be in a great position to weather the storm. This will certainly enable you to sleep well at night!

    -Gen Y Investor

  26. Chad says:

    I have to agree with Gerry on this one. I’ve read the book about 6 months ago and listen to Dave’s radio program daily. He has a significant amount of respect for his wife and all woman for that matter. I don’t think his writings were met to disrespect anyone. Go to the library, get the book and read it. Its a quick, easy read with some great common sense type information.

  27. Brent says:

    I wish there was just a way to calculate (even if complicated) a size. I don’t really like arbitrariness. I’ve set for myself 3 stages for goals. But I can squeeze my expenses really low if I know I have to(or want to). I hear the months, but when is it time to start putting that money elsewhere? 9 months? 12 months? is that minimum expenses, comfortable expenses or mean expenses? I myself had to pluck the number 15,000 out of thin air. Has anyone tried developing a system to determine this amount?

  28. Adriana says:

    I agree with nick #14 LOL

    a lot of BOLD..

  29. Shantanu says:

    How long should it take to build an emergency fund?

    I’ve looked at SO many financial advice sites and books but NONE of them address this. Do you have an idea on the time line? if i earn $X/month just starting out with 5% of $X per month in automatic savings it would take me 20 months to build a 1-month emergency fund. (Even at 10% of $X per month in savings, that’s STILL 10-months to build a 1-month fund!)That to me is TOO long!

    Any thoughts? Please help!

  30. Doug says:

    To bethh (#6):

    Unemployment insurance does not play into the emergency fund. If your car blows up, that’s an emergency. If you slip and break a leg, that’s an emergency. If your child goes out and steals a car and you need to make restitution, that’s an emergency. If your property taxes get jacked up because politicians can’t do math and you end up having to pay $4000 extra, that’s an emergency (hello, Indiana!).

    If you lost your job, and the only other one you could find was two states away, how are you going to move there? Unemployment doesn’t pay enough to pack up a household.

    The point is that you can’t “plan” for an emergency. Thus, 3 to 6 months of living expenses. This will cover most surprises in life, from an emergency room visit to retaining a lawyer.

  31. Doug says:

    To Brent (#21):

    The best way to establish a dollar figure is to go through your budget that you’ve made every month. You should have lines in there for things like mortgage and electricity that are pretty fixed, while others will be for things like “blow money” or groceries that you can that you will suspend or adjust. Take a look at the absolute minimum you need to spend.

    For myself, I then multiplied that number by 6. It works out to about 5 months of reasonable expenses. Then I took that number to my wife, who wanted a minimum of $25k in the bank. So, we compromised and now have an emergency fund of $25k. :)

  32. Kim says:

    “Guys are better at focusing in, at breaking down barriers. Women are better at planning and cooperation, at building fortresses of safety.”

    Are you serious???? As a female engineer and head of our household finances, I’m offended. Stereotypes are what gets people in to trouble. Same as making ASSUMPTIONS.

    I’m done with your blog.

  33. The rule of three to six months sounds about right. There’s a definate possibility that you might need more of course, but if you have a 3-6 month cushion, you’ll have time to work out which non-emergency fund you’ll liquidate, or collection of benefits under which insurance policy, if that applies.

    I think more than anything else the emergency fund buys us TIME. There’s no hard and fast way to anticipate how much money we’ll need under any given circumstance, so the necessity is mainly to provide breathing room for what ever life may throw at us. With that time, we’ll hopefully be able to make intelligent decisions without panicing.

  34. stefanie says:

    @ ChrisB (#12) – its impossible to say that something is purely biological because our cultural assumptions are always helping to define it as such.

    @JC (#16) – actually, I can give you endless contemporary sources that support my argument that everything is culturally determined – these is nothing “real” outside of that which is mediated by culture. One of the tasks you might want to take up is to explore the interconnections between “nature” and culture, but that is not the only task available. Fighting oppression based on cultural assumptions is one of the tasks that is more up my alley.

  35. T'Pol says:

    My Emergency Fund is not associated with living expenses. It is there for stuff that are unexpected. I have set aside 5K for that in a savings account. Many years ago when I HAD TO work for a totally horrible person until I found another job, I made a promise to myself: I was going to set aside funds to cover a whole year’s expenses so that I would never have to do that again. I call it something which could translate roughly to “Get the Hell out!” money. When my last job turned out to be a total nightmare consuming me physically and damaging my health, I just simply quit last April in this economy.

