The Total Money Makeover by Dave Ramsey – Baby Step Three Finish Your Emergency Fund

by Hank Coleman

Baby Step Three of the plan is completing your emergency fund. You should have three to six months of expenses saved for emergencies.

Emergency Fund for a rainy dayComplete The Emergency Fund. Once you have managed to completely pay down your debt in Baby Step Two of the 7-step plan by Ramsey, you are now prepared to complete the emergency fund that you began in step one. So, how much should you allocate in order to complete the fund? Much has to do with your lifestyle and your basic expenses. Because you have paid down your debt, the money you once used to reduce your overall debt should now be going in your full emergency fund in order to complete it.

Commit Yourself To Saving. Remember, the emergency fund is for emergencies only. No dipping into the account to buy a new car or a 65-inch Plasma TV. That is actually called saving for a special item. Get into the savings habit so you can continue through the seven steps and realize your goal of eventually attaining wealth.

Cover your Basic Expenses For 3 to 6 Months. Typically, it is wise to save about three to six months of your expenses to complete the emergency fund. Make sure your emergency savings account is separate from your regular checking and savings accounts so you will not be tempted to use it outside its intended purpose. Because studies have shown that people tend to fall into debt who don’t have such a savings account, this part of Ramsey’s 7-step plan is crucial for making strides toward building eventual wealth.

Following and Completing Each of the Seven Steps

Follow each step of the seven-step process and don’t go on to the next step until you have finished the preceding step. By carefully following each step of Ramsey’s 7 suggested steps, you will establish the type of savings habits that will guide you toward better investment decisions.

Choosing a High-Yield Savings Account. Therefore, make certain you sock away this extra amount into a high-yield account to make the most of your investment. The money should be accessible but still earn as high an interest rate as possible. Your emergency fund should not be in CDs, Treasuries, or mutual funds because of the high fees and surrender charges that apply to taking the money out of them early if needed.

Some good choices include:

The following banks offer high yield savings accounts that are above the normal rates of return when compared to other savings institutions.

Capital One Interest Plus Online Savings: This account encourages saving as you must have $2,500 in order to earn the account’s high rate of interest.

Ever BankEver Bank can also put you in the savings mode as you are required to open the account with at least $1,500. To avoid being assessed any fees, you must maintain $5,000 in the high-interest savings account.

Ally Bank: Ally Bank also offer high yield savings accounts. You can open an emergency savings account immediately and continue to fund it as these banks do not require a minimum deposit.

You can also check out high interest savings accounts from HSBC Direct, Bank of Internet, ING Direct, and WTDirect Savings Account, which all have some of the highest earning interest rates of the internet banks. I personally have accounts with ING Direct. Once you stash away an amount that’s comfortable for you in your emergency fund, you can now proceed to step 4, and that’s putting 15% of what you earn into retirement. Read the next post covering Ramsey’s book for more details with respect to this step.

A Review of the Basic Steps for Saving, Eliminating Debt, and Building Wealth

Ramsey’s program and book, The Total Money Makeover“, include the following baby steps to financial freedom…

For the next seven days, I will be detailing each one of these baby steps in more details. So, please check back or sign up to get all of the posts in this series in your favorite RSS Reader or by E-Mail.

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{ 1 comment }

Julie Kinnear May 12, 2010 at 8:20 pm

This is absolutely essential step, especially when you have mortgage burden (who doesn’t?). Prepare cash buffer big enough to cover at least 3-6 months payments (that’s the standard unemployment period), but also keep some cash aside in case the interest rates will go up (and yes, they will go up!) and you are not able to rise your income immediately (well, who is…). The distance between financial soundness and foreclosure is sometimes very short.

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