An umbrella makes a rainy day a lot easier.
Go Get You An Umbrella!
You’ve reached baby step 3! You now have NO DEBT except for your house, and are ready to beef up your savings. Congratulations! You are climbing a mountain and are two-thirds of the way up. Can you see the top? Pretty soon you will be at an overlook that you at one time thought was impossible. Keep moving forward! There may be times when you feel as if you are moving too slow, but just keep moving! Now isn’t the time to stop! Now you should be more motivated and here’s why. When you were paying off your debt, you were using your money to pay for something you already used or that the novelty itself had already worn off of. In other words, it’s more exciting to go buy a car, than it is to go make a payment on a car you’ve had for a couple of years. Now you’re putting your money towards your future instead of your past, and THAT SHOULD MOTIVATE YOU!
It feels better to let go of $3,000 when you know it is going into your savings? Paying off debt hurts! So for those of you that still have it…GET RID OF IT! Don’t get me wrong, paying off debt is awesome, but wouldn’t you say it’s much nicer when it’s not debt that you are using it for? (As we have gone from $26,076.75 down to just under $3,000, since January 2008, sometimes using that money to pay off debt sucked!) You know how people always say “you’ll be glad ya did”? You kind of have to tell yourself that! It is true, we are glad we did, but that still doesn’t take away the pain when dropping a wad of cash on debt!
The fully funded emergency fund as defined by Dave Ramsey’s baby steps is to save 3/6 months of expenses. Some people say it is too much, while others claim it isn’t enough. I have put together this “Do It Your Way!” series to strike a balance, and provide a way for you to reach your emotional comfort level, while staying true to the TMMO principles I strongly believe in. People like options. Let’s face it, some people have more ability, some people need more security, some people are just more motivated, and some people need more time. You can do whatever works for you!
Baby Step 1 – Baby Emergency Fund: Do It Your Way!
Baby Step 2 – Debt Snowball: Do It Your Way!
Baby Step 3 – Fully Funded Emergency Fund: Do It Your Way! (<~~You’re HERE!)
Let me start by stating that there is no right or wrong choice here. It’s really about what makes you feel comfortable or secure. If you save only 3 months of expenses, and feel somewhat uneasy about that, it may keep you from being able to knock out the next baby step effectively! I feel you want to be emotionally invested to move on to the next step in order to focus with the intensity needed. Psychologically when you have a positive emotional experience you are motivated, which is why you feel better and more motivated each time you accomplish a goal or kill off that next debt on the list!
For a single individual that is under 25, 3 months of expenses may be enough until you can make your way through the baby steps. For instance if I was this young again, I would NOT BE SO STUPID WITH MY MONEY probably save 3 months of expenses, and then sprint through funding steps 4 and 5 so I can start saving for that house much faster. Could you imagine being 30 years old and having cash money to buy your first house? Consider the discount you would get by paying cash! It has happened! I wish I had done it! You live and you learn right? Let’s face the music, we can’t go back and do it over, but that doesn’t mean we can’t change what we got wrong and start doing it RIGHT! Peek over your shoulder to learn from your mistakes, but stare ahead to go in the right direction. If you stare into the past, you just might keep walking that way.
On the other hand, someone with a good income might have the ability to speed through level three or four with no problem. If you are highly motivated then you may want to shoot for 9/12 months. For those of you with no mortgage you could save 12 months of expenses if you so desire. Like I said, there is no wrong answer, it’s up to you! Do it your way!
Level One – Save 3 Months Of Expenses
Level Two – Save 6 Months Of Expenses
Level Three – Save 9 Months Of Expenses
Level Four – Save 12 Months Of Expenses
Just like with the baby emergency fund, you may have a different opinion than your spouse. If this is the case, I generally tell people to go with the highest one. If you feel good with level two, but your spouse needs level three, it would probably be better to go with your spouses choice. This will allow your spouse to walk beside you instead of being dragged behind you. Remember you are a team, and if your spouse feels comfortable and secure, you can work through the baby steps much faster! Another thing you could do is compromise! Ex. If 3 months is $6,000, and 6 months is $12,000, you could possibly meet in the middle and save $9,000. It’s up to you.
If You Want To Save More Than Level Four…Wait
Now some people would want to strangle me for telling people to wait, but let me explain. There is nothing wrong with wanting to beef up your emergency fund, don’t get me wrong, but now it’s time to focus on other things. This is a good time to evaluate your financial plan. What do you want to do? If you do not have a mortgage, and aren’t sold on the 100% down plan to buy your house, then you want to start saving for that 20% down payment. Remember to get a 15 year fixed rate mortgage instead of a 30 year. You will SAVE thousands and thousands of dollars in interest by paying only a little more each month in payments.
With BS3 out of the way, now it’s time to start saving for retirement, and if you have children, saving for college tuition. Once you have started both of these two things, next comes paying off your mortgage. I think that if you work as diligently as you can towards paying off your house, you will have plenty of time to beef up your savings and retirement and without all the constraints. You see, when you have NO DEBT, 3/12 months of savings, you’re funding an Education Savings Account, and saving 15% towards retirement, IT’S UNBELIEVABLE HOW FAST YOU CAN SAVE MONEY! What if ALL the money you currently spend on a mortgage, car payments, and whatever else is stealing your paycheck, was going towards savings and retirement EACH AND EVERY MONTH, how fast would it grow? What would your savings look like in just one year? How about five? Twenty? You get the point right? Compound interest would be WORKING FOR YOU, instead of you WORKING TO PAY IT!
So choose the plan that works best for you, as long as you remember to be realistic. If it takes you 5 years to save your fully funded emergency fund, you may give up before you ever reach baby step four. There will be time in the later baby steps to build your savings as much as you want! Now go climb the rest of the way up that mountain so you can see the downhill journey that’s left. Having NO DEBT and a nice EMERGENCY FUND is the uphill battle, then momentum is on your side. Enjoy it!
Do you already have your emergency fund in place? How much did you need to feel comfortable moving forward? Do you wish you would have saved more or would it have been okay to save a little less? Leave a comment…
Although we are still in baby step 2 we have had the emergency fund “talk”.
The Wife wants 6 months, I’m okay with 3. So we compromised on 6.
Yes, I am a wise man. 🙂
You are very wise indeed sir! Now both of you can move forward together. Good luck in knocking the rest of that pesky debt out! 🙂
Ah, so 3 months of income, which is about 5 months of my budgeted expenses, might be good for me. And I agree with your advice to wait longer to fund it. It would be a lot easier for me to save for a new car / house, than to fund the emergency fund any longer, especially at my age (23).