  36. AnnJo says:

    I don’t doubt that Dave Ramsey and Trent are expressing a complimentary view of women in describing us as having a “security gland” and I don’t take offense at it.

    However, as someone who has worked closely for 30 years with both men and women on their financial affairs, I can confirm that, like most stereotypes, this one has only some general statistical validity, and can’t be relied on in any individual situation.

    A large percentage of men who count on this stereotype applying to their own wives will wake up to serious financial trouble.

  37. Derek says:

    I’m young and single with no dependents, I keep three months max in my emergency fund. The rest goes towards a house down payment and a vacation fund.

    I’m not against dipping into the EF to pay off big expenses either. If I can pay off a big expense on my CC with the EF money, I’ll do that instead of paying 5 bucks in interest.

    I know Dave (or Trent for that matter) wouldn’t approve of that advice but it works for me.

  38. Julia says:

    I just discovered your blog this morning and you have posted about the importance of something I learned the hard way…this morning!

    How very timely.

    Maybe it’s a result of graduating college in one of the worst years in a long time (this year), but I’m pretty sure that six months is the absolute minimum that I would keep on hand. Unfortunately at 22 I’ve already seen too many of my friends lose jobs and offers as a result of the economy.

  39. As a fan of Dave Ramsey myself, I totally agree with needing to have an emergency fund. We are currently doing baby step two, with only a little less than $3,000 until we are debt free but the house.

    We disagreed on the emergency fund too. I wanted to do 3 months while my wife wanted to do 6 months. I always say that the highest choice wins, in order to move forward as a team. Needless to say, we will be saving 6 months of expenses.

    Great Post!

  40. Kandace says:

    My husband and I are working on our EF and are trying the get eight months, per Suze Orman’s suggestion for this economy. Our total has to be significantly higher than most as we our both self-employed and pay out of pocket for health insurance. We also have alimony and child support payments. It basically doubles what you need to have in a fund.

  41. ChrisB says:

    A few weeks back I caught part of Dave’s radio show in which a caller referred to advice he’d heard on a cable money show that in this economic climate an 8 month EF was preferred… somewhat surprisingly to me, Dave disagreed. He said that anyone can do whatever they want, of course, but that his recommendation of up to six months of expenses in your EF was not based on merely on his ideas and opinions, but on the experience of the millions of people his company has counseled. He reiterated that he doesn’t think more than six months is necessary.

    I remain ambivalent, but his point that there is some empirical evidence (the experience of his clients) behind his stance was interesting.

    @ Stephanie (#26), the whole “gender is a social construct” position is so 1990’s. :-) More seriously, note that I did not say that anything was *purely* biological… I argue that it’s *both* nature *and* nuture, not *exclusively* nuture as you seem to hold (please correct me if I’m wrong).

    Speaking more generally (i.e. not with you particularly in mind, Stephanie), it’s common to find people today continuing to rebel against each and every constraint they find — even our own nature — but I doubt that that will lead to the freedom we hope it will.

  42. Johanna says:

    I don’t doubt that Dave Ramsey sincerely loves and respects his wife. I also don’t doubt that there are psychological differences, on average, between men and women, and that maybe some of those differences are innate. And I know (at least I hope) that Dave doesn’t think that women really have actual, literal, physical security glands. Those aren’t the reasons why I have a problem with his explanation. These are:

    First of all, describing the difference between men and women in terms of a “security gland” – even a figurative one – implies that women are too weird and different to understand their psychology for real.

    Second, I think it’s very harmful to automatically assume that any perceived difference between women and men MUST be innate. (And say what you will about the current research – I really doubt that Dave Ramsey’s read any of it, so I do think that he is assuming.) When you convince yourself that the difference is innate, you give yourself an excuse not to see the ways in which the difference might be cultural, and therefore an excuse not to do anything about the subtle, but important, ways in which women and men are treated differently in our society.

    And I can think of a couple of reasons why cultural standards might contribute to women’s greater average desire to have emergency savings. Here’s one: Women and girls in our society are taught to be passive and let things happen to them, whereas men and boys are taught to take action on their own behalf. (This begins very early – for example, pictures of baby girls are more likely to show them sleeping, whereas pictures of baby boys are more likely to show them playing or doing something else active.) Also, women tend to get less constructive feedback than men about their performance in school, on the job, and so forth. As a result, women are more likely to see things – like job losses – as being mostly out of their (our) control. We feel more vulnerable to risk than men do, so we’re more likely to take measures to protect ourselves.

