In my search for learning how to manage my finances better and achieving financial freedom, I came across Dave Ramsey’s book The Total Money Makeover. If you have never heard of Dave Ramsey, he is a “personal money-management expert.” He has a syndicated radio show in about 500 stations, a TV show on Fox Business, a number of books, online courses and seminars about personal finance. You can find out more about it over at his website DaveRamsey.com.
In his book, Dave talks about his 7 baby steps to financial peace, which have become very popular among many of those who like me are trying to achieve financial freedom. I must say that although I do not completely agree with some of the things he teaches, I know some people that have completely embraced his methods and are happy with the results they are getting. So, I thought I’d share the 7 baby steps and let you choose if this approach can work for you. Personally, I have taken these steps as a guide and adjusted with some of the other things I’ve learned to better fit my beliefs and family needs. You can do the same!
1- Establish a $1,000 Emergency Fund
Dave advises to save $1,000 for any unexpected emergencies that might come up. I agree that having an emergency fund is very important before going head on into getting out of debt. However, I feel $1,000 is not a big enough emergency fund for immediate emergencies. Any major repair in my car can and has cost me a lot more than that. In my case, I prefer to have saved something more like $3,000 for an emergency fund.
2- Pay Off All Debt Using the Debt Snowball
Now, I completely understand the psychology behind this. Dave suggest to make a list and start paying off your debt from smallest to largest. The reason for this, according to Dave, is that people need small wins in order stay motivated to continue and become debt free.
I agree that most people do need to see the little wins to feel that they have accomplished something. I do sometimes. But many will agree, and I know Suze Orman does, that what makes most sense is to pay the debt with the highest interest first. Otherwise, you will end up paying more because of that high interest account that won’t go down.
3- Build Up an Emergency Fund of 3 to 6 Months of Expenses
This is a no brainer. Everyone, especially those with children, should work towards having an emergency fund of at least 3 to 6 months of expenses. And with the current state of the economy, I would go as far as to recommend building and emergency fund of up to 1 year worth of expenses. It is always safer to have a really big cushion in place in case of a fall.
4- Invest 15% of Household Income into Roth IRA’s and Pre-Tax Retirement
I do not know much about retirement accounts. I intent in changing that soon. However, I do know that retirement accounts have a maximum limit in the amount you can contribute every year, so depending on your income that 15% might not event be possible. I believe you should make contributions totaling the maximum limit amount every year if you can.
Also, If your employer offers a 401K with a matching contribution, you should take advantage of that first. Get your employer’s full match and then worry about the Roth IRA contribution. Never say no to free money. This is something Mr. Ramsey doesn’t really discuss very much.
5- College Funding
I have two children, and I want them with all my heart to go to college and get a proper education. I believe it is very important for them to do that. Nonetheless, I am very aware that college is not for everyone. With that said, I do plan on saving some money to help them get through college if that is what they choose to do. But I also want them to learn to be responsible and know that things require hard work. So, for a lot of it they will have to work and earn it on their own. Just like I did.
6- Pay Off Your Home Early
Who wouldn’t want to live in a house mortgage free? I know I would love to. So, if you can work towards paying your home early and get rid of the high mortgage payment, why wouldn’t you?
7- Build Wealth and Give
After you have accomplish all of the other steps you will have extra money to be able to build on your wealth and give to those who need.
What do you think of Dave Ramsey’s baby steps? Is there anything you would do differently?