01 April 2009

Dave Ramsey's 7 Baby Steps

Quite possible the largest financial program i know of is Dave Ramsey's 7 Baby Steps. Dave is often the person that got other bloggers and financial analysts into the field. He has a number of books and programs to not only teach you how to establish financial freedom but to help you complete the program and path. Before beginning his program he suggests you have a plasectomy. This is a process of removing your ability to produce more debt. On his TV show he even shows the creative videos people send of destroying their credit cards. Let me explain the steps.

  1. $1000 Emergency Fund : Things happen we don't plan for. When starting out we often have been using our Credit Cards for Emergencies. This fund is to replace the credit card for emergencies.

  2. Debt Snowball : List all debts and minimum payments from smallest to largest balances (don't include the mortgage as this comes latter). Do everything possible to pay off that first debt. Once the first is gone take the full amount you were paying and add it to the second debt until all debt is gone.

  3. 3 to 6 month Emergency Fund : Take your emergency fund and increase it to be large enough to live on for 3 to 6 months. Now you can survive if you lose a job instead of just fixing a broken appliance.

  4. Invest 15% of your income : Use your pre-tax (401K, 403B, etc) to its max then put the rest of the 15% into a Roth IRA. This is creating your retirement fund.

  5. Create a college fund for each child : Save enough to pay for their college. Since Dave wants you out of debt he does not want you children to start with college loan debt.

  6. Pay off the home : Once the college tuitions are secure; pay off the home as quickly as possible. Get rid of the mortgage payment.

  7. Build wealth and give : Invest in mutual funds and real estate to build wealth. Use this wealth to help those in need. Help how you feel best.

Dave has a great program. I feel it is not the best plan for me. I know what motivates me and how my mind works. In the next post i'll show our plan and compare it to Dave's Baby Steps. Dave's plan is fundamentally sound and more can be found in his book The Total Money Makeover.

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