Baby Step 3: Save 3–6 Months of Expenses in a Fully Funded Emergency Fund

Baby Step 3 starts off with a happy dance. After all, you've just paid off all your non-mortgage debt! Once you've properly celebrated being debt free, it’s time to sock away 3 to 6 months of expenses in a fully funded emergency fund.

Why this step is so important

Emergencies will happen. It’s not a matter of if, but when. Whether it’s a job loss, a medical emergency, or a major home repair, having 3 to 6 months of expenses saved gives you peace of mind and the power to face almost any crisis without debt. 

What should this cover?

Your emergency fund should cover all essential monthly expenses, such as:

• Rent or mortgage

• Utilities

• Groceries

• Insurance

• Transportation

• Other Expenses: Think about ongoing expenses like childcare, pet care, medications, or any regular bills that are vital to keeping your household running smoothly.

How much should you save?

Multiply your monthly essentials by 3 to 6 to get your goal range. If you pay $5,000 in monthly expenses, a full rainy day fund is anywhere from $15,000-$30,000. Where you want to be within that range depends on your life stage and personal preference. If you are married, have a conversation and decide the right amount to save together.

If you're single and have a stable income, or married and you both have stable incomes, then saving for 3 months of expenses is a good goal. Those who should save more toward the 6-month goal include:

• If you're married with one income stream

• You're a single parent

• Someone in your home is chronically ill

• Your paychecks are highly irregular

When do you use this fund?

Only for true emergencies, not vacations, shopping deals, or impulse buys. Here are the two conditions that make something an emergency:

• You didn't know the issue was coming

• It affects whether or not you can run your household

You don't know when a car wreck is going to happen, and if it does, you can't get to the office or the grocery store. That's an emergency. Getting an email about a flash sale at a furniture store is something you didn't expect, but your house will get along just fine without that new (and unnecessary) love seat.

Next Steps

Time to start growing the retirement savings with Baby Step 4!