Did you read any Personal Finance Book?
I will tell you about a good one here.
The Total Money Makeover is Dave Ramsey’s bestselling book.
It has helped millions of families get rid of debt and change their lives forever with its simple, practical seven-step plan.
How does it work? By getting to the heart of your money problems: YOU.
In one sentence, The Total Money Makeover shows you that you’re not as financially secure as you think, that it’s time to stop accepting debt as normal and that all it takes to build the financial future you want is a seven-step plan.
I hate to be the one to say it, but chances are you’re being irresponsible about money, right now.
I’ve been there. Growing up I never had to work a day in my life. I could always get what I want – most of the time, anyway – and if I just saved a bit of my birthday money, I could usually buy that new PlayStation or a computer within a matter of months.
But if you’re serious about building a happy and truly fulfilling life, it can’t go on like this forever.
Lucky for you and me, Dave Ramsey’s here to save the day.
It’s a big book, and if you’ve read it then this post will serve as a reminder, and if you haven’t, then it’ll really help you out, because these 7 steps have helped many people change their financial destinies.
I felt that this book is aimed at relatively low income people. Some of it may help you though, if you earn in 6 figures also.
So, without further delay, let’s dive into the 7 Baby Steps you need to take:
1. Save $1,000 in cash ASAP:
This is the hardest step, but also the most impactful because if you follow through, you have made a decision to take control of your finances.
That in and of itself can be extremely difficult for most people, because you have to build an inner fire of frustration of being in debt and a desire for being financially free.
If your household income is greater than $20,000, aim for a $1,000 emergency fund.
If your household income is less than $20,000, aim for a $500 emergency fund.
As Dave says in the book, “Start with a little fund to catch the little things before beginning to dump the debt.
It is like drinking a light protein shake to fortify your body so you can work out, which enables you to lose weight… Twist and wring out the budget, work extra hours, sell something, or have a garage sale, but quickly get your $1000.”
As a reminder, you also have to put it in a place where you cannot spend it in a jiffy.
A funny way to do this is to buy a frame, put the money inside the frame, then hang it behind the coats in your closet and write “IN CASE OF EMERGENCY BREAK GLASS!” with big red letters on it!
2. Start the debt snowball:
Ramsey is famous for this concept.
This is where you take any debt you have except for your house and you list it in order from small to big and then you make minimum debts on all of them except for the one that has the smallest balance, and you attack with vengeance (what Ramsey refers to as “gazelle focus”) and pay it off as quickly as you can, using the same intensity you used to make that $1000 or $500.
The only time to pay off a larger debt sooner than a smaller one is some kind of big-time emergency such as owing the IRS and having them come after you, or in situations where there will be a foreclosure if you don’t pay it off.
The reason to list smallest to largest is to have some quick wins, build a habit and get the momentum going.
In the event that you are unable to begin tackling your debt (your budget is ‘stopped-up’) then you will need to do something radical: selling possessions, working overtime, taking a second job.
You will arrive at the beginning of Step Three in around eighteen to twenty months.
When you reach this step, you have $1000 cash and no debt except your home mortgage.
3. Kick Dr. Murphy out:
Murphy’s law is a popular adage that states that “things will go wrong in any given situation, if you give them a chance,” or more commonly, “whatever can go wrong, will go wrong.”
The two steps you took before this one were viable to accidents and unexcepted emergencies, but not now.
Now you get a full 3-6 month Emergency Fund. The purpose of this fund is to protect you from emergencies.
If you are self-employed or you earn from commissions, then it is recommended you save for 6 months at least, and if you have a high-paying, steady, secure job and other sources of income then it’s okay if you save for just 3 months.
The emergency fund is not for investing. It must be liquid.
4. Save 15% of your income towards retirement:
You’re doing awesome so far!
You’ve gotten out of debt (except for your house), you’ve gotten a fully funded emergency fund and now you can start saving and investing!
Invest 15 percent of before-tax income annually towards retirement.
15% is optimal because it allows you to complete the next two steps effectively.
Furthermore, starting to invest for retirement at this stage in the plan allows you to reap the rewards of compound interest.
When calculating your 15 percent, don’t include company matches in your plan.
Invest 15 percent of your gross income. If your company matches some or part of your contribution, you can consider it gravy.
Dave says in the book, “The Roth IRA will allow you to invest up to $5000 per year, per person.
There are some limitations as to income and situation, but most people can invest in a Roth IRA.
The Roth grows tax-Free. If you invest $3000 per year from age thirty-five to age sixty-five, and your mutual funds average 12 percent, you will have $873000 tax-free at age sixty-five.”
5. Save for college
Dave recommends using ESA or 529 plans to save for college.
He talks a lot about ESA plans. As long as your income is below $220,000 per year you could invest $2000 a year from the day your child is born to the age of 18 and that’ll buy you a pretty good amount of tuition, especially when you consider that you can invest it in just about any mix of mutual funds and let it grow tax-free.
Ramsey stresses that the pedigree of the university should not be your key concern.
If you can afford the extra money, then go for it.
If it would require you to go into debt, then do not pursue that path.
6. Pay your home off early:
This is pretty simple, but there’s a myth surrounding the topic of paying your home off early that needs to be touched upon.
The myth is that it’s wise to keep your home mortgage in order to get the tax deduction, however, if you do the math you see how ridiculous that is.
Let’s take an example.
Suppose you had a mortgage of $900 per month and of that payment $830 was interest, that means you’d have to pay about $10,000 in interest that year which created quite a good tax deduction.
And if you’re in a 30% tax bracket you would have saved yourself 30% of $10,000 or $3,000 in taxes that year.
However, how much were you paying in interest? That’s right: $10,000. So the rationale is in order to save $3,000 in taxes we spend $10,000 in interest.
I don’t think that’s smart to do.
7. Build wealth:
Yeah, this is the fun part!
Look all around you, there’s so much abundance out there.
Look at the amazing travel destinations on Instagram, or the sexy supercars on YouTube.
You deserve all of that, because you made so many sacrifices along the way!
With wealth beyond numbers, you can live and give like nobody else!
Money is a tool. It can be used for 3 things:
And you should do all of them in balance.
Having fun with your money is part of the plan because you worked for it and you need to be rewarded, investing is still essential to keep growing your money and giving is a very important part of being wealthy.
What you give, you get.
If you give others money, you get money too, always remember that.
If you want to buy, you can do it from Amazon.