For years, I’ve been a personal finance geek. Seriously, one of my first memories is sitting on the floor of my bedroom when I was probably about 6 years old, counting the money I had saved, then writing the amount on the outside of the small, cardboard jewelry box where I stored my vast sums of wealth ($46.78, if I remember correctly!) So I’ve read and listened to a ton of personal finance gurus who espouse everything from giving up the daily latte to getting rich in a year by using OPM (Other People’s Money.) But by far, the best comprehensive plan for people who want to win with their money is Dave Ramsey’s Baby Steps.
How Dave Got it Figured Out
He knows both sides of the money world. Although he is now reportedly worth over $50 million, he actually declared bankruptcy in his 20’s. He swore off debt, and fought his way back, founding the Lampo Publishing group and The Dave Ramsey Show to teach others how to manage money. I won’t say I agree with him 100%, or follow his plan point for point. However, if you are looking for a place to start, especially if you really don’t like dealing with money, his plan is pretty much the best there is. It will take you from overwhelming debt to incredible prosperity, and there’s a plan for every step along the way. Disclaimer: It will work, but it won’t be EASY.
So here it is. To start with, we’re just going to name the baby steps with a short description. Then we’ll delve into each one a little deeper in a series of upcoming posts.
Baby Step 1 – Create a mini-emergency fund.
Dave Ramsey says this emergency fund should be $1000 dollars, and that’s a pretty darn good guideline. If you have a very low income – like, say under $20,000/year, I’d go with a smaller fund of $500. My own recommendation (not Dave’s) is that if you make $100K or more as a household, you might want to keep an emergency fund of $2000. Even when we were paying off my husband’s student loan, I would have passed out if we had only $1000 in savings. I’ve gotta have some security.
Baby Step 2 – Pay off all debt except your house.
Next, make a list of EVERY debt except your mortgage. Credit cards, loans from family members, payday loans, student loans, car loans, medical bills, EVERYTHING. Then put them in order from the smallest to the largest amount to pay off. Take every extra dollar you can scrape together and throw it at that smallest debt. When it’s paid off, move to the next one, and so on. Depending on how much debt you have, this step could take 3-4 years, but imagine how amazing it would be to have absolutely NO payments other than your house. That’s what you will have accomplished when you check this one off your list.
Baby Step 3 – Save an emergency fund of 3-6 months’ expenses.
OK, so at this step you have a little emergency fund, and NO debts except the house. It’s time to get yourself a little more security by ramping up that emergency fund. This is money that you have in an easily accessible account (like a money market) so that you can cover just about any surprise that comes up. Somebody loses a job? No sweat. You have time to regroup without panic. Figure what you would spend in a typical month, without extras like cable or vacations, and multiply that by the number of months you feel comfortable with. That’s the amount you are working toward having in savings.
Baby Steps 4 – 6 – Put 15% of pre-tax income into retirement savings
Save for kids’ college
Pay off house
Dave always puts these three together, because they are usually done at the same time. You are now debt-free, except for the house, so you should have a little extra money to play with. The first thing to do with that is chunk an amount equal to 15% of your pre-tax income into a retirement account. If you still have money left over, put it toward kids’ college savings if that applies to you, or toward paying off your house early. Dave says that once people reach this point, their house is usually paid off in about 7 years, even though they are putting money toward the others goals at the same time.
Baby Step 7 – Build wealth and be outrageously generous
This is where the fun comes in. You’ve always wanted to invest in real estate? Cool! Do it now. Want to buy a house and GIVE it away. Cool! This is the time.
OK – There is a TON more detail I could go into here, but this is just to give you an overview. If you are dying to binge-read the babysteps in minute detail, check out Dave Ramsey’s book The Total Money Makeover, which you can buy here, or check out his podcast, which is available here.
If you are willing to take a few weeks to work through the whole thing with me, I’ll cover each one with a lot more detail in a weekly post.
