Baby Step 3: The Full Emergency Fund

At this point you will be debt-free and have a small starter emergency fund.

3 to 6 months of expenses in savings

Now to really blow your mind {and life-long misconceptions about personal finance}, Dave Ramsey suggests that we have a fully funded emergency fund of 3 to 6 months of expenses in savings.

Before you start building investments, first save up this nest egg to protect you and your family from unplanned debt and help you through future emergencies.

“Once you complete the first two baby steps, you will have built serious momentum. 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.” – From the Dave Ramsey website.

Building up the Full Emergency Fund rather than investing may seem counter-cultural or counter-intuitive at this point, but after being debt-poor for a while an unable to go through some life crises with a sense of peace, security and financial dignity, the full emergency fund is at the top of our family’s priority list.