  43. KS says:

    Maybe many women, who are still paid less for the same work than their male counterparts, are more likely to be financially hurt in case of divorce, etc, see more money as security?

    As for the EF, here’s where I have always had a problem with Ramsey. The $1000 emergency fund may simply not be enough till you pay off all non mortgage debt if you have big student loans or other loans (I speak from experience here).

    Student loans can be deferred in case of job loss or illness, so I am not sure it’s the best approach to getting rid of those before getting a large EF. I’d rather have a bigger cushion, then whack away at those bills. We took the intermediate road – built a smallish emergency fund, paid off all non mortgage and student loan debt, and are now beefing up the emergency fund to 3-5 months (we live on one income and it’s quite secure, which helps). THEN we’ll tackle the student loans.

    So I think the nature of those outstanding debts, your own life circumstances, etc should be factored in here.

  44. Another aspect of having a large emergency fund that wasn’t elaborated on in this post is that you can raise your insurance deductibles and save money on the premiums. Some forms of insurance, like short-term disability, become pointless to pay for with a fully funded emergency fund as well.

    I actually plan on getting a HSA with high deductible health insurance when I reach my six months of personal expenses. That way I can save money for minor health issues and still have insurance that covers larger things. This is assuming that Congress doesn’t take away that option in the future.

    I think Trent confused the emergency fund with another kind of savings account Dave talked about. When your income is irregular each month, you have budget based on priorities and you set up what Dave calls a “Hill and Valley” account where you have money set aside on good months to cover months where you can’t make all your bills. He doesn’t talk about it in the book, but he has made the distinction on his radio show. In any case, he has stated that this is different from an emergency fund, although I can see both of them being one and the same just as easily.

  45. Kat says:

    It’s absolutely scientifically sound to say that male animals in a species behave differently than females (even when picking out a new puppy I was told the differences, which neutering supposedly limits, so it is biology). So why is it so awful to say the same about homo sapiens? Women have different hormones in them than men, and these hormones influence behavior. Influence, not dictate, so women don’t HAVE to be nurturers, men don’t HAVE to be hunters, we are also influenced by society and own own ability to choose. But that there are differences between men and women is a biological fact. Women are uppity whenever it is pointed out because we are used to being degraded for those differences, but I don’t think that was Ramsey’s intention.

    Calling it a security gland seems flip of Ramsey, if he was going to make these statements he should have had some statistics to back it up, but this isn’t the first time he’s made claims that weren’t well proven.

  46. Swiftfoxmark2 (34)–You raise an oustanding point here. The difference in health insurance premiums between a plan with $1000 deductible and a $5000 one can be substantial–a couple hundred dollars a month for a family plan. If you can use the EM fund to cover the deductible (since medical in many cases would be an emergency) you can apply the money saved on premiums either to pay down debts or to fatten the EM. That’s a real win-win.

    Of course if you transfer the EM to an HSA account you’d be restricing the money to medical emergencies only. Technically then not a true EM since use of funds will be restricted.

    However if as Trent mentions your EM is $20,000, it won’t hurt to move $5000 of it to the HSA. Solid tax break there too, plus unused portion of HSA can accumulate like an IRA.

  47. Christine T. says:

    I kind of categorized Dave Ramsey’s wording as reflecting his conservative political beliefs which in general, seem to be associated with more defined gender roles. I did not find it particularly offensive. I did however find Jesse’s #15 comment offensive. Saying you are just kidding (mostly) does not neutralize from the sexist remark. I don’t think that comment should have been approved. Trent it takes away from the safe space you have created for discussion.

  48. Kevin says:

    I also disagree that CDs are a bad place to put your emergency fund into. The reason is that alot of people struggle with making sure they don’t go on a big splurge and use part of their emergency fund. CDs are a lot less liquid than a savings account and that can be a good thing.

    However, if you really need to pull money out of a CD but don’t want to get hit with massive penalties, look around. For example, at my credit union I get CD rates close to those of Ally. You can pull out the interest money without penalty. If that isn’t enough money, the terms of the CD allow early withdrawal of the CD but the only penalty is up to 1/2 of the interest earned on the CD, the principal will NEVER be touched.

