The other day I gave a brief overview of Dave Ramsey’s baby steps system to financial freedom that he outlines in his book,The Total Money Makeover. There are seven baby steps that you should take in order to gain financial peace.
Baby Step 1– $1,000 Emergency Fund
Baby Step 2–Pay Off All Of Your Debt With A Debt Snowball
Baby Step 3– Fully Fund Your Emergency Fund
Baby Step 4– Save 15% Of Your Income For Retirement
Baby Step 5– Save For Your Children’s College Education
Baby Step 6– Pay Off Your Mortgage Early
Baby Step 7– Build Wealth And Give
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Today, I will show you the ins and outs and the method behind the madness of only establishing a $1,000 emergency fund to start The Total Money Makeover. Dave Ramsey’s book is the #1 personal finance book that should be on your bookshelf. I keep a copy of it on my nightstand. It’s that good!
Baby Step 1 – Why Only $1,000 In The Bank?
Think back to every “emergency” that you have ever had in your life. I used the quotes because we tend to think that everything is an emergency when money is tight in our lives, but in reality, very few things are truly emergencies. Confusing wants with needs is one of the biggest errors that we make and one reason that you are probably in debt to start with.
But, when you think about all of the true emergencies that crop up, having $1,000 readily available will cover pretty much all of them. That’s why it is Baby Step 1. There are very few emergencies that will cost more than that much, and those emergencies that do can often be put on installments and lumped into all of the other debts that you tackle with your debt snowball in the next baby step.
Baby Step 1 – Get $1,000 In The Bank Fast
In order to keep you from going further into debt, you need to set up your starter emergency fund of $1,000 in the bank as fast as you can. So, how do you find that $1,000 when your budget is already probably super tight or even resulting in a negative cash flow every month?
One of the easiest ways is to sell something. This may not be a very popular piece of advice, but selling something is one of the easiest ways to get out of financial trouble. You will see it also in the next baby step when many times you can get out from under your debts, such as a car payment, by selling the asset. Do you have a car you can sell to raise the cash? Do you have some shares of stock that you can sell?
Do you have books, DVDs, CDs, textbooks, and other things that you can sell on a website such as Half.com or eBay? You may want to consider having a yard sale. This is a quick way to build up your cash reserves to get that quick $1,000 Dave Ramsey emergency fund in your bank. Also…don’t forget to put your emergency fund in a simple savings account or a money market account. Do not invest with your emergency fund.
Will $1,000 solve all of your financial problems? Of course, it won’t, but it will start you off on the right track. It will keep you from digging a bigger hole for your finances. You do not want to continue to add to your debt by continuing to rely on your credit cards.
This $1,000 is your starter emergency fund to keep you from added to however much debt you have. Do not save more than that $1,000. As you will see in Baby Step 2, you will be using anything extra above that $1,000 for your debt snowball.
Getting that first $1,000 in the bank is Dave Ramsey’s Baby Step 1. It’s the first thing you should do.
Did you start with Baby Step 1? Do you have $1,000 in the bank in an emergency fund? What has been your biggest roadblock holding you back?
Baby Step 1– $1,000 Emergency Fund
Baby Step 2–Pay Off All Of Your Debt With A Debt Snowball
Baby Step 3– Fully Fund Your Emergency Fund
Baby Step 4– Save 15% Of Your Income For Retirement
Baby Step 5– Save For Your Children’s College Education
Baby Step 6– Pay Off Your Mortgage Early
Baby Step 7– Build Wealth And Give
FAQs
If you have any debt other than a mortgage, then you just need a $1,000 emergency fund—aka a starter emergency fund. We call this Baby Step 1. It's the first piece of your money journey, so don't skip over it. That starter emergency fund sets you up to begin paying off your debt—that's Baby Step 2.
How much does Dave Ramsey recommend for an emergency fund? ›
How Much You Should Have in Your Emergency Savings. Here's a Dave Ramsey principle we agree with: If you make less than $20,000 per year, aim to have at least $500 in emergency savings. If you make more than $20,000, then aim for at least $1,000.
