Dave Ramsey is a well-known figure in the debt-relief world. Many owe their escape from debt to his ‘baby step’ program, and his financial advice has spurred countless others on their way to achieving the same goal. I admire Dave Ramsey and as a self-starter, I especially appreciate his budgeting tips for freelancers and people with fluctuating income, such as salespeople on commission.
However, there’s an aspect of his program that doesn’t work so well for those on a variable income: Baby Step 1. It encourages you to set aside $1,000 as an emergency fund before moving on to Baby Step 2 – repaying all your debt using the ‘snowball method’. Only after clearing your debts should you proceed to Baby Step 3, which involves setting up a 3 to 6 month emergency fund.
It’s crucial to remember that Ramsey’s book ‘Financial Peace’ was written back in 1992, and $1000 then isn’t the same as $1000 now. For instance, $1000 in 1992 has the same purchasing power as $1666 in 2013. Meaning, the recommended emergency fund of $1000 in 1992 had a real value of only $600 in 2013, as per the Inflation Calculator.
Although a $1000 emergency fund might be more than many American’s posses, it’s still a risky financial move. If your income is limited and your debt significant, you could be stuck on Baby Step 2 for years. It’s entirely plausible that at some point during this period, you’ll face an emergency costing more than $1000.
Should those with fluctuating income follow Ramsey’s plan? Perhaps not, as it’s potential financial negligence. A bare-bones budget, like the one Ramsey advises, doesn’t give you any wiggle-room for cuts. When your income dips, you’re stuck relying on credit cards once more.
I believe that those with a variable income, especially those with families to support, should have an emergency fund greater than $1000. At least one month of income or more may be more suitable.
My husband and I have been faithful followers of Ramsey’s plan. Despite our limited income, we managed to clear 23% of our debt over the course of 22 months, including periods where my freelancer income was unpredictable. But a string of unforeseen expenses, coupled with a few low-earning months, depleted our small $1000 emergency fund, forcing us further into debt.
Faced with this, we’ve now revised our plan, prioritizing setting up a two-month emergency fund before we return to aggressive debt repayment. As a freelancer, I’ve learned my income can’t always be relied upon. We need a sizeable backup for months where it dips below the usual, and the $1000 emergency fund just did not cut it.
What’s your take? Do you think Ramsey’s Baby Step 1 is outdated? Should people save more before diving into debt repayment? Discuss further on SmartAsset.com.
