If you follow Dave Ramsey at all or have read the Total Money Makeover already, you are familiar with the 7 Baby Steps. These are the core of the TMM plan....and here's the thing. They WORK. I'm not kidding you. They work despite people wanting to tell you all the reasons why they can't POSSIBLY work.
Thought I would delve in a little into each Baby Step. Just as a side note, I don't work for Dave or any of his companies. I'm just someone working the plan like millions of others. All of this information can be found outlined...at length...in the Total Money Makeover book...or on his website.
1. STARTER EMERGENCY FUND
Why do we go into credit card debt in the first place....or why do we hang onto those cards for dear life? Emergencies. What if we have an "emergency"? Pudgy Gazelle, I cannot pay off debt because of "emergencies".
That's what this step is for. The first step? Keep Murphy away from your door. Save $1000 and put it aside. That's your baby emergency fund. When a REAL emergency happens (just FYI, Christmas or a sale at The Gap is not an emergency)....you have that buffer.
In the 6 or so years we've played patty-cake with the Dave plan, we have never had an "emergency" crop up that exceeded this $1000 buffer while we were working the baby steps. Most unexpected things that HAVE cropped up (such as our dryer going kaput a few months ago) we have been able to cash flow because of our dedication to the zero-based budget. Follow the zero-based budget outlined a few blogs ago and you'll find there's a lot of extra income floating around.
2. PAY OFF ALL OF YOUR DEBT EXCEPT FOR YOUR HOME
This one is a killer. It's the one we haven't been able to get past. But, we are slaying that dragon as we speak and this time, come hell or high water, we are going to kill this baby step.
What you do in this step is you list all of your debts smallest to largest. You pay the minimums on all of your debts except for the smallest one. You ATTACK the smallest one with so much intensity people start thinking you're nuts. Once that one is dead and bleeding on the ground....you move to the next one...and then the next one.
Why don't we worry about interest rates? Because this is an EMOTIONAL movement. You get momentum when you pay off the little ones first. You start to BELIEVE in yourself. That is heavy. And it WORKS. Don't worry about the interest rates. You're going to kill these off based on momentum.
NOTE: BABY STEP 3B: This is an added Baby Step for people who want to buy a home. The plan suggests you do not consider this until you are debt free. Then, once you are debt free, you save 20% for a down payment in cash for your house.
3. FULLY FUNDED EMERGENCY FUND
Once you are done slaying the debt dragon, you return to the emergency fund. That $1000 sitting patiently in your account. Then, you build on it. You feed it until it's worthy of some TLC show. A fully funded emergency fund is 3-6 months worth of household expenses. This will cover you for anything that decides to go down....and then some....and you'll never have to break out that dangerous "emergency credit card" again.
No more debt.
4. INVEST 15% OF YOUR HOUSEHOLD INCOME INTO RETIREMENT
When we are knee deep in debt poo we are not contributing to retirement. Why? Because all of our money is going to poo cleanup. We use EVERY weapon in are arsenal. Contributions are put on pause.
Once we are to BS4, we resume our contributions.
15% of everything you make goes into retirement. We currently have retirement funds set up that are sitting, waiting for us. They are all invested in ROTH IRA's and good growth stock mutual funds. We have not put a penny into them in about 3 years since we rolled all of our 401K's over. They have grown quite a bit since then, even without us touching them. Once we are able to start throwing $$$ at them at 15% chunks, we will be unstoppable. It's major motivation to get through BS2 and 3 this time and make it stick.
5. COLLEGE FUNDING FOR CHILDREN
Now, Steps 4,5,& 6 can happen all at the same time. So, the plan is not suggesting you forego college funding until you are fully invested in your retirement. Nope. You do it together.
We chose to have 529 accounts set up for the girls. The earnings on my money in the 529 plans grow tax free, which is a huge benefit.
I do not intend for college to be 100% funded for my kids. I intend that they will also contribute to the costs of their schooling through work or scholarships (NO LOANS!).
Also, we will direct them to choose a career path that has value in the marketplace (says Mom with her private school Sociology degree....yup) and to also choose an affordable school.
6. PAY OFF YOUR HOUSE
Who the hell DOES that? Everyone has a mortgage. It's expected. You pay on your house for 30 years because houses are expensive and no can pay off their house....cmon.
Let's be real about the numbers for a second, though: You don't have any debt. You have 3-6 months of expenses in the bank in case of emergencies. You are investing, you are saving.
You INCOME is now not beholden to the payment Gods. You don't need to take thousands and throw it at Citibank or Master Card or car payments or doctor bills. You did that already. Your income is free.
So throw it at the house. Get that out of your life.
Because you know what you can do when you have no payments? (Paraphrasing Dave here....)
Anything you dang well please. Anything.
How wicked would it be to be 40 with a paid for house?
7. BUILD WEALTH AND GIVE
Here we are. The end of the baby steps. You are free of debt. Free of mortgage payments. You have an emergency fund and you have your investments and college funds. You, my friend, are seriously bizarre.
So what is the BEST way to become WEALTHY??? Yes....WEALTHY? By maximizing the use of your income. Throw it into investments. Build wealth like a crazy person.
And Give. You can give with abandon at this point because you are a weirdo with no debt.
I remember hearing a story about a local billionaire (yup, billionaire) who gave each of his kids $10,000 one Christmas, with the caveat that they had to do something nice for someone else with it.
Stories like that are just freakin' cool, and you can't give like a crazy person if you're still mired deep in debt.
Here's the thing...as we talked about in the "excuses" blog, you do NOT have to be a rich person to do this. Big shovels to clean up messes help...but it's not a necessity.
What you DO have to do is dedicate yourself to the process: you have to stick to your zero-based budget. You HAVE to work with your spouse and keep one another accountable. When you are in Baby Steps 1,2 and 3 you HAVE to cut out things that are not necessities and be INTENSE (you can be LESS intense once BS2 is done....but get that emergency fund saved!)
You income is your best path to wealth, even if it's not big.
My biggest motivation is knowing that I am living like few will NOW so I can live like few do LATER.....(paraphrasing Dave again....because he's a smart dude, that Dave). So I know my kids are well in hand and will never have to worry about how to cover something when I get old.
I will get to retire dignified because I planned.
So go out there and do it. Print out the steps and put them on your wall as motivation. Squirrel away that $1000 and start your legacy. It CAN be done.