If you know it's coming, it's not an emergency

Melody's husband believes he'll have about three months of down time each year in his new business. He wants them to skip paying off debt, and build up a big emergency fund to cover these times. Dave gives them a better idea.

QUESTION: Melody’s 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. They have $1,000 set aside for their Baby Step 1 beginner’s emergency fund. But because of the down period, her husband would like to skip paying off debt and put a full emergency fund aside. Dave says the issue here isn’t the order of the Baby Steps, it’s budgeting and getting a better business model for Melody’s husband.

ANSWER: 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 rework his business model. This guy needs something to do during those three months so he doesn’t drop off to nothing in terms of 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 your 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.