    I have looked around and there are several credit unions with similar terms. Check those out. Unlike Ramsey I don’t think the emergency fund should be too liquid like a savings account (too easy to spend). It seems better to have it less liquid BUT available. And CDs are the best for that if you can find good ones with reasonable terms.

  49. Mark says:

    “Money market accounts might have great returns sometimes, but they’re not as safe as FDIC-insured savings account.”

    Money market accounts *are* FDIC insured. Money market funds are not.

  50. reulte says:

    A couple more reasons why cultural standards might contribute to women’s greater average desire to have emergency savings:

    Statistically (you can google it) …
    – women earn less (it still hasn’t topped 80 cents for every dollar a man makes)
    – women more often take the time off to have and to raise children (less income, less credits for social security)
    – when men and women get divorced (even with no children) the man’s living standard goes up while the woman’s goes down
    – women live longer (so savings have to last longer).

    Men and women ARE ‘wired’ differently and they ARE nurtured differently.

    For me, Dave’s saving grace here was the word “typical”. This meant it was a generalization, applicable to his experience, to his audience, to his cultural environment. Anyway, I enjoyed this particular chapter of TTM. I agree that 6 months living expenses is about right. After that, I believe a person should start saving for dreams because having money in the bank earmarked for a specific purpose makes it more real, more attainable.

  51. NYC reader says:

    Two points…

    First, Dave Ramsey was flip and sexist when he called the behavior of some women to emphasize security as a “security gland.”

    I’m sure the behavior variance he is describing is due to a combination of culture, learned behavior, nature, and the real-life experiences of women who earn, on average, 78% of what men earn (in the US), and who often take time out of the paid workforce to raise children, which decreases both their current earnings and future retirement benefits.

    We all know that Ramsey’s take on life is from a more conservative and Christian perspective, so we shouldn’t be surprised that Ramsey is not exactly egalitarian and non-sexist. But that’s no excuse for Trent to post Ramsey’s remarks without some thoughtful insight and perspective on the sexist nature of the remarks. I know women who are not “wired for security” and men who are extremely cautious.

    Generalizations and stereotypes detract from the message, which is that *every one of us* needs a substantial emergency fund maintained in liquid assets.

    Now for my second point. Trent is confusing money market mutual funds (which are NOT insured by the FDIC) with money market savings accounts (which ARE insured by the FDIC). The bank money market account is a form of savings account, with the ability to write checks (up to six per month).

    I have most of my emergency fund in a bank money market account, some in a credit union share account, and a smaller portion in laddered bank CDs (certificates of deposit). It all adds up to about one year of living expenses. I used to keep six to eight months of living expenses in my EF, but with my current job insecurity I’ve added to it in the past year.

    Suze Orman is absolutely correct on the eight month minimum for an emergency fund. In this current economic climate, if more than one emergency hits you (job loss PLUS medical emergency, for example), you can’t count on being able to get a job, a well-paying job, or a job which includes health insurance in short order.

  52. Rosa says:

    @Julia #30 – your emergency fund is measured in dollars, but you should count your non-financial assets too. When I was 20 I didn’t need much of an emergency fund because I had no dependents, no health issues, no real attachment to my job, no long-term financial obligations, and a lot of options for places I could go stay & be fed while I figured out what I was doing.

  53. Pizpo says:

    # 38. your point that in divorce the former husband’s standard of living goes up and the former wife’s goes down is probably itself a generalization but very interesting.

    My wife’s desire for security is much smaller than my own even though I am the bread winner and she is the stay at home mom.

  54. Perry says:

    Emergency funds are great. I recently had to have over $1000 in repair work done on my truck. Being able to pay it out of the EF instead of using a credit card was a huge relief. On the other hand an EF is not going to cover everything. My neighbors just found out that the foundation of their house is craced and it will cost $30,000 to fix. Sadly, I’m worried about the foundation to my house. I need to have it inspected soon.

  55. NYC reader says:

    I need to clarify something I wrote in #39 above.

    I didn’t intend to come off sounding critical of Trent. He is human, after all.

    Trent has proven himself to be a very astute and sensitive person who looks at things with a set of broad and critical perspectives, and who challenges traditional dogma from all sides.

    My point in commenting that Trent should have written something about Ramsey’s sexist generalizations was simply my observation that Trent is usually skeptical of generalizations and my hope/wish that he would have extended that skepticism to the sexist tripe that Ramsey was presenting as fact, even if it didn’t initially strike him as sexist.

