Q: I’ll be receiving my income tax refund soon. It will be enough to completely pay off my two smallest debts, or get my starter emergency fund of $1,000 for Baby Step 1 in place. What should I do?
A: I love that you’re excited about using your refund to start the Baby Steps, and begin gaining control of your finances. But we call the beginner’s emergency fund Baby Step 1 for a reason.
Bad things can happen while you’re working to get out of debt. That’s why I want people to get a little money set aside before they start Baby Step 2, which is the debt snowball. What if the alternator on your car goes out, or your refrigerator dies? Life happens, and things go wrong. When this kind of stuff pops up, and you don’t have any money set aside, you’re likely to quit the plan and wind up going even deeper into debt.
I know you want to get out of debt. I want you to get out of debt, too. But I want you to stick with the plan, and actually get out of debt, instead of falling off the wagon the first time you hit a bump in the road!
Financial advisor Dave Ramsey is a prolific author and radio host.