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.
Remember, you got this!