A Car Before An Emergency Fund

Mary wants to know what step she should be on before upgrading her car. Dave explains that it shouldn't occur until after the emergency fund is established.

QUESTION: Mary in Georgia from My Total Money Makeover wants to know what step she should be on before upgrading her car. Dave explains that it shouldn’t occur until after the emergency fund is established, unless there’s an emergency.

ANSWER: The big thing to make sure of is that the car is upgraded after the emergency fund is fully funded. Baby Step 1 is $1,000 saved as a starter emergency fund. In Baby Step 2, you pay your debts off smallest to largest. Baby Step 3 involves finishing off the emergency fund by putting three to six months of expenses in it.

Once you’ve done that, that’s when you buy some toys and upgrade a few things. You can get a couch if you’ve been waiting and saving for one. But until you’ve got an emergency fund, the emergency fund is the priority in case you have an emergency. If you drive a $2,000 car that blows up and you have to buy another $2,000 car with cash, that’s an emergency.

The first time I moved up to a decent car with cash was after the emergency fund, because moving up in car is not an emergency. Moving up in couch or going on a nice vacation is not an emergency. Until I have emergencies covered, I’m not going to spend emergency money on those things.

I’m glad we lived that way, because as soon as you get that $10,000 or $15,000 in the bank just for emergencies, it’s weird how your life starts to turn. Having no payments and money in the bank has an incredible impact. I remember when we were driving a $1,000 car and we moved to about a $3,500 car. That was a big move. Then we moved up to a $6,000 car. Each and every time, we did that with cash.