About Dave Ramsey:
Who is Dave Rasey? Dave Ramsey is a businessman, personal money management expert, TV personality, and radio talk show host who has helped thousands of people take charge of their financial lives and live a debt free life. Debt can be stressful for many. Dave Ramsey’s Seven Baby Steps are designed to lead debtors out of debt and worrisome financial stress and welcome them into a life of savings and giving.
Make A Decision Before You Follow 7 Baby Steps To Financial Freedom
Before you decide to follow the steps, make a decision that you will not and are not going to incur further debt. Cut up your credit cards and say “NO” to debt.
Now that you are ready, follow the steps below.
Step 1: Set Aside $1,000
For those unexpected emergencies in life, do you have a plan? In the first step, Ramsey explains that whether it’s a maintenance issue or an unanticipated doctor visit, you should be ready! Step one is all about saving. Ramsey states that your initial goal should be to save at least $1,000. In order to obtain the money, do whatever you need to save this amount. Some easy ways to start saving are to find a part-time job, tutor children, or use your DIY skills to prepare and sell homemade products. Once you have the $1,000, open a checking account and put the money in a separate account. The reason for the second account is so you keep the funds separate from your regular account so that you do not spend the money. Now that the money is saved, should you have an emergency, you will be neither in debt, nor will you need to dig deeper into debt to have the problem fixed.
Step: 2 List and Pay Off All Debt
The second baby step is to prepare a budget plan and list all of your debts in order. Start from the smallest balance first. Start paying small debts first as they will help you stay motivated to dump your large debt. Do not worry about the interest rates unless two or more debts have a similar payoff. If all of your debts have different payoffs, then it would be better to list the debt with the higher interest rate first.
As each debt is paid, you will be surprised to see how much money you have as a positive cash flow, and before you know it, you will be debt-free!
Step 3: Build A Full 3 To 6 Months Emergency Fund
The third baby step is to calculate how much you need to live on for 3 to 6 Months (usually between $10,000 and $15,000). This money should be saved in addition to your $1,000. Remember, you will never be in debt if you start saving now to protect yourself against future surprises-no matter what comes your way.
Most of us lose our momentum after following Baby Step 2 and fail to complete the emergency fund. Keep your emergency fund in a checking account, that way you can pay whenever the funds are needed.
Step 4: Invest
Ramsey suggests 15% of household income should go into a retirement account. There are many options to invest such as a Roth IRA, 401(k) and a Traditional IRA. It is important to research what fund will be right for you.
The ‘invest’ baby step is all about building future long-term wealth. If your employer does not offer a 401(k) retirement plan, go straight to the Roth. Consider investing in the right mix of mutual funds: growth and income, growth, aggressive growth, and international. The right mix of funds now, can make you millionaire in the future.
Step 5: Save For Your Kids’ College Expenses
Now that you have paid off all debts and accumulated enough for your retirement, it’s time to think about your children. Step 5 is to save for college expenses. Saving now will help you plan for when your kids graduate from high school. As college expenses continue to rise, two smart ways to save are the 529 college savings funds or the Education Savings Accounts (ESAs). Both are tax-advantaged savings vehicles and allow parents to save money in individual investment accounts. How do you know what plan is better to invest in? Do some research, as it depends on your income and the state you live in.
Step 6: Pay Off Your Mortgage Early
This step is the big one. Ramsey suggests after you save enough for your retirement and children’s education, it’s now time to pay off your home mortgage loan. Any money you accumulate towards paying off your mortgage early could save you tens of thousands of dollars in interest. Should you have a 30-year mortgage, consider refinancing it to a 15-year fixed-rate mortgage. Stay focused and do not forget to celebrate when you pay off your mortgage early.
Step 7: Give
Life is all about helping others. Build wealth but it is also important to leave a portion for your future generations. Everyone feels happy when they give.
As a note: Ramsey suggests that in order to stay on track, set a saving goals every month and have fun along the way!
I believe Dave Ramsey’s 7 Baby Steps are absolutely worth it and are the most effective debt management process. These steps encourage you to have an emergency fund, pay off your debts, save for your retirement, save for your children’s education, and plan for your family’s future. It’s easier than you think! Start today, remember, baby steps..