Some call it Murphy, others bad luck and many of us just call it life. We all have experienced or will experience, an unplanned situation. Maybe it's a job loss, an unexpected addition to the family, or even an unfortunate accident.
So many things can pop up into our lives and throw us off balance. An emergency fund is something that can really help with occasional mishaps. Dave Ramsey, a very well-known financial adviser and best-selling author, proposes 7 baby steps to help us gain financial independence. It’s no surprise to me, that first step recommended is to save $1,000 in an emergency fund. Among Dave's baby steps include getting out of debt, saving and investing for retirement. Below I've listed the baby steps outlined by Dave.
Baby Step 1 – Build a $1,000 Emergency Fund
This is the starting point! Dave makes the case that this sets the stage for everything beyond this step. He even goes on to say that things will be way more challenging, to implement the plan without this step. Why? Well, let’s think about it for a second. If you’re trying to get out of debt or save money, and something comes up out of the blue, you’ll need to either stop the debt payments, add on another debt to cover costs or stop the savings process. Dave encourages us to think of the emergency fund just like insurance, it’s not there to gain interest, but to insure us when situations occur.
Baby Step 2 – Pay off all debts (outside of your house)
This is huge! This point here is why I’ve been listening to Dave Ramsey for the past year. Dave explains the debt snowball as a key tool for debt freedom and it really works! The debt snowball is the process of lining up all of your debts (minus your house loan) and paying each debt minimum each month while using any additional to pay extra on the smallest debt. You keep the process going until all of your debts are paid.
Baby Step 3 – Save 3 to 6 months of expenses in savings
This one is an extension of step 1. Now that the debts are gone, you can build an effective emergency fund.
Baby Step 4 – Invest 15% of household income into retirement funds
Save, save and save some more! Dave recommends saving money into a Roth IRA and other pre-tax retirement.
Baby Step 5 – College funding for children.
I do not have children, so I will be passing this one up, however Dave suggest saving money into a 529 savings fund or ESA (education saving account) if you indeed have children.
Baby Step 6 – Pay off home early
Now it’s time to fully get out of debt and have zero debt payments! So much interest can be saved by paying your home off early. Plan to pay your house off in less than 15 years instead of 30+ years, which is the norm for most people.
Baby Step 7 – Build wealth and give
Now here is the fun part! The last step is all about continuing to grow your wealth and most importantly enjoying it! Time to celebrate your hard work!
Well there you have it - the financial roadmap from ‘Uncle Dave’. I can speak from experience of how helpful it is to plan for emergencies. After following Dave and implementing his steps, an emergency feel less like a punch in the face and more like a little splinter. No, it's not fun. And yes, it’s annoying. However, it’s manageable.
Alright folks, let's save up some cash and develop an emergency fund. The next time life happens, let’s be ready to take the punch!