Question: My husband opened his own commercial painting business in May. He knows he will have about three months in the year where he’s making little to no income. We’ve gotten $1,000 set aside for our Baby Step 1 beginner’s emergency fund, but because of that down period he would like to skip paying off all our debt except for the house, which is Baby Step 2, and move to Baby Step 3 and put an emergency fund aside. I can understand his thinking, but I wanted your thoughts on the idea.
Dave: Baby Step 3 is not a fill-in-the-gap measure for income you already know won’t be there. Baby Step 3 is an emergency fund of three to six months of expenses, and the scenario he’s talking about is not an emergency. He knows it’s coming, so it is not an emergency.
I think he needs to re-work his business model. This guy needs something to do during those three months so he doesn’t drop off to no income. Also, if you’re going to set some money aside for a down time, that would not be Baby Step 3. It would be a line in the budget where you’re setting some money aside, because you know a problem’s coming.
If something happens around the same time every year it becomes predicable, and it’s not an emergency. So it’s not really a matter of the order of the Baby Steps. You budget for this down time, or even smarter, figure out a plan for his time during these months, based on his skill set, that will earn some money.
