Monday, December 28, 2009

Baby Step 3 – Three to Six Months Emergency Fund

Baby Step 3 is an exciting step to start. Once you have gotten to this step, it means that you have paid off all of your debts, except the house.

For some, it was just a matter of minding the store. Getting a budget in order and executing on that budget – telling your money who is in charge.

For others, it was very hard. You had an uncommitted spouse, maybe you are a single parent or maybe the hole was really, really deep. But you made it.

Expenses or Income?

Hopefully, you have called into “The Dave Ramsey Show” and screamed “I’M DEBT FREE!!!” Now, it’s time to roll up your sleeves and get to work on your next goal.

You and your spouse will need to decide if you are going to try and cover three or six months (or in between). You will have different factors to consider. In our case, we leaned more towards the six months – I have the larger salary and work outside the home. Cindy teaches private lessons and teaches our kids in home school. If I am out of work, then I will have to be able to cover the family expenses for the amount of time that I am trying to get another job. We both feel comfortable with that amount.

The mistake that is sometimes made is that people try and save three to six months of income. That’s not necessary. If you have suspended investments, you need to keep in mind that you want to get them plugged back in within 24 months of unplugging.

Hopefully, by now, you know what your expenses are because you have many months of budgets behind you. You know where your money goes and exactly how much you need to live.

Where to Keep It?

I made a mistake when we got to Baby Step 3 – I was “walking like Gomer Pyle on valium” through the first four months. One day, it hit me that the next step was investing 15% of our income into retirement. After a committee meeting, we adjusted our budget so we were putting 15% of our income into the Emergency Fund.

This knocked it out in short order.

Where we put the Emergency Fund was important also. You need to be able to draw on it at anytime without penalties, and that led us to a Money Market Account.

We opened one online when rates where better than CDs, and even today, the rates are still better than a standard savings account. We have check writing privileges and can transfer money into and out of the account.

But, don’t be concerned about the rates. The Emergency Fund is not an investment, it is insurance.

Don’t get fancy looking for a bigger, better deal.

The Long Road

It does take awhile to get to Baby Step 3. The average time it takes for an FPU member to get to Baby Step 3 is 18 – 24 months. This is not a race – it takes time. And, there will be setbacks along the way: life will happen.

And when life does happen, pay minimums on your debt snowball, rebuild the Baby Emergency Fund and then pick it up again.

But the rewards are so worth the effort!

Breath this thought in for just a minute – You and your family are DEBT FREE! The money that comes into your household does not have anyone else’s name on it.

It does not have Chase’s, Capital One’s, Sallie Mae or GMAC’s name it. It simply has your family’s name on it.

What does being debt free do to your Marriage? What impact will it have on your Kid’s lives as you teach them these principals? How neat is it going to be when a single mom at church needs $200 to keep the lights on and you can just walk over and stroke a check without thinking about it?

Breath it in!

2 comments:

sarah said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Alena

http://grantfoundation.net

Chuck said...

Thanks Sarah. Typically, my blog has been my method of keeping in touch with my friends. Then I discovered Facebook. If you look at my previous post count, you can probably see when the number of post started dropping.

My wife and I have had a lot of success with getting out of a financial malaise and decided to start sharing what we did. In the last two weeks, the blog has taken a definite shift towards that theme.

I hope to continue along with this theme through 2010, keep it real without spiraling to rants, but, no promises.

Cheers!