For those of you that do not know, Dave Ramsey is a New York Times bestselling author, a radio host and the guy behind my enthusiasm for this new debt free life.
You can download his radio show as a podcast at itunes. Give it a listen; this guy is a hoot.
I’ve read lots of financial management books, because I read a lot and because I’ve always been involved in small business and money. By far, Dave’s is the simplest most straightforward advice out there. He doesn’t just tell you the theory, he has a very definite step by step plan and he motivates his readers to actually follow the plan.
After I read his book, The Total Money Makeover, we attended the 13-week class, Financial Peace University that many churches host. Still not having enough of Dave, I attended his week long, very intense counselor training.
The average family, while going through Financial Peace University, pays off $5,300 in debt and increases their savings by $2,700!
The foundation of Dave’s plan are the seven baby steps:
STEP 1 – $1,000 to start an Emergency Fund
Making a commitment not to borrow money requires that you have some other method to pay for life’s little emergencies like the busted water heater or the bad alternator on your car.
STEP 2 – Pay off all debt using the Debt Snowball
List all your debts, except for the house mortgage, smallest to largest. Pay minimums on everything except the smallest and attack it with everything you’ve got. When the first debt is paid off, take what you were paying on it; add it to the minimum on the second and work like crazy to pay it off. Keep that snowball rolling until all of the debt is gone.
STEP 3 – Build an emergency fund of 3 to 6 months of expenses in savings
$1000 is not enough money to handle a real emergency. Loss of job, prolonged illness or a death in the family may require much more. Almost universally, money experts recommend 3-6 months of expenses.
STEP 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
If you were in debt when you started the program, Dave recommends stopping all retirement, college and other saving temporarily until you reach this step. Now it’s time to re-start your retirement savings.
Step 5 – College funding for children
While maintaining your 15% retirement savings, start saving for the kids college.
STEP 6 – Pay off home early
Now put all you can into paying off the house.
STEP 7 – Build wealth and give!
You have no payments. No car payments, no credit card payments and no house payment. You can really afford to build wealth and give.