Dave Ramsey is known for his personal budget plan to become debt free, building wealth, managing it well, and giving. His plan is proven to be a great budget for your personal finances. The plan has 7 main “Baby Steps”
Step 1 - Save a $1,000 Emergency Fund
Step 2 - Pay Off All Debt (Except Mortgage)
Step 3 - Save 3-6 Months of Expenses
Step 4 - Invest 15% of Gross Income for Retirement
Step 5 - Save for Children's College
Step 6 - Pay Off Mortgage Early
Step 7 - Build Wealth and GIVE!
There should almost be a Step 0 and it should be to make the decision to financial peace. Determine why you want to. Think of the legacy that you want to leave to the generations in your family that will follow. Check out our Financial Peace Review and how our journey has landed us where we are.
Step 1 - Save a $1,000 Emergency Fund
In step 1 you will build your zero based budget and build a$1,000 emergency fund. Keep this in a regular bank savings account. This money is for you to use in the case of an emergency. What we found is that the more we budgeted and planned the less things actually became an emergency. If you use funds from this you need to build the $1,000 back up before continuing with the step you are currently on. Some situations do differ and maybe you and maybe your spouse agree to keep a little more. We recommend at least $1,000 though.
Step 2 - Pay Off All Debt (Except Mortgage)
In step 2 you will pay off all of your debt using the debt snowball method. In the debt snowball method you start with the lowest credit amount first. This method is to build momentum. A lot of critics are out there that argue the point of paying the highest interest rate loan off first instead. That is a valid point. In the debt snowball it is the momentum that keeps the individual(s) feeling encouraged and accomplished.
Let’s say you have 3 debts. They are $250, $400, and $1,000. In the debt snowball you would make all minimum payments but you would throw any extra money in your budget towards the $250 debt. After the $250 debt is paid off you would use all the money that was being used for that debt and throw it now on the $400 debt. When that is paid you move to the next debt of $1,000. Keep going until you have all debts paid off except for your mortgage.
Step 3 - Save 3-6 Months of Expenses
In step 3 you will calculate your monthly expenses. You will decide if you are going to keep 3, 4, 5 or 6 months worth. This step can take some time but do not be discouraged. You have gotten this far, you can do it!
Step 4 - Invest 15% of Income for Retirement
In step 4 you will invest 15% of your income into retirement. Check with your employer for matches when calculating this. Do not worry if you cannot make 15% happen right now. Anything is way better than nothing, even if it is 1% right now.
Step 5 - Save for Children's College
Step 5 is for individuals that have children and plan to help pay for college. Check out where Dave recommends investing for this step.
Step 6 - Pay Off Mortgage Early
In step 6 you will pay off your mortgage early. If you don’t have a home this is the step that you start to save for a home.
Steps 4-6
In steps 4-6 you can, if able, work on simultaneously.
Step 7 - Build Wealth and GIVE!
In step 7 you will build your wealth and start being overly generous!
You can read more about Dave Ramsey’s 7 Baby Steps in his book “The Total Money Makeover”
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