I hope you’ve been enjoying my series on the Total Money Makeover ( a book by Dave Ramsey). If you haven’t read my other posts in this series, look no further and just click below.

Step 1: Building a base emergency fund

Step 2: The Debt Snowball (getting out of debt)

When you reach this third step, that means you have $1,000 cash and no debt except your home mortgage. You’ve pushed through with great intensity and have all the momentum on your side. You’re ready for the third step.

Baby Step 3: Finish the Emergency Fund

A fully funded emergency fund covers three to six months of expenses. What would it take for you to live three to six months if you lost your income? You have your $1,000 cash for emergency funds, but a fully funded emergency fund usually ranges from $5,000-$25,000 cash. Imagine what it would feel like to have no debt and $10,000 in savings for when it rains.

And unfortunately, it WILL rain. Money Magazine says 78 percent of us will have a major unexpected event within the next ten years. When this big stuff happens, you can’t rely on credit cards. If you use debt to cover emergencies, you have backtracked again.

The reality is that 49% of Americans could cover less than one month’s expenses if they lost their income. Scary huh?

So, what exactly counts as an emergency? An emergency is something you had no way of knowing it would come, something that has a major impact on you and your family if you can’t cover it. It could include the deductible on medical, homeowner’s or car insurance after an accident. It could be a job loss, medical bills or a blown transmission. But, something that is on sale ISN’T an emergency. Vacations aren’t. Furniture isn’t.

The emergency fund is easy to access

Keep your emergency fund is something that is liquid. Liquid money is a term that means easy to access with no penalties. Don’t use mutual funds or CD’s for an emergency fund.

Dave Ramsey suggests a Money Market account with no penalties and full check writing abilities for your emergency fund. This will not be the account that will build your wealth. This account is more like insurance against rainy days.

How Big?

It should be between 3-6 months worth of income. But, how do you choose between 3-6 months? Think about the purpose of this fund, it will help you determine what is right for you. The purpose of this fund is to absorb risk, so the more risky your situation, the greater your fund should be. For example, if you work off of straight commission or are self employed—stick to the 6 month rule. If you are single or are a one-income household then you should use the 6 month rule because a job loss in your situation is 100 percent cut in household income. If you have a stable, secure job where you’ve been with the company or government for fifteen years and everyone is healthy, you could lean towards 3 months. I know for me, I like to feel safe, so 6 months worth of income is my goal.

Use all available cash

Use all available cash to fund your emergency savings. Use the money you were using to pay debt.

Another question I always wonder about…what about buying a house? Dave Ramsey suggests that you should not buy a home until you finish this step. A home is a blessing, but if you move into home ownership with debt and no emergency fund, then you are setting yourself up for serious money problems.

According to Ramsey, Saving for a down payment or cash purchase for a home should occur after becoming debt free (step 2) and after finishing the emergency fund in this step. Don’t let buying a home, which should be a blessing, into a curse.

Do you feel like this is an important step? I know I do. My goal for this year is to completely the six month rule so I can start saving for a house and then start investing and wealth building.