The 3 things you can do with your money

Dear Dave,

I just finished paying off all my consumer debt in Baby Step 2. It took a long time, but I finally did it. Now, it’s time to grow my $1,000 beginner emergency fund to a full-funded emergency fund. I’ve been working on this for a while, and I’m glad I’m doing it. But I was wondering at what point can you spend, and have a little fun, when you’re following the Baby Steps plan.

Mark

Congratulations, buddy! The first couple of steps can be the hardest. I’m really proud of you for sticking with it and making it happen.

I recommend completing the first three Baby Steps before you start thinking about spending money on fun stuff. In my mind, that positions you on pretty solid ground, financially speaking. So, at that point it’s OK to have a little fun going on a vacation or buying something – reasonably priced, of course – that you’ve had your eye on.

Like you said, Baby Step 1 is saving $1,000 for a starter 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 cash to cover three to six months of expenses.

But don’t have so much fun that you forget about the other Baby Steps. Baby Step 4 means putting 15% of your income into pre-tax retirement plans, like mutual funds and Roth IRAs. Don’t neglect saving for college if you have kids. That’s Baby Step 5. And Baby Steps 6 and 7 are paying off the house early, building wealth and being outrageously generous. Live like no one else, so that later you can live and give like no one else.

Everyone likes having fun. And there’s nothing wrong with spending some cash if you can afford it. I just want people to make sure they have their finances in order first. Remember, there are only three things you can do with money. You can spend it, save it and you can 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