Financial personality Caleb Hammer recently shared a gripe he has with "The Total Money Makeover" author Dave Ramsey's advice on emergency funds. He believes it's no longer a sufficient amount of money to store away.
"It's not enough money to cover anything in this world," Hammer said in a YouTube clip.
He went on to discuss why a $1,000 emergency fund doesn't work and what you can do to improve your finances.
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Adjusting The $1,000 Emergency Fund For Inflation
Having a $1,000 emergency fund first made sense when Ramsey promoted the concept in "The Total Money Makeover," which he published in 2003. That book covers Ramsey's seven baby steps to financial wealth, and the first baby step is to have a $1,000 emergency fund.
That amount of money in January 2003 translates to $1,788 in today's dollars, according to the U.S. Bureau of Labor Statistics' CPI Inflation Calculator. Aiming for the inflation-adjusted amount instead of the $1,000 Ramsey prescribes in his book will give you a better financial cushion.
It's a step up from a $1,000 emergency fund, but big emergencies can still wipe out this fund.
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Create An Emergency Fund Based On Your Financial Situation
Although considering inflation from the first time Ramsey mentioned having a $1,000 emergency fund is helpful, Hammer is a fan of letting your personal finances dictate how much you should save instead of relying on an arbitrary number.
"One-month emergency fund or cover your highest deductible?" Hammer said in the clip.
Hammer then suggests creating a budget and monitoring your expenses so you know how much you spend each month. You can also distinguish expenses based on whether they are truly emergencies or discretionary.
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Debt Snowball Vs. Debt Avalanche
Hammer also touched on the debt snowball and debt avalanche, two popular ways to pay off debt. The debt snowball focuses on tackling small debts first so you build progress, while the debt avalanche prioritizes debt based on interest rates. Hammer was doing a financial audit and shared why he preferred the debt snowball method in this scenario.
"I think you're going to be more of a snowball person," he said in the clip. "Sto putting little bits of extra toward the debts. [Debt avalanche] not a method that works for [everyone] because you're just going to [have] the feeling of no progress."
Getting out of small debt and closing credit cards if you have too many of them can build momentum. Debt snowball and debt avalanche are both great methods, but it's important to establish a sufficient emergency fund that covers at least one of your key expenses.
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