Baby Step 1: That is the question.
Dave is a big proponent of Baby Step 1. Relative to income. If you household income < 20k a year then emergency fund should be < $1000.
The idea behind the small amount is to cause a stir or panic to pay off your Baby Step 2 as fast as you can (effectively clearing your non mortgage debt).
Dave, while, well meaning gets very angry about this at times and espouses the “well it’s worked for so many others” or “it’s how I designed the system” and neither of these are inherently good reasons to do anything at all. Many other millions are still in debt but also have emergency funds, this is “besides the point” of an emergency fund and how he design the system isn’t a good reason because there are many instances where having a much larger emergency fund is better.
Dave can’t decide for you what is right for you for Baby Step 1. He can look at the numbers all day but ultimately it comes down to your comfort level and your personal situation. Let’s break it down in what I like to call “Job Properties”
- Is it stable?
- Does it pay well?
- Are you able to simply “maintain” your level of debt if you wanted to
If all three answers are yes, then maybe 1k will feel safe enough for you. However, if all three answers are yes and Murphy shows up (like Dave adamantly suggest that he might) Murphy might bring his friends and suddenly you’re further in debt than you were before. But hey, at least you had 1k right? The same argument Dave uses to make on stopping your investment contributions can and SHOULD be applied to putting a hold on paying off debt (IF you can maintain levels)… it’s even a “caveat” for things like baby planning (He says not to do Baby Step 2 and sock away savings then when baby is home and healthy, put that debt [aside from 1k] right on the credit cards).
Guess what, just because you’re home with the baby doesn’t you’re out of the woods yet hvac goes out, car dies, hail storm strikes. Well you’re back to 1k in Emergency funds with a cold/overheated parent and baby.
So Is 1k Enough? Yes and No
Imagine that two and three are yeses but one is a no, well you may very well might want to have a few months of living expenses socked away because the earth could fall off under you. If the answer is no to 2 or more of these then you need to keep looking for a better job AND sock away as much as you can for a few months of living expenses.
It’s not even THAT cut and dry though Mr. Ramsey. Yes, I’m far from being rich as you or many of those that followed your program but that does not make my point any less valid – putting the advice of the rich above others, even on the subject of money feels a little “icky” and wrong. Sometimes the intern has a fantastic idea that makes the company millions. Thanks Intern!
My point is this, take the steps with a grain of salt, apply it to YOUR comfort zone and YOUR situation. Don’t try to shoehorn it into your life.
Example 2. Step 6 is to pay off your home; if you owe 30k on the house, and 60k in student loans – PUT THE HOUSE BEFORE THE STUDENT LOAN in baby step 2 ( I mean if that feels right to you and your situation :))
If you’re able to put off paying your debts off to establish a “temporary” emergency fund for things like newborns, then you can just KEEP the emergency fund and pick up Baby Step 2 whenever you feel safe and ready. Then when Baby Step 2 is complete… guess what? You’re already closer or completely done with Baby Step 3! All the while having greater protection for you and yours.
We’re doing it a bit different in our house too; our Baby Steps look a little different.