If you haven’t heard of Dave Ramsey, you are probably in excellent financial shape. For many, he represents a financial savior for those who have too much debt and want to improve their money management through Dave Ramsey’s 7 baby steps.
Who Is Dave Ramsey?
Dave Ramsey is a well-known personal finance guru and coach, helping millions through his top-rated nationally syndicated weekly radio program, books, Financial Peace University, and more.
Step 1 Save $1,000 For Your Starter Emergency Fund
Dave wants you to do two things before dealing with the emergency fund. You need a budget and get current with your creditors if you are behind with payments. Pay your basic living necessities first, and pay what is due on your credit cards and student loans.
Step 2 Pay Off All Debt (except the mortgage) Using The Debt Snowball
The debt snowball requires you to list all your debts in order of smallest payoff balance to largest, excluding your home mortgage, irrespective of the loan’s individual interest rate. All loans are put on the list even they are loans from a family member with zero interest.
Step 3 Save 3-6 Months of Expenses for a Fully Funded Emergency Fund
Establishing an emergency fund of three or six months is dependent on your circumstances. Do you earn a steady or irregular income, have better job security because you are a tenured teacher, or work for a new start-up company? Those who make lumpy compensation or face higher risks of losing their job should go for the more extended funding to feel financially secure.
Step 4 Invest 15% of Your Income in Retirement
Investing 15% of your income should take full advantage of tax benefits and the company match of the sponsored 401K plan. Typically, you need to allocate a minimum percentage to earn the company’s contribution, “free money,” but part of your compensation package.
Step 5 Save For Your Children’s College Fund
According to Dave, going to college is a want, not a need, and a luxury. For many, that may be so. College prices rise faster than inflation, and having a college degree doesn’t guarantee success or wealth. However, paying your college costs fully with loans is a financial drag on your young adult life.
Step 6 Pay off Your Home Mortgage Early
Dave dislikes most types of loans, except for the home mortgage. He wants families to eliminate this mortgage as quickly as possible in this step. His recommendation is to find any money in your budget outside of living retirement and investing in college. If you can pay cash for your home, all the better.
Step 7 Build Wealth, Give, And Live Like Nobody Else
Dave wisely tells his readers that wealth is not “an escape mechanism” and is in line with our sentiments.
This step is relatively short and lacks guidance for investing outside of retirement and college planning. Dave wants you to take a bow at this “Pinnacle Point” when you successfully get to this step, and maybe thank him for the well-deserved roadmap he set for readers.