When money is tight, we all look for ways to cut corners. We all look for a plan that will make our money go further. One plan that I have found that has consistently helped my family stay on track with our finances is Dave Ramsey’s baby steps.
You may have heard of Dave Ramsey, as he seems to be everywhere these days. He has a nationally syndicated radio show and new show on Fox business.
Who is Dave Ramsey and what is his philosophy on finances? This article will answer both of these questions.
First, Who is Dave Ramsey? He is a self-made millionaire. He was one of the youngest real estate millionaires ever. However, he lost everything he owned over the course of two years. Dave started over and learned how to manage money correctly. This money management turned into a multi-million dollar journey for Dave and his wife Sharon. They are now self made millionaires again and completely debt free.
I first heard of Dave Ramsey when his radio show went national. He’s changed up the titles to some of his stuff, but fifteen years later, he is still teaching the same methods.
One of the basic things that you will learn from listening to Dave Ramsey is that he uses a plan called “baby steps”. He gets this name from the movie What About Bob. Simply put, baby steps are the steps to getting out of debt.
What are these steps? As found on Dave Ramsey’s website, there are seven baby steps.
Baby Step number one is your “mini” emergency fund. Dave recommends that you set aside $1,000. 00 in an emergency fund so that when emergencies arise you can pay for them with cash instead of having to charge it. This fund is not for dinner out or new clothes. It’s for when the car unrepentantly quits working or your kid has to go to the ER.
Baby Step number two is Pay off debt using a debt snowball. A debt snowball is when you list all of your debts smallest to largest. Then you pay the minimum payment on all of them except for the smallest one. You should throw as much money as you can at the smallest bill so that you can pay it off quickly. Then you add the minimum payment from that smallest bill to the payment you are already making on the next smallest bill (along with any extra money). You keep working your way up the list adding the payments from bills paid off to the next bill. This creates a snowball effect and allows the debt to be paid off quicker.
Baby Step number three is 3-6months expenses for emergencies. Remember that $1,000.00 you set aside for emergencies? After all of your debts (except the house) are paid off, you are going to come back to the emergency fund and build it up to 3-6 months living expenses. The reason Dave Ramsey recommends this is because most families live paycheck to paycheck. What would happen if you were suddenly disabled? How would your family pay the bills? The emergency fund protects you when things like this happen.
Baby Step number four is investing 15% of household income into Roth IRAs and pre-tax retirement. It is inevitable that you will one day not be able to work. Having 15% of your income set aside for retirement allows you to retire without worrying how you will live. You won’t have to depend on Social Security to live.
Baby Step number five is college funding for children. You want to make sure you kids can attend college. By setting up a college fund, you will insure that your children won’t have to go into debt to get an education.
A lot of people want to put this step in front of retirement. The reason that Dave Ramsey doesn’t do this is because one day you WILL retire. You don’t know if your kids will choose to attend college or not. So, you should make sure you are set up for your retirement and then worry about the college funding.
Baby Step number six is Pay off home early. Now that you’ve paid off all of your debts, and saved for your future and your children’s futures, it’s time to get rid of the house payment. Imagine for a moment what life would be like if you had no house payments. Wow!
Baby step number seven is Build wealth and give! Invest in mutual funds and real estate. With no payments (other than regular bills like utilities, gas, food, cable, etc), it is easy to invest in good growth stock mutual funds and sit back and enjoy life.
I am not there yet, but I’m looking forward to the day I get to baby step number seven and I am able to change my family tree.
For more information, go to Dave Ramsey’s website. There you can learn more about these baby steps, find a radio station that carries his program, and find out more about his books and tv show.