How much should you have in Dave Ramsey's Baby Step Number 1? ›
Baby Step 1: Save $1,000 for Your Starter Emergency Fund
In this first step, your goal is to save $1,000 as fast as you can. Your emergency fund will cover those unexpected life events you can't plan for.
How many people can afford a $1000 emergency? ›
Only 44% of U.S. adults would pay an emergency expense of $1,000 or more from their savings, as of December 2023 polling. Inflation is a common culprit that's affecting savings.
What are Dave Ramsey's 7 baby steps in order? ›
You can too!
- Save $1,000 for Your Starter Emergency Fund.
- Pay Off All Debt (Except the House) Using the Debt Snowball.
- Save 3–6 Months of Expenses in a Fully Funded Emergency Fund.
- Invest 15% of Your Household Income in Retirement.
- Save for Your Children's College Fund.
- Pay Off Your Home Early.
- Build Wealth and Give.
If you have any debt other than a mortgage, then you just need a $1,000 emergency fund—aka a starter emergency fund. We call this Baby Step 1. It's the first piece of your money journey, so don't skip over it. That starter emergency fund sets you up to begin paying off your debt—that's Baby Step 2.
What is the 50 30 20 rule? ›
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
How much does Dave Ramsey say to put in savings? ›
According to the Ramsey Solutions post, the recommendation is to invest 15% of your household income for retirement. The article uses the example of a household income which is $80,000 annually. Based on these earnings, each year you need to invest $12,000 towards your retirement savings.
What is a fully funded emergency fund? ›
Starter emergency fund: If you have consumer debt, you need a starter emergency fund of $1,000. This might not seem like a lot, but it's just a temporary buffer while you pay off that debt. Fully funded emergency fund: Once that debt's gone, you need a fully funded emergency fund of 3–6 months of expenses.
Is a $5,000 emergency fund enough? ›
Saving $5,000 in an emergency fund can be enough for some people, but it is unlikely sufficient for a family. The amount you need in your emergency fund depends on your unique financial situation.
The numbers are consistently around 60%, meaning only 40% of Americans have enough savings to cover an unexpected expense without going into debt. As of January 2023, the report shows that 57% of Americans have less than $1,000 in savings.
What percentage of Americans live paycheck to paycheck? ›
Recent MarketWatch Guides survey results indicate that 66.2% of Americans feel like they're living paycheck to paycheck. Respondents struggling to make ends meet span demographics, including genders, generations and incomes.
Does Ramsey baby step work? ›
Do Dave Ramsey's Baby Steps Work? They can, but they might not be for everyone. Ramsey's steps are sound and logical, but they rely on some best-case scenarios. Not everyone makes enough money to save 15% for retirement while also saving for college and paying the mortgage early.
What is the baby step 1 according to Dave Ramsey? ›
Baby Step 1: Save $1,000 for Your Starter Emergency Fund
Only 32% of Americans say they can pay cash for a $400 emergency. That means 68% of them are borrowing, selling or going into debt when life happens.
What to do after Dave Ramsey's baby steps? ›
What Comes After the 7 Baby Steps?
- Save $1,000 for your starter emergency fund.
- Pay off all debt (except the house) using the debt snowball.
- Save 3–6 months of expenses in a fully funded emergency fund.
- Invest 15% of your household income in retirement.
- Save for your children's college fund.
- Pay off your home early.
If your essential bills come to $6,667 a month or less, then you may be well-protected with $20,000 in the bank. But if you're a higher earner who spends $8,000 a month on essential expenses, then your minimum emergency fund target should really be $24,000.
Is $30,000 a good emergency fund? ›
Most of us have seen the guideline: You should have three to six months of living expenses saved up in an emergency fund. For the average American household, that's $15,000 to $30,0001 stashed in an easily accessible account.
What is a good amount to have for an emergency fund? ›
Generally, your emergency fund should have somewhere between 3 and 6 months of living expenses. 1 That doesn't mean 3 to 6 months of your salary, but how much it would cost you to get by for that length of time.
Think back to every “emergency” that you have ever had in your life. I used the quotes because we tend to think that everything is an emergency when money is tight in our lives, but in reality, very few things are truly emergencies. Confusing wants with needs is one of the biggest errors that we make and one reason that you are probably in debt to start with.