How do you know how much six months of living expenses is? Well, figure out what it would take for you to live with no income for one month then multiply it by six. This would include things like mortgage, utilities, food, gas for your car, etc.
Take the $1000 you put away and just as aggressively as you attacked your debt I want you to sock that money away for this emergency fund.
What do you do with it as you are getting it together?
Put it in an easily accessible place like a savings or money market account. This is not, I repeat is not for investment. Your objective is not to make money off this account but to have money put away for a rainy day that you can get to in an emergency.
Without this emergency fund in place, all the hard work you put into getting out of debt is in jeopardy. Without that money it is very likely you will reach for a credit card to save you. And who could blame you. Don't let that happen. Get that emergency savings fully funded.
So what does an emergency look like which warrants tapping into this money?
Things like medical emergencies, the loss of a job, a blown engine in your car, etc.
What it isn't is that dining room set you've had your eye on that just went on sale at 50% off.
How many months could you cover?
Okay, that is the gist of Baby Step Three, but of course, like always, please refer to Dave Ramsey's website and books for more specific details.
Next week, Baby Step Four!
Click Here to go to "Get Out of Debt - Part 9."