If you haven’t heard of Dave Ramsey, you are missing out on plenty of financial wisdom. Dave Ramsey is a radio talk show host, author of several books including the total money makeover & Entreleadership and teaches money management based on biblical principles in Financial Peace University.
The Seven Baby Steps
As you organize yourself to follow the baby steps, you need to setup a zero-based budget. This is where you allocate your paycheck before you actually spend it.
With this budget, your total pay-check amount is listed at the top and reduced for every individual expense listed. All monies have to be allocated thus ending with a zero balance.
There’s power in focusing all your efforts, resources and energy to a cause. In this case it will be to you finances. For that matter, all investing can be put on hold until you clean up the debt.
Emergency fund: $1000
This is the starter emergency fund as you organize your personal finances. With all the emergencies that happen often, the start-up emergency fund is a good way to transform all the small emergencies into inconveniences. For example if your air conditioner breaks down, you can use the emergency fund without additional use of your credit cards.
Get Out of Debt – The Debt snowball
This is where you list all your debts smallest to largest amounts e.g credit card debt , school loans, auto loans, personal loans, money your borrowed from family e.t.c. excluding the mortgage. You pay down minimums on all debt and any extra monies are paid to the smallest debt. This process is repeated until all debts are paid off. Considering this process is part of modifying behavior, successes along the way are a motivational factor thus allowing your to stay on track. Given human behavior, we are more encouraged and motivated by victories,
According to Dave Ramsey, “Personal finance is 20% head knowledge and 80% behavior”. Surely if this was a math problem, we wouldn’t be accumulating debt in the first place. Personal debt is usually a sign that you are living over your means. Furthermore, Contrary to popular methods of getting out of debt, when using the debt-snow ball method, interest incurred on the debt is only consider if you encounter two debts of similar amounts.
Fully-Funded Emergency Fund
Once you are out of debt, now you are ready to fund your emergency fund to the maximum, which are approximately 3-6 month expenses. At this time you will have the estimates of your monthly expenses from the zero-based budget you have been following. Remember this is not an investment. Just find a save place to save and keep the monies like a money market. These funds are only for emergencies’ e.g. replacing your car tires is not an emergency, that’s part of car maintenance or that European cruise.
Invest 15% for Retirement
Planning for retirement is an important part of your financial planning. Investing 15% of your household income in Roth IRA’s and other pre-tax retirement plans is recommended. With all the momentum you have gained at this point, it is tempting to invest less in order to payoff the house faster or save for the children’s college. But taking care of your future is priority. You don’t’ want to find yourself at retirement age and have insufficient funds during that time.
Saving For College
At this point, you are ahead of most of the American population. With the momentum and planning you have put forth. As you plan for college savings, you need to have a goal. With that goal, you will be able to set the percentage or amounts of monies you need to save every month in order to attain that goal. Some of the best tools for saving for college are the Education Savings Accounts (ESAs) and the 529 plans. Avoid using insurance products, savings bonds, zero-coupon bonds and pre-paid college tuition. If you decide to make an investment, always consider the inflation rate.
Pay-off the house
This is serious stuff, when you begin putting any extra monies towards paying off your house early. You will continue to build momentum as you pay-off your house. Your goal of living completely debt free is within reach.
Start Building Wealth and Give
You have just freed up your best wealth building tool. At this point you are debt free and ready to increase your investment capacity. The end goal is to leave an inheritance and give like no one else .