Baby Step # 3 – Three to Six Months of Expenses in Savings
In Baby Step #1 we talked about putting $1000 in your emergency fund because Jesus warned us, “in this life, you will have trouble.” We also defined an emergency as an UNEXPECTED EVENT THAT YOU CAN’T PLAN FOR. Your $1000 emergency fund was designed to give you some margin in your budget so you wouldn’t be tempted to go further into debt when life happened and you needed to get rid of a situation that just stinks.
Once you get to Baby Step #3 you have established your emergency fund and paid off all of your debt except for the mortgage on your house. You have learned some new behaviors and gotten some practice with giving every dollar a name before it ever got there. You’ve got some momentum and freed yourself from financial bondage.
Now it’s time to be proactive about protecting your future. You have the money you were using to fund your debt snowball and you are trying to figure out what you are going to do with it. But don’t start throwing all your “extra” money into investments quite yet. It’s time to build your full emergency fund. Ask yourself,
“What would it take for me to live for three to six months if I lost my income?”
Your answer to that question is how much you should save.
Use this money for emergencies only: incidents that would have a major impact on you and your family. Keep these savings in a money market account. Remember, this stash of money is not an investment; it is insurance you’re paying to yourself, a buffer between you and life.