I’d love to be in a place where debt is dumb, cash is king, and the paid off home mortgage (instead of the BMW) is the status symbol of choice. Can you imagine living with a FICO score of 0? It’s all possible.
Dave Ramsey, Yet Another Financial Guru?
I’ve actually been following best-selling author and radio and television personality Dave Ramsey for some time now. He tells us that we can live this way, and he shows us how.
I’ve heard Ramsey’s story: he was one of those early accumulators who ended up losing his net worth as fast as he had built it. He had $4 million by the age of 26 but then declared bankruptcy after banks called all of his loans. Then less than ten years later, Ramsey was a millionaire again — but this time, he made his millions helping people out of the same jams he’s experienced. Interesting, how this riches-to-rags-to-riches story is such a familiar thread among many financial gurus (Robert Kiyosaki, anyone?).
Ramsey’s road to wealth does not use get rich quick schemes (he’s nixed those ideas that were responsible for his quick millions). Instead, his new path to wealth is based on seven simple, common sense “Baby Steps”.
Learn To Budget First!
But before starting the Baby Steps, Ramsey teaches that you first need to have a budget — you need to tell YOUR money what it’s supposed to do. The first things on the budget should be food, housing, utilities, transportation (car payment, gas, tune ups, oil changes, etc.) and clothing. Any leftover money can be used to pay down debt.
If you’re serious about budgeting you can consider a software program that works for you. There are free systems out there, but the one I found most effective was this highly rated budgeting tool called YNAB or “You Need A Budget” for short (you can also visit the YNAB store on their site for other budgeting resources). It’s built on a savings paradigm intended to get rid of your debt quickly. It differentiates itself from most standard budgeting tools with its unique premise of providing you with a “forward-thinking” budget, one that keeps you aware of your saving and spending activities in advance (a month ahead).
Now after you develop your budget, you can start the Baby Steps program!
Dave Ramsey’s Baby Steps To Financial Success
1. Save up for a small emergency fund.
Save $1000 in a high yield savings account (not CD). Ramsey has found that when people resolve to pay off credit card debt, that is the week the car breaks down, or the refrigerator dies, or another emergency comes to tear down the perfectly-balanced budget. Having that small emergency fund can help keep Murphy’s Laws at bay.
2. Pay off your debts with the debt snowball strategy.
What follows are some great debt elimination tips. When you have your $1000 in the bank, it’s time to start attacking your debt. Baby Step 2 starts with a list of your debts (include your credit cards, car loans, student loans and everything except your mortgage) from smallest to largest regardless of interest rate. While making the minimum payments on all the rest, attack your smallest debt first. Throw every extra penny you have at it until it is gone. When the smallest is paid off, work on the next one, then the next, with all the extra money you can.
Baby Step 2 also encourages us to aggressively save everything we can, and to earn extra income to get things paid off as soon as possible. Some suggestions: Only go out to eat on very special occasions. Use shopping coupons. Resist the temptation to drive a “nice car”. Start an online business. Deliver pizzas at night. Get a paper route in the mornings. Sell on Craigslist. Earn and save money on used items. Have a yard sale and cash in on clutter.
Sell all that you can, such that — as Ramsey says often — “the kids think they’re next and the dog is hiding.” As the debts are paid off, close all revolving accounts (HELOCs, lines of credit, everything) and cut up all your credit cards, and try not to use them again.
3. Grow (or extend) your emergency fund.
After all of the debts except the house mortgage are paid off, quickly stash three to six months of expenses into an emergency fund and put the money into a money market account. This should only take a few months since you’re living on an established budget and have no more payments.
4. Save and invest for your retirement.
Baby Step 4 requires us to start saving for a dignified retirement. Put 15% (not including any employer matching) — and only 15% — of your household income into Roth IRAs, traditional IRAs and your company’s 401k plan. The money should be diversified into Growth Stock, Growth and Income, Aggressive Growth and International mutual funds with at least a 10-year track record.
5. Save for your child’s college fund.
Save for your kid’s college fund (in a 529 account like College Advantage, Ohio 529 savings plan) but put no more than $2000 a year, the maximum for a tax-free Educational Savings Account IRA, into each college fund. Depending on the age of your children, you may want to suggest that they help out financially, by having them work their way through college.
6. Pay off your home mortgage early.
When you reach this step, it’s time to put every extra penny toward your house payments in order to retire your mortgage as quickly as possible. Not only will this strategy open up tens of thousands of dollars a year in funds that no longer need to go toward your mortgage payments, it will also save you hundreds of thousands of dollars in interest payments over the life of the loan.
7. Continue saving, build your wealth, invest and give. Rinse and repeat.
After the house is paid off and everything else is taken care of, you’ll have so much less to worry about, even if pink slips are being handed out like candy. So sit back, save piles and piles of money, work on building your net worth and give some of it away.
Ramsey’s book, “The Total Money Makeover”, is — once again — on the New York Times Bestseller list. He hosts a call-in radio show (check local listings) as well as a call-in television show on the Fox Business Network during weekdays. His “Financial Peace University” offers in-depth, 13-week courses which teach time-tested and proven ways to manage money. Read more about him on DaveRamsey.com.
Contributing Writer: Rachel Strong
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