Baby Step #3 - Create a true emergency fund (4-6 months)
In Baby Step #3, Dave Ramsey advises you to save 4-6 months' worth of expenses in a separate savings account. This is where you take your $1000 emergency fund up to an amount that will truly protect you in case of unforeseen emergencies. This is meant to cover more than the occasional car engine repair or new washer; this sum should help you in case of an illness or job loss that might last for several months.
How do you determine the amount? Look at your budget (yes, you're doing a budget by now, right?) and eliminate anything that's "extra" such as eating out, vacations, extra savings -- because you won't be doing any of those things during an actual emergency such as the loss of your job. Just the basics and anything you really can't do without. If the situation ever comes to pass, this will definitely mean having a hard core conversation with your family about things that need to be given up during this period of time.
The best news about having a fully funded emergency fund is that, when faced with a serious illness or the loss of a job, at least you don't have to wonder where next month's rent or electric bill is coming from -- you've got it!