Baby Step Three – 3-6 Month Emergency Fund
Welcome back to my continuing break down of Dave Ramsey’s Baby Steps. These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.
I personally find these steps simple and easy to follow but also elegant and effective.
In previous installments I covered:
Baby Step 1 – $1000 Emergency Fund
Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball
Today, we’ll examine Baby Step Three.
Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses
Once the debt is conquered it’s easy to plant the flag and count the victory. But financial success is more journey than destination. It is tempting to immediately want to exercise some of the pent up spending demand. Let’s be honest, even though new habits are formed during the early stages, there is still a pull towards a nice dinner out and an upgraded TV and new wardrobe and… hey, someone needs a cold shower.
Knocking out the non-mortgage debt is a nice milestone and should be celebrated. But it is also a spot on a larger continuum. Enjoy yourself a surf and turf and then move on.
And that’s where Step Three comes into play. Properly executed, Step Three is where your life really starts to change.
Using the same aggression you’ve cultivated to knock out your debt – and the hefty snowball you’ve established, your next goal is to assemble a full grown Emergency Fund of 3-6 months of your monthly living expenses.
Note, this is not 3-6 months of your income but your expenses. Since we’re now living below our means, this target is not a far reach and depending upon your household situation – single or multiple incomes, children living at home, general health factors – you can elect to amass 3 or 4 months rather than 5 or 6.
I personally plan to err on the 6 month side of the discussion and perhaps even larger. The comfort afforded by knowing that you could support your household for months on end even if no additional dollars were flowing is a unique feeling.
Trust me the security truly is something else. Having received a buyout settlement following a job loss in early 2009, I know how safe I felt and how free I was to address my employment situation on my terms. While I hope to avoid unemployment in the coming years, I do want to recapture the security fostered by a plump cash reserve.
It is at Baby Step Three where the term Financial Freedom fully evolves from an evasive concept to a way of life. This is when you know you’re starting to win.
Stay tuned for upcoming installments in this series:
Baby Step 4 – 15% Earnings Invested for Retirement
Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)
Baby Step 6 – Pay-Off the House
Baby Step 7 – Save, Invest, and Get Rich
Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well. While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.
Read, Enjoy, Comment, Subscribe!
Bible Money Matters – step 3
Enemy of Debt – step 3
Being Frugal – step 3
Dave Ramsey – step 3
Taking Action to Meet our Savings Goals