    I really hoped that Trent would have identified the sexist nonsense as such, but based on his track record of learning and growing from our comments, I’m sure he’s got his radar tuned into it now.

  56. getagrip says:

    I think a hard part for many people (including myself) is that three to six months is a lot of money to be sitting there, doing little, in a bank account. As mentioned, we’re typically talking tens of thousands of dollars.

    I like one response I saw to this from Dave Ramsey. Don’t think of the EF as an investment to make you money. Think of it as insurance to protect your actual investments from losing money by being forced to tap into them.

    That said I also agree with Trent in that I’d prefer to have rolling CDs so at least you’re earning something above the typical bank account.

  57. Mary says:

    You are all overlooking one thing:
    The reason women are “generally” happier with a larger EF, in my opinion, is that “generally” men are bigger risk takers.
    It goes against their very grain to have money sitting in a “liquid account” earning very little interest, when they could put it in mutual funds, etc., earning far more.
    They talk about mathematics, etc. etc., not thinking that if their mathematical skills are so up-to-speed they wouldn’t be in such a financial state.
    Women that have the ability to see the big picture take the more secure route.
    Generalizations again…..but if one didn’t generalize at least a little, how could one write a book appealing to many?

  58. Debbie M says:

    I also disagree that emergency savings shouldn’t be in CDs. That supposedly “substantial penalty for early withdrawal” isn’t usually that big. At my credit union it’s three months of interest or all the interest so far, whichever is less. (For CDs over a year, make that six months of interest.) If CD interest is substantially higher than savings interest, it is quite likely, especially over several years time, that you will have more money using CDs than a savings account, even if you occasionally have to cash one out early. (And shockingly, you get a US income tax deduction on any of these penalties you pay–it gets subtracted off your income.)

    Note: if you’ve laddered your CDs and still need to cash one out, all else being equal choose the one with the lowest interest rate or the one where the penalty would be lowest, probably the one you just bought. If you cash out the one that’s going to come available next month, and then need more money next month, you’ll have to cash an additional one early.

    Nowadays, my online savings account pays almost the same as the CDs at my credit union (and at my online savings bank), so I don’t bother with the CDs.

    For a while, I kept $500 in my local bank and only enough other money until I had $700 and then would buy stocks. So if I had an ill-timed emergency costing more than $500, I might have to cash out stocks, perhaps right after they plummeted. I liked that idea, too. But then I have no dependents, a government job with very little chance of layoff plus a fixed interest mortgage plus I don’t need a car to get to work or to a grocery store, etc.

    (Now I have a bunch of renovation stuff I might be about to do soon, so I have loads of cash again. By “cash” I mean it’s in my online savings account except for one last CD with a good rate and $500 in my local credit union savings account which can be transferred to my checking account instantly if the internet is up.)

    As far as how big to make your emergency fund, although I’m obviously the poster child for the three-month version, that’s not how I do things. I actually split mine up into a new-car fund, car-repair fund, health-repair fund, and house-repair fund. I put a certain amount of money each month into these and don’t stop doing so just because it reaches some threshold.

    I suppose I have an unemployment fund, too. I have some vacation time saved up that would be cashed out if I were laid off or quit (a little over two months of full pay, so more like three months of expenses). And I could take back contributions to my Roth IRA.

    I’m realizing Ramsey might not consider any of these to be real emergencies (obviously my car will break down occasionally and I will get sick sometimes) except maybe the unemployment. But if I had some other sort of emergency, I would raid from these funds and also my vacation fund (funerals don’t make the best vacations, but hey).

    Finally, yes the sexism was offensive. But just because someone’s an idiot in one area doesn’t mean they have nothing useful to say. Aren’t we all idiots in some area? Too bad have this thread has been hijacked by this unrelated topic.

  59. Chelsea says:

    Hi Trent,

    I think I fall into the 6-month savings category because I am single. THAT is a scary prospect – but I think it’s the reality check we all need. My goal is to pay down any debt I have first, then move on to the ER fund.

