Baby Step 3 – Explained

Congratulations! If you made it to Baby Step 3, you have finished paying off all your consumer debt, and are working on building your 3-6 months’ emergency fund. Now, I mentioned that you weren’t going to stay in Baby Step 1 forever didn’t I?? If I didn’t, shame on me. This is where we can celebrate a bit because it has been a crazy road am I right?

The reason we start to build on our 3-6 month emergency fund is for unexpected occurrences such as: job loss, car breaks down, unplanned medical expenses, etc. You have heard your mama telling you to save money for a rainy day? Well, when the rainy day comes, you for sure want to be carrying an umbrella. This step may take you very few months, or if you have relaxed a bit and dropped the 2 extra jobs you were working just so you could get out of debt, then it may take a little longer. That’s okay. Breathe.

The one thing you are striving for is financial peace / security. When you have 3-6 months of expenses sitting in the bank, you start to de-stress. You breathe a sigh of relief knowing you aren’t going to borrow money and get yourself into a hole with debt again. You are changing your family tree! You are sacrificing now, so that later, you can do whatever you want to do and not owe anybody any money. It is completely freeing to know you don’t owe anybody a single payment.

We spent 1 year building our 3-6 month emergency fund because we were on one income. We chose to stop borrowing and paid cash or used our debit card for all purchases. It feels really good to not have to wait until your statement closes for you to make a payment on a credit card. That used to give me so much anxiety! Sometimes, I would pay it off before the statement closed and watch my credit score drop (insert angry face emoji here).

Remember, we are still in Baby Step 3 – don’t start investing anything just yet. That will come once this step is completed. Take your time. Discuss with your spouse / significant other what level you think that the 3-6 month EF should be at. Everyone is in a different situation so there is no set dollar value attached to it.

My wife and I are both working so our 3-6 month EF is low. We are currently working on Baby Step 3B – down payment for a home. By the way, it is taking us a REALLY LONG TIME because we are in California where it is ridiculously expensive. I will get more into BS3-B later. For now, I want to congratulate you again for making it this far and motivate you to keep pushing forward. You got this!

Published by MadsenFinancialCoaching

Madsen Financial Coaching was created to bring awareness to personal finance. When you pay attention, you win! We work with clients to understand their behavior and relationship with money, as well as basics of personal finance such as: following a budget, eliminating debt and building an emergency fund to name a few. We want you to succeed, and it starts with your willingness to put in the work.

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