DAVE SAYS: Don’t paint yourself into a financial corner
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You’re going to need a better plan
My husband opened his own commercial painting business in May. He knows he will have about three months in the year where he’s making little to no income. We’ve gotten $1,000 set aside for our Baby Step 1 beginner’s emergency fund, but because of that down period he would like to skip paying off all our debt except for the house, which is Baby Step 2, and move to Baby Step 3 and put an emergency fund aside. I can understand his thinking, but I wanted your thoughts on the idea.
Baby Step 3 is not a fill-in-the-gap measure for income you already know won’t be there. Baby Step 3 is an emergency fund of three to six months of expenses, and the scenario he’s talking about is not an emergency. He knows it’s coming, so it is not an emergency.
I think he needs to re-work his business model. This guy needs something to do during those three months, so he doesn’t drop off to no income. Also, if you’re going to set some money aside for a down time, that would not be Baby Step 3. It would be a line in the budget where you’re setting some money aside, because you know a problem’s coming.
If something happens around the same time every year it becomes predicable, and it’s not an emergency. So, it’s not really a matter of the order of the Baby Steps. You budget for this down time, or even smarter, figure out a plan for his time during these months, based on his skill set, that will earn some money!
You still need an emergency fund
I’m debt-free except for my home, and I’m about to start Baby Step 3 of your plan. I will be will back on active duty in the Navy soon, and they provide certain types of relief funds for its members depending on where you’re based and other factors. With this in mind, how should I approach Baby Step 3?
For Baby Step 3, I tell folks to have three to six months of expenses set aside in an emergency fund. You have incredibly stable employment, so you would probably be okay on the three-month side of that equation. And you wouldn’t need quite as much emergency fund money as if you were a straight commission salesman.
However, my guess is you’ll still have emergencies that will be your responsibility to cover. Everyone needs an emergency fund, Brad. But in your situation, you’ll probably be okay with one that’s closer to three months of expenses rather than six months of expenses.
Thank you for your service to our country!
Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 13 million listeners each week on 585 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.