When my wife and I decided to get out of consumer and credit card debt eight years ago, the first thing we did was establish an emergency fund.
Our reasoning, based on the awesome book – The Total Money Makeover – was quite simple. We wanted to be able to deal with unforeseen expenses without adding to our credit card debt. We needed a cash-reserve.
When we started out, we had about $500 in our online savings account, so we decided on an even $1000 as a goal, for a mini-emergency fund. Over the time it took for us to get out of debt, we accessed (and rebuilt) our emergency fund (say that five times fast) on two different occasions. For us, $1000 was both a reasonable amount and a decent “cushion”.
We kept our emergency fund in our online savings account with ING Direct. A few years ago, ING Direct was purchased by Capital One, so our online savings is now with them, in our 360 Savings from Capital One 360 account. We love the convenience of connecting our online savings with our local checking account – and the Capital One 360 customer service is superb. Other options for where to keep an emergency fund include a money market account, an interest bearing checking account, or even an old school passbook savings account.
Once we focused, building up our initial emergency fund took a relatively short amount of time. We cut back on non-essential purchases and funneled our savings to our emergency fund. Nearly a decade later, I can still remember the pride we felt when we saw that $1000 in our savings account – and the psychological boost provided was awesome.