Emergency fund motivation and retirement

Donna is concerned about maintaining motivation while she saves up for her emergency fund. She's also worried about retirement. Dave addresses both, explains the reasoning behind the Baby Steps, and offers some encouragement.

QUESTION: Donna makes $38,000 to $40,000 a year working in the trade show industry, and she’s about to start Baby Step 3, which is saving three to six months of expenses for her fully funded emergency fund. It took her 14 months to pay off $8,000 in consumer debt, and she asks Dave how long it should take to complete her emergency fund, how to stay motivated, and how to handle her retirement worries.

ANSWER: Six months to a year at most. Your take-home pay should be about $3,000 a month, so three to six months of expenses will probably be in the neighborhood of $8,000 to $10,000. If it took you about a year to pay off that much in debt, then it should take about a year to accomplish this.

Here’s the problem. If you start building retirement right now and have an emergency, you know what you’ll use? You’ll use your retirement. That’s why the emergency fund comes before retirement in the Baby Steps. But you’re only 52. You’re a spring chicken! I’m 55, so we’re going to make it, kiddo.

The average household income, which is often two incomes, is $52,000. So at $38,000 you’re on the lower end of the spectrum, even as a single. One thing I would challenge you to do is to think about and work toward what you could be doing at age 60 that will make you $80,000 a year. Instead of looking at this like you’re already old and you’re just going to kind of slide into home plate, let’s go ahead and say it: the number-one decade of income earning for Americans is their fifties. The reason is that you finally get enough wisdom and life experience, and it finally starts to come together within a career. They slow down, typically, in their sixties, and in their forties they haven’t quite hit the top yet.

In your case, you’re probably working really hard for that $38,000. In your fifties, if you’re starting over — or if you start making a lot more — we call that an “encore career.” That’s what I want you to do. I want you to start thinking fresh again, and stop telling yourself that you’re old. You’re really not. I’m not saying you quit today, but I am saying you’re going to be making $38,000 eight years from now unless you start aiming at something else.

My point about all of that, mathematically, is that’s as much an answer to your retirement fears as trying to leapfrog over and start doing retirement without an emergency fund in place. So put your emergency fund in place over the next 12 months, and start doing some goal setting and reading and thinking about what you want to be doing. Maybe you want to own a trade show company by that time. I don’t know. Bu think about what you want to do and what it is that has brought you to this point.

I’m going to send you a copy of a book we sell a lot of called Start. I want you to treat your emotions and your mind like you’re 19 or 20 years old, and you’re just coming out of high school or college again. Ask yourself, “What would I do if I could do anything?”

Because you know what? You can do anything!