I want to be me a millionaire so fricken bad…thank you Bruno Mars for helping me introduce this post! There is a way out of money stress. Having a lot of debt is crippling. It is overwhelming and most people don’t even know where or how to begin paying it back. The people that have a lot of debt are also living paycheck to paycheck. I absolutely HATE living this way. Well if you’re looking for that rescue flotation device…here it is: Dave Ramsey’s 7 Baby Steps are here to the rescue! These steps are designed to be followed one right after the other to lead you out of financial strain and into a life of saving and giving. Millions have worked this plan and you and I can too.
Don’t do the steps out of order. These steps are called BABY steps for a reason. They are supposed to alleviate some of the overwhelming feelings. Don’t focus on too much at once. Keep your focus on the step you are currently working on, and when you can say “yep, that’s done” move on to the next step. Continue all the way until you are able to get to the last step. Are you with me? Let’s get Gazelle intense. That’s a Dave Ramsey thing…I didn’t just come up with that on my own (although I wish I did). Google it.
Dave Ramsey’s 7 Baby Steps to Financial Peace
Baby Step 1: Beginner Emergency Fund
For those of you that don’t know, an emergency fund is for those unexpected events in life you can’t plan for. Things like a car battery dying, a random plumbing issue, your breaks squealing at every stop sign, a baseball that meets your window, etc. An emergency fund is essential in order to be prepared for these types of situations. You won’t have to go further into debt to fix the issue if you have one. You don’t want to dig the whole deeper as you’re digging your way out. Chances are if you are reading this, you are considering or committed to a Total Money Makeover. Get selling things, get an extra job, do whatever it takes to get that $1,000 saved up as soon as possible.
Baby Step 2: Pay All Debt Except for House
This step will make the biggest difference in your every day life. Are you ready for it? BAM here it is. Oh lord, who let Emeril in? Anyways, use the debt snowball technique to knock out each of your debts one by one. List all your debts in order, smallest to largest. The smallest debt will be your #1 priority. Pay off this debt. Then add what you were paying on it to the next debt and start attacking it. When you start eliminating the easier debts, you will see results and stay motivated to keep eliminating your debt. As each debt is paid off, your cash flow will increase allowing the bigger debts to be paid off sooner than you think. Before you know it, all your debt (except the house) is paid off!
Baby Step 3: 3-6 Months of Expenses in Emergency Fund
With less of your income leaving to cover stupid expenses, you can focus on fully funding your emergency fund. Most people lose momentum at this step and don’t continue to build up their emergency fund. But what they forget is this emergency fund will be able to cover the bigger emergencies in life, such as a job layoff, a big medical bill, a leaky roof, etc.
To figure out how much to set aside, calculate how much money you need to live on for 3 to 6 months (for most that is between $10,000 and $15,000), and start saving. You will never be in debt again, no matter what life throws at you. Make sure the money is in a simple checking account or a money market account with check-writing abilities, so you can pay the doctor or wrecker service on the spot.
Baby Step 4: Invest 15% of Household Income into Retirement
Let’s get serious about retirement. With no payments hanging over your head and a fully funded emergency fund, invest toward the retirement of your dreams! Between your 401(k), Roth IRA, and traditional IRA, you have lots of options. Find the fit that is right for you. The money you were using to attack debt can now help build your future.
This step is all about long-term wealth. Take 15% of your gross household income and invest it first into matching company 401(k) plans and the Roth IRAs. If your company doesn’t offer a retirement plan or match your contributions, then go straight to the Roth. Spread the money across four types of mutual funds: growth, aggressive growth, growth and income, and international. Even a couple hundred dollars a month invested now can make you a multi-millionaire.
Baby Step 5: College Funding for Children
College tuition and housing expenses continue to rise. Don’t let college sneak up on you. Saving now will put you ahead of the game when your kids graduate from high school. There are two smart ways to save for this. One is a 529 college saving fund and the other is a Coverdell ESA (Education Savings Account). There are both tax-advantaged savings vehicles that let you save money for your kids’ education expenses. As with retirement, you can also spread the money across four types of mutual funds: growth, aggressive growth, growth and income, and international. Both 529 plans and ESAs allow you to save money in an individual investment account. But do your homework first! Depending on your income and what state you live in, one might be better than the other.
Baby Step 6: Pay Off Home Early
There’s only one final debt now standing in your way of complete freedom- the mortgage. This step is the big one! Can you imagine life without a house payment? Any extra money you can put toward the mortgage will result in tens of thousands of dollars of interest saved. If you currently have an adjustable rate mortgage, interest only, or even a 30-year mortgage, consider refinancing to a 15-year fixed-rate mortgage and pay it off faster. It takes the average family five to seven years to pay off their home early. This journey to financial peace is a marathon. Stay focused, intense, and keep a steady pace. Don’t forget to celebrate the small victories along the way.
Baby Step 7: Build Wealth and Give
This is by far the most fun step. Nothing stands in your way anymore. You have reached financial peace. Now you can live and give like no one else can! Build wealth, become insanely generous, and leave inheritance for future generations. What else are you going to do with your money anyway? You know what people with no debt and no payments can do? Anything they want! And it’s all because you had discipline for a few years and now you can leave a legacy.
With perseverance, discipline, focus, persistence, and good habits you can achieve financial peace in a shorter amount of time than you think. You can do anything you set your mind, heart, and soul into. How badly you want it will determine who quickly or successful you will be.