Baby Step 3 Complete: Now What?

July 24, 2017

Written by Nicole

Well it’s official!

Baby Step 3 is complete!!!

And it’s an absolute relief. In August 2016 I made the last payment on nearly $100K of student loans debt! It felt great to complete Baby Step 2.  I had been working hard for 6 years to accomplish the goal. Then I moved on to Baby Step 3.

Let’s be honest..Baby Step 3 is not exactly the sexiest baby step in the world so I had a difficult time staying motivated while saving for my fully-funded emergency fund. Working through Baby Step 2 (Paying off all debts but the house) was a wild ride! Honestly, a complete mindset shift was required to focus on saving vs. paying off debt and I wasn’t prepared for that feeling. Oddly, I didn’t feel the same urgency in Baby Step 3 that I experienced in Baby Step 2.

What are the Baby Steps?

Just in case you are unfamiliar with Dave Ramsey’s Baby Steps here they are:

  1. Baby Step 1: Put $1,000 in a starter emergency fund.
  2. Baby Step 2: Pay off all debt using the debt snowball.
  3. Baby Step 3: Fully funded emergency fund (3-6 months of expenses).
  4. Baby Step 4: Invest 15 percent of your household income into Roth IRAs and pretax retirement plans.
  5. Baby Step 5: College funding for your kids.
  6. Baby Step 6: Pay off your home early
  7. Baby Step 7: Build wealth and give.

Immediately after paying off the student loan debt, I set out to save cash for a car. My car, which I bought used in 2007, is a 2004 with about 240,000 miles on it. Feeling as if I was on borrowed time with such an old car, I set a cash savings goal of $25,000 in order to eventually replace it. No more car payments for me if I can help it!

Little did I know that I would have to put my savings goal on pause due to news of an impending job loss coming up in May of 2018.  So, I kicked my emergency plan into high gear because saving for a car was no longer a priority

How much did I save?

I saved $20,000 total. But, in full transparency I did not start completely from scratch.

The $1,000 starter fund (Baby Step 1) was not enough for me to feel comfortable financially. While I paid down debt I maintained a larger emergency fund so that I could sleep easier at night. With two (then three) kids, a house, and a rental property, $1,000 doesn’t cover much.

My husband and I started off with roughly $8,000 in emergency savings after completing Baby Step 2 and over the past year we added another $12,000. To me, $20,000 seemed like a nice, round number to close out Baby Step 3.

What will I use the emergency fund for?

Our emergency fund is reserved for true emergencies, such as a job loss, illness/injury, or other financial catastrophe.

I like to use sinking funds to cover some of the other expenses (and minor annoyances) that occur unexpectedly such as flat tires, car repairs, or the rare speeding ticket. This additional savings helps to keep a buffer between my monthly budget and my emergency fund.

How did I save for my emergency fund?

  • Maintained a monthly budget in order to minimize overspending (not exciting right, but it works!)
  • Rocked my side hustles! (I find myself super tired some days, but the additional income has been a true blessing).
  • Kept my personal and discretionary spending to a minimum in order to stash away more cash (with the exception of a much needed (debt free) vacation with the hubby to Mexico in June).
    FrugalChicLife Vacation

    Eric and I- Debt free Cancun Vacation

    Hey, you gotta live right?

Where do I keep my emergency fund?

Emergency funds should remain liquid for easy access in the event an emergency arises. If the money is too accessible it will be tempting to spend it.

I prefer an online Money Market account for maintaining my emergency fund.

So…Baby Step 3 is complete, now what?

1. Add to my sinking funds. Some of my sinking funds are down right pathetic at the moment. Uhh..I have $1.84 in my car maintenance fund. So the plan is to build some of those funds back up over the next few months. I will also finish saving for Christmas and will add money to the Home maintenance Fund and Life Happens Fund.

2. Resume saving cash to buy a used car. However, I have decided to lower my savings goal from $25,000 to $18,000. I will probably buy a slightly older car with higher mileage and put the other $7,000 towards investing or a down payment for a second rental property..More info to come in future posts.

3. Continue with Baby Step 4. I was already investing above the 15% towards retirement even before I got serious about paying off debt so I plan to continue on with that. I max out my 403B at work every year and we contribute to our IRAs during the years we are eligible. (*We exceeded the salary max a couple of years in a row and was ineligible to contribute).

4. Ramp up my investing efforts. I am looking into investing in low-cost index funds with Vanguard to further diversify my retirement savings.  The fund that I am interested in has a $10,000 minimum investment requirement to get started. I have been researching financial independence and early retirement like crazy and I realize that I need to also invest additional money in taxable investment accounts. I am currently reading How to Retire Early by Robert Charlton.  If you are even remotely interested in early retirement then I HIGHLY recommend that you check out this book.

5. Travel more. Over the past 6 years I have been laser-focused on my financial goals, but I also have many other goals to accomplish. Traveling is high on the list of priorities. One of my goals for 2017 is to visit at least two new places during the year. I am on track to complete that goals with a trip to Niagara Falls and to Dallas, Texas to attend FinCon but there are so many other places I want to visit and explore. Balancing enjoyment of the present with planning for the future is crucial because tomorrow is not promised to anyone. My husband and I plan to get away at least once every 3 months. It’s not always necessary to travel some place warm and exotic (although that would be nice!). There are lots of places in the US that we still want to visit including Colorado and Washington State. I have always wanted to say that I have visited all 50 states and I still have a long way to go.

Where are you on the Baby Steps? What are your plans once you are debt free?

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  1. Thiara

    I ‘ve started watching your YouTube channel about a week ago and I must say I am obsessed . I am about to start my journey to financial freedom and got already many tips from your videos. I’ve started budgeting for next month and will do the cash envelope system as well. I will try that out while thinking about starting my emergency fund. I leave in west Africa, Senegal and I am determined to make this work. Many Thanks and Congrats for completing Baby step 3.

    • Nicole Hatcher

      Hello! Thanks for stopping by. I’m glad the videos are helping out. Using cash helped me tremendously especially when I got serious about consistent budgeting. All the best on your journey!

  2. OurFarmLife75

    I’m a little late to the game but Congrats on Baby Step 3! I can’t wait to get there. We are currently on Baby Step 2 and will be done by next year. It has been a very eye opening journey and one that has taught me so much about money. The most advantageous thing I have learned is that I do not have to live with debt. Just because everyone does it and all the ads push it doesn’t mean it is necessary to live a happy life! I am so much happier now even on a strict budget and paying off debt than I ever was spending whatever I wanted whenever I wanted to. I have a goal and a plan for my money and life. It is so refreshing! Keep up the good work and I am subscribing to your youtube channel.

    • Nicole Hatcher

      Congrats on your progress on the Baby Steps as well! They are a great framework for getting a handle on your money. I completely agree with you..there is a great sense of freedom and accomplishment in knowing that you have control over your money instead of your money controlling you. Thanks for stopping by!

  3. Treena

    I just finished baby step 3 today. I have 5 months expenses saved up. If I get laid off, it would be at a certain time of year (June), because I am on a 10 month contract. I would also get 2 weeks severance, I also have a guaranteed seasonal 2 month job, so really I feel that I’m ok for 7.5 months. I don’t own a home nor do I have any children. I have also been saving for retirement all along through this journey because I have a pension. I’m not sure what to do now. Before you get all jealous, I am a low income person who makes less than 35k a year. I also recently had my hours cut at work. I am looking for other options.


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