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If you are reading this article on Dave Ramsey Baby Step 3, you must have already completed some of the Dave Ramsey Baby Step method. In Dave Ramsey’s book titled The Total Money Makeover, Baby Step 3 recommends that you should have an emergency fund. And it should be worth three to six months of your expenses. You have shown that you have gazelle intensity, so let’s discuss how to build that longer emergency fund.
However, most people believe that three to six months of your income is all that’s needed—no more, no less! But that’s not all that Dave Ramsey emphasizes; he further recommends that it should only be your initial goal.
If you’re out of work for a prolonged period of time or you have a real emergency. It is expected that there will be a reduction in how you spend money as activities such as eating out, partying, and other less important things will reduce. As such, you can get away with earning a lesser amount from your savings, and not the total paycheck.
Way to save money for emergency funds
Here are the steps recommended by Dave Ramsey if you plan to build an emergency fund.
1. Make a budget and stick to it
Write down all your monthly expenses and income; you can make use of budgeting apps to get the desired result. When you do this, you can plan to save an exact amount of money for your emergency fund. This will make it easy for you to jump to the next step.
2. Set a monthly savings goal
Your monthly savings goal is the amount of money you want to set aside to keep building your emergency fund. The thought of separating such sums of money from your account can seem hard, but Dave Ramsey believes that such a sacrifice is needed to progress. And if you’re consistent, you’ll be surprised about how much you can save in no time. Don’t know how much you should be saving? Go back to the first step and check your expenses.
3. Adjust your savings goal
You may be able to save more with time—for example, if you or your spouse get an income raise. It means that you can now increase the amount you put into your savings. Dave Ramsey suggests that you look into your budget to find ways to cut down costs.
Quick Ways to Save $1000
In the article titled a quick guide to your emergency fund, Dave Ramsey suggests that the easiest way to increase your emergency fund is by selling some of your stuff.
Take a look at your garage. Do you have items you have no use of? Are there things you can do without? Selling unnecessary items can increase your emergency fund quickly. Don’t overlook any item, as every little thing helps. Small bucks can add up to help achieve that goal in no-time. Another advantage is that it’ll help you declutter your property. Win-Win!
Another way that Dave mentioned is to start a side business or to take a part-time job. Part-time jobs like dog walking in the morning, taking a freelance job on UpWork, babysitting can earn you some bucks. You’ll be surprised that people pay for those activities you find fun and easy.
How much should I save for an emergency?
Dave Ramsey believes that the more stable your income is, the less you need an emergency fund. However, he also believes that saving up to three months of monthly income should be non-negotiable.
Dave believes that if you have a stable source of income, then a three-month emergency fund is okay. This is the same for individuals that are a part of a two-income household. But if you’re self-employed or you work in sectors with a high job-loss rate, then you should consider at least a six-month emergency fund.
If you come from a family with a history of a chronic medical condition, then you should try to save up for a six-month fund. Even if your income is high enough to pay for health emergencies, you should save for major ones.
Where should I keep my emergency fund?
Dave Ramsey answered this in his article titled “an emergency fund is not an investment.” He recommends that people should put their funds in a money market account. He says that you shouldn’t invest it in anything that can depreciate in value. And neither should you put your money in an account that will penalize you for withdrawing your money earlier than expected.
Dave further explained that the emergency fund is not an investment but insurance. And just like other insurance, it’s not expected to be treated as an investment. Its main purpose is to protect your investment, as lack of emergency funds will make you borrow at a bloated rate. Another irresponsible option you’ll have without an emergency fund is to cash out your 401(K)—however, IRS will penalize you.
Dave Ramsey explained in the article that emergency funds protect your home from foreclosures.
In Conclusion
In the book “The total money makeover,” Dave Ramsey explains that Baby Step 3 is essential to having an “Insurance” on your finances. And with everything written in this article, you should easily have the emergency fund you need.