When Do You Stop Adding To Savings?
Joel wants to know if he should continue to add to the baby emergency fund while he's getting out of debt or stop saving. Dave explains the best way to get out of debt is focus.
QUESTION: Joel on Facebook wants to know if he should continue to add to the baby emergency fund while he’s getting out of debt or stop saving. Dave explains the best way to get out of debt is focus.
ANSWER: Yes, you do. Baby Step 1 is you don’t pay any extra on your debt and you don’t put anything into retirement and you don’t have any fluff in your budget and you totally concentrate on Baby Step 1 with every dollar you can squeeze out of your budget until Baby Step 1 is done. Baby Step 1 is $1,000 in a beginner, starter emergency fund. Baby Step 2 is starting to attack your debt, everything but the house, listing your debts smallest to largest, pay minimum payments on everything but the little one, and attack the little one with a vengeance. When you start working on that, you’re not saving anything. All you’re doing is attacking debt. Complete focus. What you focus on is what you win at. If you focus on your health, you’ll start winning at your health. If you focus on your career, you’ll start winning at your career. If you focus on who can’t get a date, then you’ll know everything about The Bachelor. What you focus on is what you’re going to know about. Focusing on your debt is going to knock your debt out.
Once you have the $1,000, I would not continue adding anything to that nor would I add anything to retirement while you’re working the debt snowball. When the debt snowball is done, you’re debt-free but your house. Now we’re not going to pay any extra on the house until we build the $1,000 account up in Baby Step 3 to three to six months of expenses. Once that’s done, then Baby Steps 4, 5 and 6 we do at the same time. Baby Step 4 is putting 15% of your income into retirement, Baby Step 5 is saving for your kids’ college and Baby Step 6 is all extra goes to pay off the house. People working the Total Money Makeover are paying off their homes on average in about seven years. They’re debt-free on average in 18-24 months. In six more months, they have their emergency fund of three to six months of expenses set aside. That’s the average, which means some do it faster and some do it slower.