We're sure you've heard of him. Dave Ramsey, that is. Dave has become the voice of reasonable finances in America and beyond. Today we are going to discuss Dave Ramsey's baby steps and why each one is so important.
Dave Ramsey has been known to be America's trusted source to help people find the path to financial freedom. He has developed a seven-step system that will help anyone get out of debt. Today we are going to discuss Dave Ramsey's baby steps and why each one is so important.
Dave Ramsey's Baby Steps Explained
1. Save $1000 as Fast as You Can
Step one helps to create a safety net and teaches you how to begin saving money. With one-thousand dollars in savings, you will be prepared for the unexpected and not have to be pushed deeper into debt when an emergency happens.
You might think that it is impossible to save that type of money, but there are ways to do it with some determination and creativity.
- By arranging a garage sale, you will be able to get rid of anything that you do not need.
- You can also sell some of your items online through eBay, Craigslist, Offerup, or Letgo.
- If you are able to work over-time than do it and add the extra money you earn to your one-thousand dollar goal.
- Create a budget and determine where you can start cutting back money that is unwisely spent.
Finally when you have reached your goal then stash the money away in a separate checking account and don't touch it unless it is an emergency. And be sure you and your spouse agree on what constitutes an emergency! A new pair of shoes isn't an emergency (unless they're work boots you need to do your job). Likewise dinner out isn't an emergency either.
2. Pay Off Debt
You probably feel overwhelmed when thinking about debt. Everyone in debt does. You also may not know where to start. Dave Ramsey says to start small and calls his method the snowball effect. Though it is so simple, it is also absolute genius. Here's how you do it:
- List your debts in order from smallest to largest.
- Begin paying off the lowest debt and work your way down the list one by one, until they're all paid off.
Soon enough you will be rolling down that mountain of debt and will start seeing significant progress as you work towards those more massive debts. This method will help to get you moving in the right direction and build the confidence you need to stand up and decide to be financially secure.
3. Create a 3-6 Month Emergency Fund
This step is about extending your emergency fund and getting rid of debt for good. Crunch the numbers and figure out how much your family will need to live on to withstand three to six months. Dave Ramsey estimates this figure to be around ten-thousand to fifteen-thousand dollars. Keep adding to that first one-thousand dollars that you saved up in baby step one and expand that emergency account.
With this step it is recommended to invest 15% of your gross income towards your retirement.
- First if you're in the U.S., you will want to invest the money into your companies 401(k) which will match your contributions.
- If your company doesn't offer a 401(k) or retirement plan, then invest in a ROTH IRA.
- In Canada take advantage of similar company plans if available.
- If not, save your money tax-sheltered in an RRSP or TFSA.
Dave also recommends spreading the money across four different types of mutual funds: growth, growth and income, international, and aggressive growth. Investing this money towards your retirement is essential for your financial security in the future.
5. Save for College
It is estimated that the average college student owes around thirty-seven thousand dollars in student loan debt after they graduate. This is precisely why a college fund is addressed in step five of Dave Ramsey's baby steps.
Dave Ramsey suggests three different ways to help save the money in the U.S.
- The first way is to start a 529 college savings fund (in the U.S.), this type of savings is tax-free and allows the ability to save as much as three-hundred thousand dollars. One benefit is that the majority of the time this fund can be transferred to another person.
- Another U.S. option is a Coverdell Education Savings Account which allows you to save two-thousand dollars a year per child. This fund is also tax-free and has a variety of investment options, but there are income limits to qualify.
- The final way to save is a UTMA OR UGMA which is an account that is controlled by a parent or grandparent. These types of savings cannot be transferred to anyone else and the beneficiary at the age of either eighteen or twenty-one will have access to the account and can use the money for anything.
In Canada, there are similar RESPs and other Education Savings Plans. Talk to an advisor to see which ones are most suitable for your family.Do your research and determine which option would be more beneficial for your family.
6. Pay Off Your Home
Paying off your mortgage can relieve stress within your physical and financial life. Dave Ramsey suggests that you consider refinancing to a 15-year-fixed-rate to pay off your home faster. You can also pay a little extra every month towards your mortgage. Dave Ramsey says that even paying one additional payment a month will knock four years off your overall payback. Before you start making any other payments make sure to check the policies with your mortgage company.
This is the final step to Dave Ramsey's baby steps and it the most rewarding. Now that you have dug yourself out of debt and are living a wonderful debt-free life you can share that life with other people. Don't forget to give to others and share your experience.
If you are struggling with debt and want to get yourself and your family to that financial freedom, follow these steps and watch your life slowly change.
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