I think that at this point that you all know that I drank the Kool-Aid of common sense that is Dave Ramsey’s money philosophy. Let me tell you a little more about Dave’s baby steps advise that I’ve utilized, and encourage my clients to do as well.
- Starter Emergency Fund
- Debt Pay Off (expect mortgage)
- Fully Funded Emergency Fund
- Retirement Investment
- College Savings
- Mortgage Pay Off
- Build Wealth & Give
Well, I guess we’ll start out at the top and talk them through a little further. Shall we?
Starter Emergency Fund
Put $1,000 in a starter emergency savings fund. If you’re a college student or just out of high school $500 will do. If you have really bad luck, or you’re feeling incredibly nervous about only doing $1,000 – then do $2,000. But that’s all. For now.
Debt Pay Off
Pay off all of your debt! This is often the step that takes the longest time to complete…if you’re “normal” like the rest of society. It’s okay – you don’t have to be normal for too long. Start with the smallest balance. I know that may not be what you’ve heard (maybe more like higher interest rate) but it’s okay….you need momentum – and this snowball method will get you there. Pay off the smallest balance, then move the next highest, etc.
Fully Funded Emergency Savings
You didn’t think we’d stop at $1k did you? Now your debt is paid off, you can pad that savings for emergencies – and never have to use your credit card again. Consider what your expenses would be for 3-6 months. Save that amount into your now fully funded emergency account. Then walk away from it. This is not a vacation fund, car savings, or shopping emergency fund.
Retirement Investment
Put 15% of your income into a retirement account. Many companies match your contributions too. It’s time to prepare for your golden days. Don’t wait until your old, or even older. Put your % away and forget about. Compound interest is our friend – let it grow.
College Savings
Do you have kids? Want them to get further education? Whether it’s a traditional university, a trade school, or another higher learning – it’s time to save now. Recommendation is 10% of your income towards college savings.
I was lucky enough to get scholarships and financial assistance to pay for most of my education; I walked away with about $20k in student loans and a degree in business. I hustled part of my way through college, and certainly didn’t have a lavish lifestyle. Remember this story? $20 Bucks Broke I want to help our kids with part of their education, but we’re not sure that we want to pay for all of it…character building opportunity, I think.
Pay off Mortgage
That’s right – pay off your house! The earlier you can pay off your house, the less interest you’ll pay. Think about that for a minute. You can save 10’s of thousands of dollars in interest you pay that sucker off early. This is likely your largest financial expense, once you pay this off – your wealth building opportunity really gets intense.
Build wealth and give!
No debt, funded your big savings ventures, and a paid for house – now just invest and give that money away. Be a blessing to others. Travel. Play. Give. Repeat.
Well, there they are – they 7 Baby Steps and the philosophy that Dave Ramsey developed that we use today.
Let me tell you a little more about how to work these steps.
Baby steps one, two, and three are intended to be one at a time steps. Intentional, intense, and all in. These are the three biggies that change your mental state, and your true financial picture. Baby steps four, five, and six you pick up after those first three are completed – and you do those altogether. If you’re looking for a more details on starting a budget, review last week’s post.
- Let’s say you make $80k per year as a married couple with two kids.
- You bring home about $6,500 each month.
- Debts total $25,000 – student loan $10k, credit card $5k, car loan $10k.
- Expenses, including minimum on your debts total $5,000.
- Take that leftover $1,500 and first fund your starter emergency fund.
- Then throw that extra $500 that first month onto your smallest debt.
The next month, take your $1,500 and pay down your credit card – your balance is now $3k. Do that again for two more months – now do a little dance – first debt is paid! Now take all that you were paying towards that card and add it to your next debt. Tackle the student loan followed by the credit card (if you have equal amount debts then you can pay off the one with the higher interest rate). Then dance again! You’ve got the idea now.
After your debt is paid off.
Take that monthly amount you were paying toward your debt and toss it into that emergency savings account until you have funded 3-6 months worth of expenses – all dependent on your comfort level. Done with that? Feels good doesn’t it?
Pause for a minute. Take a nice vacation. Breathe. Feel the freedom of financial peace.
Now, put 15% of your income towards retirement, 10% toward college savings, and toss the rest at your mortgage as extra payments towards the principal, until that bad boy has a zero balance.
Lastly, build wealth and give! Bless others. Take lots of vacations. Heck, go live in another country for a while. ?
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