Dave Ramsey Baby Steps Step 1: $1000 Emergency Fund
Photo by: peretzpup
The M-Network is currently doing a series highlighting the Dave Ramsey Baby Steps for getting out of debt and getting your life on the right track financially. You can read about all of the steps over on Cash Money Life who kicked things off with a great introduction. As other members of the network add their articles, I’ll add them to the end of this article.
Why have an emergency fund
An emergency fund is established to help you deal with unexpected or unplanned events that can and will occur in your life. These are things like:
- Car repairs
- Home repairs
- Medical bills
- Unplanned travel expenses (i.e. illness or death of a far away relative)
Of course these are just a few examples. Without an emergency fund, these expenses typically land on a credit card in hopes that you can pay them off quickly, but in reality just add to the already large pile of debt many of us have. These types of expenses will happen to you and they are difficult to plan for. The emergency fund allows you to handle these unexpected events without debt and without stress.
Dave Ramsey quotes Money magazine as stating that “78 percent of us will have a major negative event in a given 10-year period of time.” 78% is a pretty high number, so chances are it will happen to you. An emergency fund will help you be prepared.
Avoiding Murphy while following the Dave Ramsey baby steps
Later steps in the Dave Ramsey baby steps will tell you to establish a larger more permanent emergency fund that is 3 to 6 months of your salary. In the early steps, we’re focused on getting out of debt. The $1000.00 “baby” emergency fund will help you weather the various little events that occur as you go through the process of becoming debt free. Ramsey likes to call them “murphies” or often refers to “Murphy moving in”, or “Murphy coming to visit”. The $1000.00 emergency fund will help you weather these little “murphies” without relying on new debt.
Helping you budget
The baby emergency fund is also going to be a key strategy to help you stay on budget. A budget is really a plan and as I often tell my software developers at my “real job”, “A plan is only valid until something changes“. Like a plan, a budget works great, until something unexpected occurs. That is what your emergency fund is for: handling the unexpected.
These unexpected items can be as simple as making a mistake in your budget and accidentally overspending, to intentional overspending due to the budget process being new, or completely unexpected expenses such as your hot water heater bursting (this actually happened to us).
$1000 for everyone?
This is where I vary a little with what Dave Ramsey recommends. Dave is pretty firm on the $1000.00 amount for the initial emergency fund. I look at it as a target or guideline. For example, for a single person that is renting in a large city with no car, a $1000.00 emergency fund might be overkill, and say $500.00 might be more applicable. For me, I own a home, 2 cars, am married and have 6 kids. $1,000.00 often isn’t enough so I tend to lean closer to $2, 000.00.
The bottom line is it really doesn’t matter if it’s $500.00, $1,000.00 or $2,000.00. Just save an amount around $1,000.00 that you feel comfortable will support those unplanned an unexpected expenses. The whole idea is to avoid using debt to ride those events, but to use your emergency cash instead.
I started with $1,000.00, and quickly realized I was coming far to close to using that whole amount a few times so I bumped it up to $2,000.00. Decide on an amount that makes you feel comfortable and don’t go overboard. Remember, we’re targeting getting out of debt first, we will save later. If the amount is too small, save more. If the amount is too big, save less. To be successful in this journey you will need to be flexible.
Where do I keep my emergency fund
While I have a particular preference, the real answer is wherever you feel comfortable. I don’t recommend you keep it in with your normal spending money as it becomes hard to track what is budget money vs. emergency money. I also don’t recommend you keep it as cash under your mattress. There is nothing worse than working hard to save up your baby emergency fund only to have it stolen or misplaced.
I learned a very important lesson about my emergency fund, make it available when you need it. I now keep my emergency fund in an ING Direct savings account but I also have an ING Direct checking account and have an ING Direct debit card in my wallet. In the event I suddenly need my emergency fund money, I make a quick call to ING, transfer the money from my emergency savings account to the ING Checking account and the money is available. I considered just keeping it in the checking account, but I like the additional interest earned from the savings account.
We established our emergency fund quickly, as we started follow Dave’s baby steps the month we received our tax return in 2007. I found his book at our local Sam’s Club, and fortunately purchased and read it.
I initially put $1000.00 in an ING Direct savings account. We later slowly adjusted that amount up to $2000.00. We’ve had to tap it a few times since, once when our debit card was stolen, a few times due to budgeting “issues” where we overspent or just under allocated, and one other time when I had to get some unexpected car repairs. We haven’t used a credit card since. Given we were using credit cards constantly prior to starting the Ramsey process, I think this is a true testament to the effectiveness of the emergency fund.
Make sure you check out I’ve Paid For This Twice Already… where you can read about Step 2 in the Dave Ramsey Baby steps. Paid Twice will discuss the debt snowball and most likely will talk about snowflaking too, which is a strategy I highly recommend!
Here are all of the articles thus far from the M-Network series:
- Overview of the Dave Ramsey Baby Steps at Cash Money Life
- Step 0 – No More Debt at Debt Free Revolution and Single Guy Money
- Step 1 – $1000.00 Emergency Fund – (you just read it, but hey, read it again!)
- Step 2 – Baby Step 2: Pay Off Debt Using the Debt Snowball at I’ve Paid For This Twice Already…
- Step 3 – Fully Funded Emergency Fund at Being Frugal
- Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement at The Dough Roller
- Step 5 – Dave Ramsey Baby Step 5 at My Two Dollars
- Step 6 – Dave Ramsey’s Baby Step 6: Pay Off Home Early at Moolanomy
- Step 7 – step-7 live and grow rich invest in mutual funds and real estate/ at Plonkee Money
- Dave Ramsey’s Baby Steps: M-Network Style at I’ve Paid For This Twice Already
Do you have an emergency fund? How much do you keep in yours? Have you had to use it? Do you follow the Dave Ramsey Baby steps? Add a comment!