There’s been a lot of talk on the blog lately about emergency funds and baby steps. So since we’re on that topic, I have a question: do most of you believe there are exceptions to Dave Ramsey’s Baby Steps?
Listening to his show, I feel like he’d say never. But I agree with commenters here that say people like me with huge, long-term debt should be adapting the Baby Steps, especially when it comes to emergency funds and retirement savings.
In case you’re not a Ramsey follower, he teaches people to follow seven Baby Steps:
1. Save $1,000 for your starter emergency fund.
2. Pay off all debt (except the house) using the debt snowball.
3. Save 3-6 months of expenses in a fully funded emergency fund.
4. Invest 15% of your household income in retirement.
5. Save for your children’s college fund.
6. Pay off your home early.
7. Build wealth and give
So here are the two adaptations I think apply:
1. Keep More Than $1,000 in Our “Starter” Emergency Fund
Currently we’re in Baby Step 2 paying off $291,000 of student loans. We have $8,000 in our emergency fund that we don’t touch. Dave would tell us to put $7,000 to our debt, and keep only $1,000 in our starter emergency fund until all our debt is gone.
But our debt is so large we’ll be dealing with it for years and years. It scares me to only have $1,000 cash available to us for that long! Paying off $7,000 of our debt would be good, but I don’t feel it’d be best. I’d rather have extra cash available to us in savings. $8,000 is not a full Step 3 that would cover 3-6 months of expenses, but it’d cover us for a month or two if something came up.
2. Invest Even While in Baby Step 2
We don’t want to put off investing for retirement for too long. We’re in our late 30s, after all. But how long is too long? Fortunately we started contributing to our retirement seven years ago, and we only stopped last summer when we got more aggressive with our debt. That means we have $100,000 in an IRA that’s slowly growing even while we take a break.
However, my husband is itching to contribute to our retirement again. I vote we make a good dent in our loans first—maybe for six to twelve more months—and then contribute 10% of our income instead of 15% so we can still work on the loans. I just feel like we can’t wait to save for retirement until our massive debt is paid off, but I still want to make those stupid loans disappear.
Would you justify adapting the Baby Steps in our situation? How would you tweak them?