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How to save for large expenditures

Where should you save for large expenditures when you’re doing the Baby Steps?

Dear Dave,

Where should you save for large expenditures when you're doing the Baby Steps?

Heath

Dear Heath,

Depending on what the expenditure is, I would suggest saving for these sorts of things after Baby Step 3. Once you've paid off all of your debts, except for your home, and built an emergency fund of three to six months of expenses, you reach a point where you can breathe a little bit. After all that hard work and sacrifice, you're finally in a position to replace that ratty, old furniture or get a better car. The question then is this: How much do you want to temporarily cut back on investing in order to make this expenditure happen?

Personally, I'd like to see you allocate a fixed percentage of your income toward play money and still be able to put 15 percent of what you make into retirement. If you want to slow down a bit on Baby Step 5, which is paying off the house, in order to take a once-in-a-lifetime vacation, I'm cool with that. But I don't like the idea of slowing down on funding your retirement.

The basic idea here is to always handle your money with planning, purpose and maturity. You've got a little room to play back and forth once you get past Baby Step 3. But until then, I want you to be hardcore about scrimping, saving and getting your financial house in order!

-Dave

Dave Ramsey is America's trusted voice on money and business. He has authored five New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover,EntreLeadership and Smart Money Smart Kids. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

I’m debt-free except for my home, and I’ll have that paid off in about 12 months. I currently make $60,000 a year and live in an area of Florida that is designated a flood plain,

because a river that empties into Tampa Bay runs behind my home. Currently, I’m paying $1,070 a month for flood insurance. My house is worth $325,000, and water has only come up into

the yard twice in over 20 years. Since I’m doing pretty well financially, do you think I need to keep my flood insurance policy?

Trudy

Dear Trudy,

From what you’ve told me about the history of your property, it sounds like your biggest concern might be if a hurricane caused a backwash in your area. Insurance is already pretty

tough in Florida when it comes to those kinds of things, but you don’t want to run the risk of your house getting mowed down and losing everything.

If I were in your shoes, I think I’d like the protection of flood insurance. What you’re paying for the policy is such a small percentage of your world, compared to the value of your

home and your income. Keep the coverage, Trudy!