The very first Baby Step of the get-out-of-debt plan isn't even concerned with paying debt, it's to put some money aside for emergencies. This Baby Emergency Fund (BEF) of $1000 is a buffer between you and Murphy. [You know Murphy: the anything-that-can-happen-will-happen guy.] Once that's in place, budgeting the debt payments in Baby Step 2 can be done with a little more confidence because you know your plans aren't going to get derailed completely by some unexpected expense (aka Murphy) popping up in the middle of the month. Of course, not every unexpected expense costs less than $1000 but many do and the uneasiness over not being able to cover a bigger emergency is supposed to be a motivating factor to speed you through Baby Step 2.
Once Baby Step 2 is completed, it's time to save again. While there's still no way to save enough to cover every possible unexpected expense, a bigger buffer between you and Murphy certainly makes good financial sense. A fully-funded emergency fund (FFEF) will contain somewhere between 3 and 6 months of expenses. The $1000 BEF becomes the seed money for the FFEF. By the time Baby Step 3 is completed, there's enough cash in savings to take a pretty big financial hit or -- as often happens -- two or three smaller-but-simultaneous ones. Once again, this firm financial foundation allows for more confident budgeting as you move to the final three Baby Steps. Two of those steps also involve saving, oddly enough: investing for retirement and saving for college.
There is a third type of saving which is also done throughout the Baby Steps: sinking funds. As with the emergency funds, which step you're on will influence how much saving is devoted to sinking funds. The difference between emergency funds and sinking funds lies in whether a known or an unknown expense is being anticipated. An unknown, unexpected expense should be covered by an emergency fund while a known, expected, other-than-monthly expense should be covered by a sinking fund. See this article for more detail about sinking funds.
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If you are new to Debt Free Fanatics, and want to learn more about techniques for getting out of debt, we encourage you to register and participate in our forums. Our members have been managing their money for years and are happy to offer advice and instruction on how you can manage your money better and get out of debt.
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