The $20 emergency fund

The following is a repost of an entry first posted on my  other (and original) blog, The Empty Kitchen. I thought it was relevant here as well:

All financial experts agree on one point: an emergency fund is a must.  It’s crucial to have cash on hand in the event of an emergency such as an unplanned doctor visit, a flat tire, a service call on an appliance (if you own your home) or you simply need food or milk. However, the recommendations for the amount of money in the emergency fund vary from $500 to $1000 to 3-6 months of expenses. For people just starting out, living on a strict budget, or living paycheck to paycheck, that amount of money seems impossible to achieve. So for those of us in that situation, I propose another amount for an emergency fund: $20.

$20 does not seem like a large amount of money. I contend that it is. $20 can cover a co-pay for a doctor visit or an over the counter medication. $20 can buy several days worth of food. $20 can put gas in your car to get to work or buy a bus pass. $20 can buy many loads of laundry at a laundromat, including some detergent and dryer sheets. It can even buy you a cooler and ice if your refrigerator breaks.

But what if several of these things happen at once? After all, Murphy likes to not only knock at the door, he likes to come in, prop his feet up and have a snack. My best suggestion for that scenario is this: prioritize. Figure out what is the most important and spend the money on that. If you can take that $20 and spread it out over a few, then do that, too. For instance, if you suddenly find yourself with a vicious cold, a broken fridge and no clean clothes or undies, $20 can cover one load of wash (use a drying rack to save money on the dryer if you can), some OTC cold medicine and tissues and a few bags of ice.

So how do you start the $20 emergency fund? There are a few ways. One way would be to, on your next payday, rearrange your budget to allow for $20 to come out (if you have to, take $20 out of your grocery budget and eat from your pantry for a few days or find some free entertainment and take $20 from your entertainment budget). Another way would be to cash in your change jar, if you have one, and use that money to start your emergency fund (caution: do not use the machines in supermarkets. They take out an 8.5% fee. Try to find a bank instead). A third way would be to save the $20 over a few paychecks. For instance, take $5 or $10 from each of your next few paychecks and stash it away until you get to $20. And yet another way: see if you can find a babysitting, dog walking or some other odd-job type gig, even if it’s just for one day, and use whatever you earn from that to start your $20 emergency fund.

Once you have your $20, stash it somewhere, whether it’s in an envelope marked “Break only in case of emergency” or a compartment in your wallet or your jewelry box. Just make sure that you keep it somewhere you remember! It’s also extremely important that you do not use this $20 for something frivolous with the promise to yourself that you’ll pay it back. The one thing that I’ve found is when you make a promise like that, it’s hard to keep it. And I’ve also learned that when you need the money the most is exactly when you don’t have it.

It is also extremely important that if you have to use your emergency fund for something necessary, or any portion of it, that you pay it back as soon as possible. The $20 is there to act as peace of mind in case Murphy makes himself as home. There is nothing more unsettling as knowing you’re not armed for his visit.
I also suggest that, when possible, keep $20 as a house/personal emergency fund and a separate $20 for a transportation emergency fund. If it’s not possible at first, don’t worry. Just start with one general $20 fund and work your way up. This also will serve as the baseline for building a bigger emergency fund later on.

This $20 is not intended to be your entire emergency fund. I wholeheartedly agree with Dave Ramsey’s suggestion for $1000 baby emergency fund and eventually 3-6 months of living expenses. My family is working on our 3-6 months right now and it is hard and it took us a while to get to the $1000. But the $20 is a good place to start. It gives you a small cash cushion to handle many minor emergencies. And that peace of mind is priceless.

(Full disclosure: This idea is not entirely mine. Special thanks to Wendy K. for suggesting this!)