    Jim from Bargaineering did a guest post on the Quicken Blog for us a while back on ER savings funds too. Breaks down a few simple tips for getting started. Thought folks might like to take a look if they just need a starting point for scraping up those extra funds each pay period or month: http://blog.quicken.intuit.com/2009/05/12/do-you-have-an-emergency-fund/

    Chelsea, Quicken

  60. Dr C says:

    I agree that you can use your monthly budget to get a sense of what you would need to either “survive” or get by. However, the last time I was unemployed (for 10 months), I didn’t take into consideration health issues. The cost of something like COBRA will usually be more than what you are shelling out for health benefits with an employer. If you are unfortunate enough to fall ill while unemployed (or have chronic health problems while employed), you need to factor this into the equation. Or (conversely) take your chances. I ultimately gave up COBRA because it was killing me to pay it compared to the generic medication I was on at the time.

  61. Bonnie says:

    #8 Stephanie should read the book “His Brain, Her Brain” by Walt & Barb Larimore. Due to the testosterone wash that occurs during development of male fetuses, male & female brains are NOT the same. And, the resulting difference in behavior of men & women often has to do with natural strengths & weaknesses of male & female brains. For example, the corpus callosum, which connects the left & right hemispheres of the brain, is much larger in females. This results in women being better at multi-tasking and men being better at focusing on one task at a time (without getting distracted). Very interesting and even entertaining book. Highly recommended.

  62. Lenore says:

    Maybe women have more foresight because we come from a long line of tribal witches. Maybe men have mysterious glands too, although not necessarily concerned with money. Maybe blonds have more fun! Stereotypes are so pointless, baseless and limiting. Any non-fiction book that cites them is best ignored.

    Wanna hear my non-fundamentalist opinion on the emergency fund issue? 1) If you can’t see eye to eye with the one you love on finances, do NOT get married. Live in sin. Keep your house and vehicle in your own name, and set up trust funds for any offspring. 2) If you’re already married and not in debt over $1000, stay married and squirrel away cash on your own. It costs too much to get a divorce and break up a household. 3) If you’re gay, do not buy books by Dave Ramsey. He isn’t ready to acknowledge, let alone address, the financial needs of non-heterosexual households. He thinks you’re an abomination, but I think he is. And I know I’m right because the Goddess told me so.

  63. Mark says:

    Is it a “stereotype” that men, on average, are larger than women? Or that they are much stronger, on average, than women, particularly with respect to upper body strength? Or that men are, on average, faster than women? Or that men can, on average, jump higher than women?

    There are evolutionary reasons why men and women have different skeletomuscular systems. I don’t think it is particularly radical to admit that their brains aren’t exactly the same, either, (as has been shown by numerous studies) and that this results in differences that can’t be explained by cultural or societal conditioning.

    Different brains don’t make men or women better or worse than each other any more than different bodies do. It just makes them different. I don’t understand why that seems so scary to some people.

  64. Kris says:

    Nothing like taking a comment out of the context in which it was written and getting all the feminist fired up about it.

    I mean, I could do that with a statement of yours where in this very post you say

    “Guys are better at focusing in, at breaking down barriers.”

    See, taken out of the context in which it was written I am sure many people could read a lot into that statement. If I posted that statement on another website and wrote that “Trent at Thesimpledollar.com says…” How many people would respond that you are sexist, narrow minded, etc.?

  65. Marta: “I have little patience for such gender generalisations. They are unnecessary — why not say simply that some *people* thrive on security, while other *people* are more willing to take risks?”

    What Marta said. Some wives are more concerned about financial security than their spouses, some are less. Whether or not it’s more likely to be one way or the other (and for whatever reason) is simply a distraction in this case.

    So why not, well, simplify, and cast the issue in a way that’s useful both for couples who fit Ramsey’s model for couples that don’t? There are certainly plenty in both categories, from my own personal experience.

  66. One word got dropped out as things went out: I meant to say “cast the issue in a way that’s useful both for couples who fit Ramsey’s model and for couples that don’t”.

    To say that you and your spouse are a certain way can be a useful example. To assume that *my* spouse and I must be the same way (at least if there isn’t something odd about us) is, to say the least, presumptuous.

  67. dude says:

    “I’m sure the behavior variance he is describing is due to a combination of culture, learned behavior, nature, and the real-life experiences of women who earn, on average, 78% of what men earn (in the US)”

    Perhaps some of them earn less because they do less work do less work and/or work less hours and/or work a less stressful position. HR and Marketing are usually out the door by 5 at places that I’ve worked. The Engineering and Computer Science folks typically work long (12 hour), stressful days.

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