As mentioned in one of my last posts, this year I was hit with a major tax bill of $8,335 due to something I reported in 2014 that the IRS didn’t like… kill me. I had a melt down for about three straight days after I got that letter. After speaking with a lawyer I decided it wasn’t worth it to go to tax court because his fees would about cancel out anything I would get the IRS to shave off. Anyway, the point of that story is that during my three day meltdown, I called my parents whining and freaking out all over the place and was met with a string of lectures about how important it is to have savings. I am so sick of hearing “What?? You make almost six figures how do you not have $10k in a savings account!?” If only it was that simple …
I completely understand the need for some cash on hand in case of emergencies. I’ve definitely run into a surprise car issue that needs to be fixed at inspection time or those fun times when you realize you mailed two payments at the same time and don’t have enough to cover both in your account. Dave Ramsey (and many other online financial gurus) suggests keeping a baby emergency fund of $1,000 while you pay off debt. At first I thought that was crazy small and didn’t understand why it wasn’t closer to $5K or $10K. Then I started thinking of all the things that could actually go wrong, how much they would cost to fix, and how many would actually need to be paid ASAP. The list I came up with was, not that many.
Take for example my tax issue. Yes, it’s a huge pain in my ass, but I don’t need to pay it all at once. I can make payments and add it to my debt snowball. Even most medical debt these days allows you to make small payments until the debt is paid off. My point is not that you should never build up a sizable emergency fund. My point is that while you are in the process of paying off debt, you can probably get by on a smaller amount than you think. I just think about that $600+ in student loan interest I pay every month and how having a large wad of cash in savings just sitting there wouldn’t make sense to me.
Again, personal finance is all about what helps you sleep better at night so if you want $10K in your savings while paying off debt, you go for it! Live your truth! But I’ll be sticking with my $1,000 savings for the time being. Also, the news splash that came out last year about the majority of Americans not having enough to cover a $400 emergency makes me feel like I’m doing alright. I’m paying down debt, planning for my future, and eating the hell out of some beans and rice.