Dave Ramsey is a worldwide financial guru that has reached celebrity status. His methods have helped millions of people from all walks of life. Dave’s methods are affectionately called “The Seven Baby Steps.” These steps outline some basic financial planning strategies and a method for getting out of debt and becoming financially successful.
Step 1 – $1,000 to start an emergency fund
The first part of Ramsey’s plan is to build an emergency fund. This fund covers emergency expenses (naturally). Let’s say your water heater breaks. This is where an emergency fund would come in handy. The purpose of Ramsey’s emergency fund recommendation is to “break the cycle of debt.” By not borrowing, you can start to get yourself out of debt once and for all.
Step 2 – Pay off all debt using the Debt Snowball
The next step in Ramsey’s plan is to start paying off your debt. Start listing all of your expenses. Include your mortgage. List the smallest expenses first and don’t worry about the interest rate on the debt. Then, start paying everything off. Start with the smallest debt first. Once this is paid off, use the funds you’ve freed up from your paid off debt and apply it to the next largest debt. Continue like this until all of your debt is paid off.
Step 3 – Save up three to six months of expenses in savings
Saving up three to six months worth of expenses in your savings will do a lot to help protect you from the unexpected things in life. An emergency savings is not an investment. Dave recommends investing this into a money market account for safe keeping. A money market account is a very liquid investment that allows you to gain access to your money whenever you need it.
Step 4 – Invest 15 percent of your income into a Roth IRA and pre-tax retirement accounts
Dave’s fourth step is to start saving for retirement. When all of your debt is paid off, except your house, you should start saving 15 percent of your household income into Roth IRAs and traditional retirement accounts. He also suggests not to save more than this because any additional money will help you with steps 5 and 6. Don’t save less than this, Dave warns, because you need to save something for yourself when you retire.
Step 5 – Save money for your kid’s college education
By this step, you’ve accomplished some major life-changing things. You’ve paid off almost all of your debt, you have an emergency fund, and you have started saving for your retirement. Now it’s time to save for your child’s college education. Dave suggests that you assume a 12 percent rate of return in your investments and then reverse engineer what you would need to save based on this assumption.
Dave also does not recommend using insurance, savings bonds, zero-coupon bonds, or pre-paid college tuition in this step. He explicitly recommends using a 529 college savings plan.
Step 6 – Pay off your home early
This is where things get serious. You will start paying off your house and realise your dream of a free and clear home. This last debt hanging over your head is often times the biggest one. However, Dave recommends paying off your mortgage so that you are completely debt-free.
Step 7 – Build wealth and give
Dave puts a lot of emphasis on this last step. He suggests building wealth and then giving it away. Leaving an inheritance for future generations is the last step in the process and one that he recommends you do so that you can bless others with your excess.
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Guest post contributed by Glen Turpin, for Carfinance247.co.uk – vehicle financing solution providers.
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