Dave Ramsey’s Baby Step One - $1,000 Emergency Fund In The Bank (2024)

FAQs

Dave Ramsey’s Baby Step One - $1,000 Emergency Fund In The Bank? ›

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.

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.

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.

The Lowes borrowed this idea from Dave Ramsey, who advises building a $1,000 emergency fund as the first “baby step” toward paying off debt, because something is always bound to go wrong, no matter how careful you are. “Car blows up. Transmission goes out. You bury a loved one.

Only 44% of Americans can afford a $1,000 emergency expense, says Bankrate.

Choose a traditional savings account or a short-term certificate-of-deposit (CD), currently the most attractive accounts. (Early withdrawal penalties on a CD rarely lower the yield below that of a savings account.) Consider opening a new account or sub-account for this money so you're not tempted to spend it.

The American Rescue Plan Act of 2021 established a new $1 billion Pandemic Emergency Assistance Fund to assist needy families impacted by the COVID-19 pandemic. States, the District of Columbia, tribes operating a tribal TANF program, and all five U.S. territories are eligible to receive funds.

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.

The debt snowball method is a debt-reduction strategy where you pay off debt in order of smallest balance to largest balance, gaining momentum as you knock out each balance. When the smallest debt is paid in full, you roll the minimum payment you were making on that debt into the next-smallest debt payment.

The goal is to save $1,000 quickly. Ramsey says Baby Step 1 shouldn't take more than a month with proper budgeting, cutting back on spending, picking up extra hours or side jobs and selling items you no longer need nor use. Of course, this can vary based on your individual income and situation.

How many Americans have no savings? ›

As of May 2023, more than 1 in 5 Americans have no emergency savings.

“Every single day your high-interest debt goes unpaid, it's costing you money — a LOT of money — in interest,” Krawcheck says. Instead of putting your extra cash toward an emergency fund, she suggests that focusing all of it on credit card debt first will save you more in the long run.

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

A stunning new Bankrate survey of 1,030 individuals finds that more than half of American adults (56%) lack sufficient savings to shoulder an unexpected $1,000 expense.

Bankrate found that only 44% of Americans surveyed could afford a $1,000 emergency expense. That number is actually up one percentage point from the previous year, the company said. Those 56% of Americans who couldn't weather the storm said they would address that unexpected emergency charge in other ways.

You probably noticed “job loss” tops the list of usually unexpected expenses. That's the main reason the fully funded emergency fund is set at 3–6 months of expenses—so a job loss doesn't destroy your finances.

While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.

For many people, $5,000 would be inadequate to cover several months' expenses in the event of job loss or an expensive emergency. If that is the case for you, $5,000 would not be considered an overfunded account.