Dear Dave: I make $25,000 a year, and I’m single. I expect my salary to increase to $35,000 next year, so can I get by with a $500 starter emergency fund instead of $1,000? I have about $38,000 in debt right now, including student loans, and I don’t know how to keep up with bills and everything if I try saving a bigger emergency fund.
Dear Jane: You really need a starter emergency fund of $1,000 if you’re at a point in life where student loans are in the picture. It might seem like an impossible task right now, but that should be your first big goal. A written, monthly budget will go a long way toward helping you achieve that goal.
Making a budget for your money isn’t rocket science. It’s a simple, written planning process where you give a name and destination to every dollar you make before the month begins. Food, shelter, clothing, transportation and utilities are necessities, so they come first. After you’ve taken care of those, make sure you’re current on your debts. Once all that is out of the way, put every spare dollar you can into your emergency fund.
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If you do this with a sense of urgency, and limit spending to necessities, it won’t take very long. You’ll be surprised by how quickly it can happen, and you’ll love the newfound sense of security you’ll have in knowing $1,000 is sitting there ready to cover life’s little emergencies!
Dear Dave: My wife and I are on Baby Step 3 of your plan, and we’re about halfway to building our fully funded emergency fund. We don’t like our current home very much, and we’d like to sell and move as soon as possible. We have a little over $30,000 equity in the place, so would selling the house be a viable option for funding Baby Step 3?
Dear Justin: I wouldn’t sell the house just to do Baby Step 3. That’s usually a pretty easy Baby Step after you’ve gotten everything paid off except the house. As you know, a fully funded emergency fund means saving three to six months of expenses, so you shouldn’t have to sell your home in order to accomplish that.
However, if you don’t like the house anyway, and you’re already planning on selling it, then yes, set some of the equity aside. I wouldn’t put all of the equity into the next deal. I’d hold back my three to six months of expenses, so that when you move into another house you’re debt-free with a fully funded emergency fund sitting there.
It sounds like there’s nothing to prevent you from selling it today, if you’re sure that’s what you both want to do. Just hold on to enough so that you still have an emergency fund in place, and use the remainder for your down payment. So if that equation works for you, sell the house. If not, you may need to completely save up your emergency fund before you sell in order to make it work.
Regardless, when you move I want you to have an emergency fund and be debt-free in addition to your down payment. That’s what we’re after!
Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.