This month we experienced 5 feet of water in our basement. It put our entire HVAC system totally out of commission. In 90-degree weather with a 77-year-old living with us, we stayed in a hotel while we waited for the cleanup and new system to be installed.
It made us think a lot about “emergency funds.” The replacement cost more than Dave Ramsey’s famous starter emergency fund ... a whole lot more. Even the hotel stays would have come close to blowing through the starter emergency fund. Thankfully, we questioned the typical advice years ago ...
We got into a conversation about emergency funds in a recent group coaching call. A participant brought up that number everyone who’s been through Financial Peace University can recite in their sleep. He wanted to know if it still made sense.
I quickly jumped on a quick fact search. Financial Peace University started in 1994. That’s 32 years ago. Over to an inflation calculator, and $1,000 in 1994 is equivalent to $2,253.39 today. I asked the group: how responsible is that, really? Would $2,253 have covered our HVAC? Not close.
Another client jumped in with the number I think about even more than Ramsey’s. There’s a widely known stat (originally from this report) that a huge share of Americans can’t cover a $400 emergency. If you’ve ever had a true emergency, you know it’s never actually $400. It’s the bill that starts at $400 and ends somewhere else entirely, same as our HVAC did.
Which got us thinking ... if the $1,000 emergency fund is such a commonly held belief, why do so many struggle to cover even $400 ... let alone something much bigger?
And before you blame inflation, keep reading.
The zombie idea is the number itself: a single figure, introduced 30 years ago as a starter goal, still gets repeated today as if it were a finish line. Ramsey never claimed $1,000 was a full emergency fund ... his own framework moves you to 3 to 6 months of expenses in a later step. But the $1,000 is the one that stuck in the culture. It’s the one people quote at parties. It never got adjusted, and somewhere along the way, a lot of people stopped hearing “starter” and just heard “enough.” Then, the $1,000 gets raided over and over again and never stays anywhere close, especially with the debt that piles up when the true emergencies are more than $1,000.
Even the 3-to-6-month standard has the same problem underneath it: it was built with one kind of household in mind, and it gets handed out to everyone regardless of what their life actually looks like. Two people in that same coaching call, both business owners, said versions of the same thing without prompting each other. One put it plainly: if something goes south with the business, you need something in storage for the business and something in storage for you. She’s aiming for closer to a year. The other, newer to ownership, hasn’t settled on a business number yet, but knew instantly that whatever a W-2 employee needs, he needs more. Nobody told them to say that. They arrived at it separately, from the same math: a business owner is covering two sets of risk with one household’s income, and the textbook number was never built to hold both.
For my family, the HVAC was one test. Brandon’s car was another. It got totaled in the same storm, and the insurance payout didn’t cover a replacement. To recover, we aren’t dipping into an “emergency fund” account, because we don’t have one. [gasp!] If you looked at our YNAB categories, there’s no line item called “emergency fund.” What we have instead is a 10/10/10 split: after our tithe, 10% goes to short-term savings, 10% to medium-term, and 10% to long-term. When something happens, we pull the gap from whichever bucket fits, usually medium-term, and keep building it back up.
This isn’t something we invented. It comes from Tim Austin, who learned it from people in their 70s and 80s back in the early 1980s ... he calls it common practice for the generation that lived through the Depression and came out the other side with real financial instincts. It’s written up in Pamela Yellen’s book The Bank On Yourself Revolution (pages 129-130 to be precise). Long before “emergency fund” was a category on anyone’s budgeting app, this was just how people who’d been through hard times built resilience: not one pile of money you’re afraid to touch, but several categories doing different jobs, all available if the basement floods again.
Where we keep this money matters too. It needs to stay accessible without losing ground to inflation, so we use a specifically designed whole life insurance policy instead of a savings account.
A friend of mine does too, and she’s very specific about how she treats her funds. She earmarks about 10% of her policy’s cash value as her business’s emergency fund ... right now it covers roughly 2 months of expenses, and she’s building it further. When her business needed to pay off a variable-rate line of credit that was bouncing between 9-12% interest, she and her husband loaned the business the payoff amount straight from that cash value, with a real promissory note and an amortization table. The business pays them back monthly, with interest, and they use that payment to repay the loan against the policy. Same dollar, doing more than one job.
Whatever your storage place for your savings, a number that was never meant to be permanent got treated like gospel (pun intended) for 30+ years. That’s the actual problem, not the dollar amount.
You might make more and still spend every dollar you earn, wondering how you’ll ever build a bigger pool of accessible cash. If you want a bigger emergency fund, or a different way of thinking about one, my favorite question is this: “What would have to be true first?” That could look like an income increase, a debt paid off, a bucket renamed into something you’re actually excited to fill. Solve what needs to be true first, set things up to build the reserves, and then the number moves on its own.
Our HVAC and car didn’t check what we’d budgeted for. Neither will yours.
What number were you taught to treat as “enough,” and have you ever actually checked whether it still is?