A lot of you might know my personal finance story by now, but if not, here’s the Cliff Notes version. I’ve taught in public schools for 18 years. During my first few years of teaching, my best friend and then-co-worker had her first child. That first year of motherhood was tough on her. She went back to the classroom when he was about 6 months old. However, because of some minor health problems, she was getting calls every week (sometimes a couple of times) that she had to be at the daycare within an hour to pick him up. (Because of her husband’s job, he was often out of town.) She was a super-conscientious teacher and she was about to loose it.
I decided watching her that year, that I was going to do everything I could to give myself options. I wanted to make sure that I could take some time off of teaching if every my family needed me. My first step was to pay off debt and make a habit of saving something every single month. Step 2 was to take charge of my income, which a lot of people think you can’t do as a teacher. However, through the years I did an MLM, sold real estate, and managed my own rentals. I knew that WANTING to make my family my first priority was a pipe dream unless I had the money to choose whether or not to work full time.
The Payoff
Well, it was worth it all. And not just one in my life, but twice so far. When my daughter was born and we had just relocated, I was able to stay home with her for an entire year. Then, just three years ago, it all got to be so much I thought I was going to blow a gasket. Three kids, two jobs, a side business, and lots of out-of-town travel for my husband. So my husband and I talked it over, and I resigned from full time teaching. I got to spend two whole years building a side business and enjoying the time before my two youngest started school. What a gift!
None of that would have been possible if our money was a mess. THAT is why I started this blog. I wanted other teachers to have the same options that I did to take care of themselves, their mental health, and their family.
Your Personal Finance Journey
Now, let’s get to the nitty-gritty. If improving your financial situation is important to you (and I hope it is), and you desperately want to have options in your life, it is incredibly simple (not necessarily easy) to do so. All you have to do is increase the gap between what you spend and what you make. And there are really only two ways to do that – if you are moving in the right direction.The first way is to increase what comes in and the other is to decrease what goes out.
Offense – Your income vs. Defense – Your expenses
Most personal finance blogs will focus on one of the other of those. Trent Hamm from “The Simple Dollar“, Dave Ramsey, and the frugality-focused blogs tend to hit that side of the equation hard. Some others, like Ramit Sethi’s “I will Teach you to be Rich” or Michelle Schoeder-Gardner’s “Making Sense of Cents” lean toward the other side of the equation and help you increase your income.
The truth is, neither one will get you where you want to be if you totally ignore the other. If you only make $12K a year, you’re not going to make progress no matter how frugal you are. On the other hand, we’ve all heard of celebrities who make an obscene amount of money and still – somehow – manage to go bankrupt. Of course, these are the extremes. But let’s not forget that even less obvious issues can really keep you from making progress.
With that said, I hope to cover both sides of the equation. We’ll talk a lot about some side-hustles and small businesses that can increase your income. (For some side hustles that bring in over $20/hour, check out my post on High-Dollar Side Hustles.) We’ll also talk about ways to decrease your spending. Some of you will relate more to reducing what you spend. Others will want to increase your income. But please, PLEASE don’t allow yourself to ignore either one long term. You might want to START with a single focus to help you make some quick progress. (For most people that would probably be cutting spending.) Once you’ve made some progress on that, though take a look at the other side, too.
My wish for you
My goal for every one of you would be to have a financial life the affords you options. To go to sleep at night knowing you can easily pay your bills, even if an emergency arises. To be able to shed some of the emotional baggage that surrounds personal finance. To feel confident and knowledgeable about your money.
During the next few weeks, I’ll be posting a Personal Finance 101 series. Based on Dave Ramsey’s 7 Baby Steps and my own personal finance journey it will cover the first steps to getting finances in order. For some of you, this might be too basic, but if money totally isn’t your thing, this is ALL about you. Leave whatever shame or embarrassment you have about past decisions at the door. (Well, there’s not really a door to a blog, but you get the idea, right?) Lao Tsu said, “The journey of a thousand miles begins with a single step.” Take that first step, and let’s go.
