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Ask Dave

The Busted Budget

Michelle is on Baby Step 3 but can't get her budget to work. What is she doing wrong that she can't get her emergency fund in place?

QUESTION: Michelle in Los Angeles is on Baby Step 3 but can’t get her budget to work. She doesn’t know how she’s going to come up with her three to six months of expenses. She makes $50,000 a year and has a $900 house payment. What is she doing wrong that she can’t get her emergency fund in place?

ANSWER: If you have a $900 house payment and save $200 a month for taxes and insurance, that’s $1,100. Your take-home pay should be in excess of $4,000. Your house payment is not unreasonable. Your taxes and insurance aren’t choking you to death; those are reasonable.

I might temporarily stop retirement savings while I finish Baby Step 3. That will help some. It may be that you look for some other things to sell or you look for some part-time work temporarily just to get this fund built so you can get back to doing retirement savings as soon as possible.

I don’t hear you doing anything really poorly. You are doing a written budget and you don’t have anything mentioned here that is completely out of control. If you are getting $400 for a tax refund, that’s not much and it’s not killing you. That’s just a few bucks a month, and it’s not enough to adjust it for. I think you’re on track.

I think you’re just learning to live on a written plan and make everything behave. But I don’t sense a ton of waste here. I think you are doing a pretty good job with this. I’ll tell you to just keep hammering on it until you can hit a few of these goals. You are not going to do anything that’s flashy with this, and that’s fine.

We are trying to be the tortoise, not the hare. I don’t mind being slow, I just want to be the first one to cross the finish line. Slow and steady wins the race.