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Ask Dave

Cheat The Baby Emergency Fund?

Sue asks if the baby emergency fund should ever be more than $1,000. Dave explains his rules of thumb for the baby emergency fund.

QUESTION: Sue in Ontario from My Total Money Makeover asks if the baby emergency fund should ever be more than $1,000. Dave explains his rules of thumb for the baby emergency fund.

ANSWER: It should be less than $1,000 if your household income is less than $20,000 a year. I would limit it to $500 if that’s the case just to get started. Should it be more than $1,000? I think if you’ve got an emergency that’s pending and you’re in an unstable situation, you don’t start the Baby Steps. Instead, you pile up cash until you get past that.

I guess if you had $200,000 in student loan debt and you made $60,000 a year so it’s going to take you several years to dig out of that, then you don’t want to sit there for five years with only $1,000 in the bank. You might crank that up to $2,000 or $3,000. But I don’t think you kick it up to $30,000 while you’re sitting there in credit card debt. If you’ve got an extreme amount of debt and a low income so it’s going to literally be years, you might cheat that up a little bit, but not much. Just a little bit.

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