Dear Dave,
I just finished paying off all my consumer debt on Baby Step 2. It took a long time, but I finally did it. Now, it's time to grow my $1,000 emergency fund into a fully funded emergency fund. I've been working on this for a while, and I'm glad I did. But I was wondering when you can spend time, and have a little fun, if you follow the Baby Steps program.
Mark it
Dear Mark,
Congratulations, friend! The first few steps can be very difficult. I'm proud of you for sticking with it and making it happen.
I recommend that you complete the first three Baby Steps before you start thinking about spending money on fun things. In my mind, that puts you in a strong position, financially speaking. So, that's when it's okay to have a little fun going on vacation or buying something—reasonably priced, of course—that you've been eyeing.
As you mentioned, Baby First is saving $1,000 for the first emergency fund. Baby step 2 is where you pay off all debt—except your home—using the debt snowball method. In Baby Step 3, you go back and fully fund your emergency fund with enough money to cover three to six months of expenses.
But don't get so excited that you forget about the other Baby Steps. Baby Step 4 means putting 15 percent of your income into pre-tax retirement plans, such as mutual funds and Roth IRAs. Don't neglect saving for college if you have children. That's Baby Step 5. And Baby Steps 6 and 7 are paying off the house early and building wealth and being incredibly generous. Live like no one else, so that later you can live and give like no one else.
Everyone loves to have fun. And there is nothing wrong with spending some money if you can afford it. I want people to make sure they plan their finances properly first. Remember, there are only three things you can do with money. You can use it, save it and give it away. Following my plan will allow you to do all three without putting yourself in a financial bind.
Keep up the good work!
— Dave
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