Dave Ramsey’s Baby Steps: Step 1 – $1000 Emergency Fund

photo credit: nick farnhillI am a big fan of Dave Ramsey and his advice on money and life. He has changed the way I think about my finances and it has been all for the better. This is going to be the start of a 7 part series covering Dave Ramsey’s Baby Steps to financial freedom.

Step 1: $1000 Emergency Fund
Step 2: Get out of Debt
Step 3: 3-6 Months Emergency Fund
Step 4: Start Saving 15% for Retirement
Step 5: Save for Kid’s College
Step 6: Pay off the Mortgage as Fast as You Can
Step 7: Give, Save, Spend!

Baby Step 1: Save $1000 as a Starter Emergency Fund

This is the easiest and the hardest baby step. It is the easiest because it is usually the smallest amount of money. It is the hardest because it means you have to change old habits.

This baby step is all about changing old habits. You can’t use credit cards any more. You can’t finance anything. You have to change your behavior. The $1000 dollars is for emergencies and emergencies only. It can’t be used when the pizza guy comes to the door. When you need new tires you get to use the emergency fund.

“But I want to just start getting out of debt”

You can’t. It won’t work. The problem is emergencies happen. Cars break down, and the furnace will go out. You have to stop using credit cards and change your behavior, so you have to have a cushion. If you don’t have this safety net when something happens you’ll get discouraged and fall back to your old way of doing things. You’ll put it on the Mastercard or Visa and then give up in failure. You can’t let this happen.

A few months ago we noticed the tires were starting to go bad on our car. We knew they weren’t going to last forever, but we let them go a little longer. Then winter came and the weather started getting worse. We got quite a bit more snow and ice this year in Nashville than we usually do, so we had to get new tires. We shopped around and ended up spending a little bit less than $300. When we had it done they let us know it was also time for new brakes. I fixed those myself to save about $200 dollars, but it was still another $40 or so.

The good news? We had our emergency fund from baby step one in place. Instead of being a crisis, it was merely an inconvenience. The car is fixed and then we started to replenish the emergency fund. We got it back and then resumed paying down our debt. This is what it takes to succeed at getting out of debt and finding financial freedom.

On to baby step 2: Get out of Debt.