Popular personal finance expert Dave Ramsey doesn’t give advice based on pie in the sky theories; he’s lived it. He was a millionaire at the age of 26 when he lost it all in just three years. After digging himself out, he began sharing what he had learned with others through books, seminars, and a popular radio show.
Ramsey focuses on helping people dig out of debt and gain control of their financial futures. His method uses a series of baby steps that he walks his followers through. Here’s a summary of those steps:
1. Build a “Baby Emergency Fund” of $1000. This will tide you over until you can build a larger fund and will keep you from resorting to credit when emergencies occur.
2. Pay off your non-mortgage debt with a Debt Snowball. Basically you will list your debts from smallest to largest and pay the minimum payments on everything except the first debt. For that debt you will throw any extra money you can place your hands on at it until it is paid off. Then you follow suit with the next debt, and the next until they are all paid off. The secret here is when you pay off one debt, apply the amount you were paying on it to the next debt in line. That is what causes the snowball and allows you to pay off debts quickly.
3. Build a Fully Funded Emergency Fund of 3-6 months of expenses. This emergency fund should be kept in a liquid, readily accessible account and will be used in case of true emergencies like job loss, medical crises, etc.
4. Invest 15% of your income for retirement. Your income, for the purposes of this step, should be pre-tax and the money should be invested growth-stock mutual funds. Don’t count your employer’s contributions in the 15%.
5. Save for college. It is important that this step come after saving for retirement. There are other ways to pay for college: scholarship, work, etc. but no one is going to give you a scholarship for retirement. Ramsey’s suggestion for saving for college is to use an ESA (Educational Savings Account), invested in a growth-stock mutual fund.
6. Pay off your mortgage. Now is the time to focus on paying off your home mortgage and becoming completely debt-free. Ramsey rejects arguments about keeping your mortgage for the tax deduction or the low interest rate, opting instead for the guaranteed return and risk reduction that come with paying off a mortgage early.
7. Build wealth. Here’s the fun part. According to Ramsey there are three good uses for money: Giving, Investing, and Having Fun. That’s what this step is about.
You can learn more about Dave Ramsey and his program by visiting www.DaveRamsey.com.