Prerequisite: If you haven’t read the Introduction page of Dave’s 7 Baby Steps, I recommend clicking here to go back and read it. I’ve written some helpful information about The 7 Baby Steps including the plan overview and instructions.
If you’ve read it and are ready to start Step 1, great! Glad to have you here. Continue reading on.
Dave Ramsey’s 7 Baby Steps Plan
Step 1: Build a Starter Emergency Fund of $1,000
Hello and welcome to Step 1 where you’ll build a starter emergency fund of $1,000.
In this step, your only goal should be to save for a starter emergency fund of $1,000. This means that any money left over after your living expenses are paid should be funneled toward your starter emergency fund.
You can keep track of income and expenses (your budget) fairly easily with the help of free apps. The one I’m currently using is the Mint app, although previously I’ve used the Everydollar app.
They’re both great and I’m still deciding on which one I like better. I suggest trying them both out, fiddling around with them for a few days, and see which one you prefer.
Credit Card Payments and Lifestyle Changes
During this step, you should only be paying credit card minimums and living as frugal as possible. For example, some frugal lifestyle changes would be cutting out non-essential expenses like a cable, cancelling your gym membership, and cooking at home vs dining out.
If you’re really serious about getting out of debt and building wealth, you’ll learn that being frugal is the chosen lifestyle.
This mentality was drilled into my brain from reading the book The Millionaire Next Door: The Surprising Secrets of America’s Wealthy.
Why a $1,000 Emergency Fund?
The reason I chose this fund range is because it’s likely sufficient enough to take care of unexpected expenses like your car breaking down.
As well, it’s worth noting that a press release from the Federal Reserve stated that 40% (4 out of 10) Americans couldn’t afford a $400 unexpected emergency expense.
Dave’s starter emergency savings goal of $1,000 will put you on the more financial secure side of that statistic, giving you the financial backing to have a bit of a safety cushion left, should a $400 unexpended expense find it’s way to you.
Additionally, a $1,000 starter emergency fund is small enough to save for in a relatively short period of time. By being able to quickly save up for your starter emergency fund, you’ll surely feel a sense of accomplishment. You’ll also have gained a bit of security knowing that going forward, should any small financial hiccups occur, you now have the monetary means to take care of it.
What Emergency Fund Amount Should You Choose?
As far as choosing a number goes, I feel that it’s purely preference, but it’s important that you choose one and stick to it. What we want when we accomplish this step is to build financial confidence in yourself and gain a bit of security. This will give us the momentum to keep moving forward.
What Do I Do When I Reach My Emergency Fund Goal?
The first thing I want you to do is take a breath and congratulate yourself.
For some of you, approximately 40%, this may have been difficult – but you did it. So take a moment to feel good that you set a financial goal and hit it.
Next, I want you to remind yourself that the emergency fund you’ve just built is for emergencies only. Do not under any circumstances use money from this fund to pay for things you could have planned ahead for.
Things like groceries, clothes, or gas money do not fit into the category of what an emergency looks like. If you track your income and plan your expenses well, you won’t need to dip into emergency fund money for these sorts of things.
Stay committed to the plan. You’ll thank yourself for it should any emergencies happen during this whole process.
When you’ve fully funded your emergency fund, click over to Step 2: Become Debt-Free.