After running across a debate on Instagram, it became very clear that while many people follow Dave Ramsey–they do not all interpret his Baby Steps the same way. Some even choose to disregard them.
In this particular case, a post I found on Instagram discussed whether the terms “financial cushion” and “emergency fund” are interchangeable. After reading more in depth, it really wasn’t about the terms, but more so about the true intentions behind Dave Ramsey’s Baby Steps 1 & 3. (You can find his 7 steps by searching Google)
One person believed that they are one of the same in which a small fund is meant to be a temporary starting point that should grow into 3-6 months worth of expenses after paying down debts. The other person believes that the two are different funds. An “emergency fund” of $1000 should be separate and used for small emergencies, while a “financial cushion” should be created, after paying down debts, to hold 3-6 months worth of expenses.
And guess what? Both are 100% correct! It’s about how YOU reach YOUR goals in YOUR most successful way. So, regardless of the way a person many handle their savings, we all have good reasons for saving money: to be prepared for emergencies, to make purchases while avoiding extra costs from attaining debts, to go on fun vacations, and more.
In this post, I want to bring attention to the four ways we stash our cash for emergencies. Being prepared for emergencies is our number one savings goals and these methods have truly enhanced our budget.
TO COVER 3-6 MONTHS OF EXPENSES
We all know or have heard that it’s important to set aside 3-6 months worth of your expenses– the ones that are absolutely necessary. These funds are meant to absorb the weight of a financial crisis such as the loss of a job, identity theft, or anything that prevents you from being able to take care of your necessities over a long period of time.
FUND RANGE: $5000-$10000+
"RAINY DAY SAVINGS"
TO COVER UNEXPECTED EXPENSES
Let’s say you’re driving to work one day and all of a sudden, your car breaks down. Definitely the type of unexpected expense most people would whip a credit card out to pay. It’s a one-time, sucky situation that doesn’t involve months of lost income. This fund is meant to cover expenses such as; that horrible car repair, your a/c unit needing repair, an unexpected medical bill, a paycheck shortage, etc. The goal is to prevent resorting to credit cards or usage of your emergency fund.
FUND RANGE: $1000-$5000
TO COVER MINOR MISHAPS OR MISCALCULATIONS
Little mistakes happen. You may have to cover minor miscalculations, payroll errors (they happen), unexpected bill increases, etc. For example, we just recently moved to Korea and because of exchange rates, EVERY pending transaction amount changes (mostly increases) once the purchase fully posts. A financial cushion would be the little bit of money that keeps your account from experiencing an overdraft. Even if you are 100% perfect at balancing, you may simply prefer just having a small amount of money in your spending accounts to keep from having a zero balance. Either way, that’s what you would call a financial cushion.
FUND RANGE: $50-$1000
FIND YOUR WAY TO GIVE EVERY PENNY A VALUABLE PURPOSE!
TO COVER RECURRING EXPENSES (ANNUALLY OR QUARTERLY)
The three stashes we mentioned above all had something in common– they are unexpected. However, a sinking fund is for the expected expenses such as; car tag renewals, insurance costs, holidays and special occasions, vacations, back to school, taxes and escrow, pest control, etc. Sinking funds are yearly or quarterly costs, divided up to fit a monthly budget. Some people even stash whatever they can to make the burden of that one-time costs a little lighter. The money is stashed until needed.
FUND RANGE: Varies
ALWAYS REMEMBER: POSTS ON SOCIAL MEDIA AND BLOGS ARE ALL OPINIONATED.
You’re going to find hundreds of different blog and social media posts that touch on similar topics. It’s important to take everyone’s opinion into consideration, but also to do your own research and create a system that works best for you.
If you feel these are interchangeable and that method helps you save, then that is absolutely amazing!