In one of my first posts on this site I gave a brief overview of Dave Ramsey's 7 Baby Steps, and gave links to a few other sites who talked about them.
Today I want to begin my series on the 7 Baby Steps by talking about Baby Step 1, saving up $1000 for a baby emergency fund.
Before You Start The 7 Baby Steps
The 7 Baby Steps can be a lifechanging paradigm shift for many people, but like any program to help you get out of debt and prosper, you need to be ready to change your lifestyle, and make some drastic changes to the way you're living. You have to be ready to commit to no more consumer debt, and know that people are going to think you're off your rocker. You're going to stand out from the crowd and be different – but that's OK! To prosper and get ahead, you have to be different! As Ramsey says:
You have to live like no one else, so that later on you can live like no one else!
You'll need to make some short term sacrifices so that later on you can prosper and give more and live more!
Dave Ramsey’s 7 Baby Steps
So here's a quick look at the 7 baby steps. Today we'll cover step 1.
- Step 1 – $1,000 to start an Emergency Fund
- Step 2 – Pay off all debt using the Debt Snowball
- Step 3 – 3 to 6 months of expenses in savings
- Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
- Step 5 – College funding for children
- Step 6 – Pay off home early
- Step 7 – Build wealth and give!
Baby Step 1: $1,000 To Start An Emergency Fund
The first thing you need to do when you're on the Baby Steps plan is make sure your necessities and minimum payments on your bills are taken care of. Then, you proceed to baby step 1 where you save a $1000 emergency fund. What’s an emergency fund? An emergency fund is your backup plan for when things go wrong. What kinds of things could go wrong? Here's just a start:
- Auto needs repair
- Unplanned emergency room visits
- Lost job
- Family funeral or wedding to attend
- An occasional bill you forgot about (like your property taxes for example)
Unplanned Expenses Happen To Everyone
There's an adage, known as Murphy's Law, that says, “Anything that can go wrong, will go wrong“. Dave Ramsey likes to say that an emergency fund will help keep those “little murphies” at bay and keep you from having a small emergency turn into a bigger one.
The problem is that we all have major negative events in our lives, but not very many of us actually plan for those occurrences.
Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.
78% of us will have a major negative event. Those numbers alone should startle you into realizing your need for an emergency fund. And those numbers are only for the MAJOR events – we all have a ton of smaller expenses that pop up every year.
Is A $1,000 Emergency Fund Enough?
A lot of people see this first step in the baby steps plan and immediately bring up the point that $1000 just doesn't seem like enough money to save up for your baby emergency fund. Ramsey suggests that for most people it IS enough to cover most emergencies. All of them? Maybe not, but that's what Baby Step 3 is for, to save up a larger emergency fund to cover just about any major occurrence that could happen.
My wife and I ended up saving $2000 for our baby emergency fund – so we did increase the amount just a bit. I think the key is to look at your situation, see what is reasonable to save up fast – in 1-2 months, and go with that. Depending upon your situation a little less than $1000 might even work.
Where To Keep Your Emergency Fund?
When you save for an emergency fund a question often comes up, “Where should I keep my money?”. People want to know if they should keep the money in a CD, a online savings account or some other type of account. Ramsey suggests that you keep this money accessible, preferably in a bank with a local branch nearby, where you can get to the money quickly in an emergency.
Personally my wife and I keep our money at our l0cal bank in a money market savings account. It doesn't earn much interest, but that's not really the point of the baby emergency fund. The point is to insure against those unplanned events. When you save up your larger emergency fund later on, you'll have more options on where you want to save that money.
Where do you not want to keep your $1000 emergency fund? Keep them out of CDs, stocks, real estate, or other investments. Keep it somewhere you can get to it in a short period of time.
Do Your First Budget
After you have decided to save up your $1000 emergency fund, the next step you'll want to take is to do your first “quickie budget” as Dave Ramsey calls it. The reason? If you're going to save the money and get out of debt, you have to know where your money is going, where you can cut, and where the money will come from to pay off your debts. Download Dave Ramsey's “quickie budget” .pdf here:
Beyond doing a quickie budget, it would be a good idea to do a more in depth budget if you can using a free budget software like the one from mint.com.
A budget is telling your money where to go, instead of wondering where it went.
After you pay the minimums on all your debts, save as much money as you can towards your $1000 emergency fund. If you need to sell some things on Craigslist, get a part time job, or sell your sacred baseball card collection, just do it! Do what you have to and get that $1000 saved!
Next Time: Baby Step 2 – Pay Off All Debt Using The Debt Snowball
After saving up your $1000 emergency fund, the next baby step is to pay off all your debts using the debt snowball. Stay tuned for that next time!
Have you used Dave Ramsey's baby steps? Were you able to get your $1000 saved up quickly when you started? What did you have to do to get it done? Tell us your thoughts on the Baby Steps in the comments.