Step 3: Build An Emergency Fund

Prerequisites:

Before you move onto Step 3: Build An Emergency Fund, it’s important to move forward only if you’ve completed the prerequisites stated above.

If you have, great! Let’s keep the ball rolling.

Dave Ramsey’s 7 Baby Steps Plan

Step 3: Build an Emergency Fund of 3 – 6 Months Worth of Living Expenses

Welcome to Step 3 of Dave’s 7 Baby Steps Plan where you’ll build a fully funded emergency fund of 3 – 6 months worth of living expenses.

In this step, the goal is to first figure out what your monthly living expenses are. You should probably know this by now since you’ve been budgeting since Step 1: Build a Starter Emergency Fund.

Once you’ve estimated what your monthly living expenses are, you can decide how many months of living expenses (choose from 3 – 6 months) you want to have saved up for your fully funded emergency fund.

How Many Months Should You Save up For

Typically speaking, the amount of months you want to save up for depends on your job security. Is it a steady job? Do you get paid regularly? Do you have a fear of losing your job?

The more insecure your income and income source is, the more people typically tend to aim for a bigger emergency fund, toward the 6 month end of the spectrum. 

On the other hand, people who feel secure with their employer having regular paychecks generally tend to have a smaller emergency fund savings, toward the lower 3 month end of the spectrum.

That said, there’s no hard or fast rule here.

When I was on this step, I was in a fairly secure position working at a profitable company. Still, I chose to build a 6 month emergency fund because I knew it’d give me a bigger safety cushion should anything tragic happen.

Use the Goal Feature in Your Budgeting App

Both of the free budgeting apps I’ve mentioned in these steps (Mint and EveryDollar) have a feature where you can set up a custom savings goal.

Use these to help you stay on track. They’re excellent for giving you a visual of your progress. I found this to be motivating because I’m pretty competitive and I always want to do what it takes to be better.

I also found that being able to log your progress and see yourself closer to the finish line helped me feel like I was going somewhere. Not in a physical sense, like going to the movies, more like I felt like I was closer to being more and more financially free. It felt like I was giving myself less and less to worry about, financially, should something bad happen to the future me.

Use as Many Visuals as You Can to Stay Focused

Use as many visuals as you can to make your emergency fund amount and progress present in front of you every day.

During this step, you should be living as frugal as possible in order to hit your emergency fund goal faster. Because the faster you build your emergency fund, the sooner you can start growing your wealth.

So, on top of habitually checking and logging my income/expenses into my budgeting app, I also had a dry erase board. On my dry erase board, I drew up a sort of beaker shape that had tick marks. The tick marks represented a money milestone for how much I needed to contribute to hit my $15,000 emergency savings goal. It was broken up into monthly contribution amounts.

Everytime I hit a monthly contribution goal, I’d get my marker and fill it up to that tick mark. 

It was like a race against myself for myself. And it was as useful as it was addicting.

What to Do When You Reach Your Emergency Fund Goal

If you’ve hit your emergency fund goal I’m sure you’re feeling like a million bucks. And you should be! It’s an incredible feeling too few people experience.

All of that hard work you put in, not caving into social pressure to buy things or go out to eat has gotten you this far and it can and will get you even further.

Now that you’ve successfully completed Step 3, it’s time to move onto Baby Step 4: Invest 15% of Your Household Income Into Retirement