I’m always asked about how to start or where to start if you are struggling with your finances. If you have a mountain of credit card or student loan debt or a slew of other financial problems, it can be very intimidating where to start. That is why I always recommend that people start with Dave Ramsey. I’m a huge Dave Ramsey fan and his book, The Total Money Makeover. It is one of my top ten personal finance books that everyone should read. It should be on everyone’s nightstand. So, it is a great place to start. While there are many great ways or ideas out there, Dave Ramsey’s Total Money Makeover is one of the best ways to save your money, build an emergency fund, get rid of debt, and start to take control of your finances. Dave Ramsey is nationally known thanks to his books, nationally syndicated radio show, and many appearances on national television.
The Total Money Makeover consists of Dave Ramsey’s seven step plan to build an emergency fund, get out of debt, invest, and start to gain financial independence. Dave Ramsey said in his book that that got the idea of naming his program with baby steps from the movie, “Forget About Bob”. Forget About Bob is a comedy with Bill Murray where Bob torments his psychiatrist who tries to help him with his OCD. Like an alcoholic, his doctor tells him to take baby steps and get through his problems in small bites, one day at a time. So, throughout the entire movie, Bob walks around talking about baby steps. And, Dave Ramsey’s popular system was born as well out of that movie.
Baby steps can help you take control of your finances. Dave Ramsey has seven baby steps. Below are a little brief synopisis of Dave Ramsey’s seven baby steps to financial freedom from his book, The Total Money Makeover. Over the next few days, I’ll break each one down and talk about them in more depth.
Baby Step 1 – Start An $1,000 Emergency Fund
The very first of Dave Ramsey’s baby step is to get a $1,000 emergency fund in the bank. This step is critical to help you to stop adding to your debt. If you do not start this way, you may still fall back on using credit cards. So, in baby step one, sell things or save up as fast as possible to get that first $1,000 in the bank. An emergency fund makes sure you have money to cover these circumstances and stops you from getting into debt.
Baby Step 2 – Pay Off All Debt With The Debt Snowball
The second baby step is to list your debts in order, make the smallest debt your first priority, and pay off all of your debt besides your mortgage using the debt snowball method. This is a psychological method in the sense that by paying off the first debts with the smallest balance, you will be motivated to pay off the rest. This is typically contrary to many popular opinions on paying off of debt which recommends paying off the debt with the highest interest rate first instead.
Baby Step 3 – Complete Your Emergency Fund
Once you have completed the first two baby steps, consider what would happen if you were out of work for three to six months? Once you have found the answer this is how much you should then save, and add it to your $1,000 starter emergency fund and complete your fully funded emergency fund.
Baby Step 4 – Invest 15% Of Household Income
Once you reach baby step four, you will have a substantial emergency fund and no payments on your debts except your house. Now Dave Ramsey’s Total Money Makeover says that you should invest 15% into Roth IRAs and pre-tax retirement investments. Remember no more or no less than 15%! Dave Ramsey has other plans for your money as well as he leads you to financial peace.
Baby Step 5 – Establishing A College Fund
Baby step five helps you learn to save for your children’s college education with a 529 College Saving Plan. Like a Roth IRA, a 529 College Savings Plan allows you to make after tax contributions and withdraw the contributions and earnings tax free for educational expenses, tuition, room and board, fees, and other education needs.
Baby Step 6 – Pay Off Your House Early
Now you are getting to the final stages of The Total Money Makeover, and it is time to pay off your house early. All your extra money after investing and saving for college should go towards paying your mortgage off. Once you start to pay off parts of your mortgage, you will gain momentum and be well on your way to financial peace and independence.
Baby Step 7 – Build Wealth And Give
Now you are at the final baby step, it is time to build wealth and give, leave an inheritance for your children or the ones you love, and help others with the money you have built up. This step is the final one and always ongoing.
Over the next couple of days, I will discuss each of Dave Ramsey’s Baby Steps from The Total Money Makeover in more detail.