Dave Ramsey is a popular and influential TV/Radio Icon in the world of Personal Finance. He advocates getting out of debt as the pathway to financial freedom and wealth. Bellow are my understanding of his 7 baby steps to total money makeover a great book that changed my perspective about debt.
Step 1. Build Up a $1000 Emergency Funds:
A good way to start your money makeover and get out of financial stress is to begin by finding ways to build a $1000 emergency fund. Finding ways to stack up Benjamin Franklin helps to keep you from going back to using debt during times of emergencies which eventually comes around especially when you least expect it. Although $1000 Benjamin Franklin may seem small, it is a good way to learn to start your savings goals.
Step 2: Use the Debt Snowball and Start paying off Debt:
The Debt Snowball is a strategy that keeps you motivated by looking at the little success you make from paying down your small debt accounts. The debt snowball suggest that the individual make a list of his/her debt starting from the smallest to the largest, and then concentrate on paying off the debt with the smallest balance with all the extra money they can come up with, while paying the minimum payment to other debt. When the smallest debt is paid off, get on the next smallest debt and also continue to apply the amount you were paying on the previous paid off debt to the new smallest debt until it is paid off and the cycle continues
Step 3. Build Up 6 Months of Emergency Funds:
In order to keep Murphy away from your home, Dave Ramsey like many other personal finance coach suggest building up at minimum a 6 months’ worth of emergency funds.
Step 4: Invest 15% of Income Towards Retirement:
Step5: Save for Your Kids College Education:
Although schools don’t teach financial education and the principles of managing personal finance, it is still very important to educate your Kids and this does not mean putting them through school funded with debt that they will have to pay all through the rest of their adult life. Since you have succeeded with paying off your debt, building up emergency funds and putting away 15% of your income towards your retirement, at this stage you can begin to put away no matter how small towards funding your child’s future education. There are different accounts that you can use to achieve this goal, accounts such as the 529 Plan is a tax-advantaged account designed to encourage savings for future education cost with savings that compound tax free. A Coverdell education savings account or commonly known as an ESA is another option towards saving for education expense.