Baby Step 3(b) is an official part of Dave Ramsey’s Plan, but it is never included in Dave’s list of Baby Steps. If you listen to the Dave Ramsey Show, people call in all the time who are working the plan and they ask questions like, “When is it OK to purchase another car?” or “Our washing machine is on it’s last legs, when can I purchase another one?” or “When can we take a vacation?”
Dave always says that these things are part of Baby Step 3(b). Translated, this means that when you are debt free except for your home mortgage (Baby Step 2) and have 3-6 months of expenses set aside as a fully-funded Emergency Fund (Baby Step 3), you are then ready to replace those things that you have let slide during the first 3 Baby Steps. This can also include a few small luxury items like a reasonable vacation or a new HDTV, but the items that you purchase in this step should mostly be necessities and the list should be small.
Be warned, however, that this can be a very dangerous Baby Step! When you get here, it usually means that you have sacrificed for 2 or 3 years to get your finances in order. Perhaps you are driving a beater car or haven’t been on a real vacation during that time. It would be very easy to go on a spending spree with your newly freed-up income, but you really need to make some tough decisions about exactly what you need to do at this step and what can wait until other Baby Steps have been completed.
The way to do this is to sit down with your spouce and write out a list of your Baby Step 3(b) goals that you both agree upon and, then, when those goals have been met, move on to Baby Step 4.
After our fully-funded Emergency Fund was in place in late 2008, my wife and I saved up and replaced both of our vehicles in early 2009. She was driving a 2000 Nissan Frontier and needed a smaller, 4-wheel drive vehicle for her work. I was driving a 1998 Pontiac Grand Prix with 240,000 miles on it. We saved up and paid cash for new (to us) cars. She got a 2002 Subaru Outback Legacy wagon and I got a 2008 Pontiac Grand Prix. It was a lot of fun saving up and being able to write a check to purchase vehicles. They really do drive a lot better when they aren’t towing around a payment book!
