THE TOTAL MONEY MAKEOVER
Dave Ramsey's plan for making over your finances in seven "baby steps." The "baby steps" theme comes from that old Bill Murray movie,?What About Bob??Remember, his therapist (Richard Dreyfus) convinces him to take "baby steps" to break through his paralyzing fear of the world. Here are Dave Ramsey's baby steps:
- Save $1,000 in a Beginner Emergency Fund.?Until you put some separation between you and the financial cliff you've been dangling over the last several years you will never succeed, financially. $1,000 isn't a lot of money these days, but it is enough to cover most car repairs and replace broken appliances. This baby emergency fund should be kept ultra-liquid, and easily accessible. A good place to start is at your local bank account or credit union. Do not "invest" this money; this fund is for emergencies only.
- Develop a Debt Snowball.?Forgetting interest rates and annual fees for a moment, Ramsey advocates lining up your debts smallest to largest. Make minimum payments on all the debts, and attack the little one with every extra dollar you can squeeze from your budget. When that smallest debt is paid off move on to the next one, combining that debt's minimum payment with the amount you were paying on the first debt, plus any extra you can squeeze from the monthly budget. In this way,each time you move up a debt your "snowball" gets larger and larger. By the end of the your debt snowball plan you could be making monthly payment well in excess of $1,000 a month towards a car payment or large credit card balance.
- Save 3-6 Months of Expenses in an Emergency Fund. Now it's time to beef up the emergency fund you started in Baby Step 1. Calculate 3-6 months of?expenses?(not income) and use that as your savings goal. If you are single, or married with only one income, lean towards the 6-month figure.?For most families their goal amount should be around $10,000in a high-yielding savings account. *Note, step 3b is to begin saving for a large purchase, such as a down payment for a home or to upgrade a car with cash. This should only be started after you have a fully-funded emergency fund in place.
- Save 15% of Your Income for Retirement.?If you suspended retirement contributions to get to this point, now is the time to restart those contributions. If you have an employer-sponsored plan such as a 401k that offers a match, invest up to the matching percentage, but no further. Any amount above that, up to 15% of your income, save in a Roth IRA.
- Save for the Kid's College. It's important to note that this step comes?after?saving for your own retirement. Many parents, with good intentions, put saving for their kids' college funds ahead of their own financial goals.?This is a bad idea. They don't offer grants or work-study programs to pay for your retirement.?If you are without savings for college, there are alternative ways to fund an education. Ramsey sort of hedges here - citing that kids tend to get more out of their education if they pay for it themselves. Then again, he confesses that it is a noble goal to pay for your kid's education. Part time jobs aren't all bad though, and if they develop an expensive taste for clothes or toys in college they can get a job and pay for those themselves.
- Pay Off Your Mortgage Early.?This is one of the most controversial steps because most financial experts will tell you that money spent reducing a mortgage could earn you a much better rate in the market. Maybe, but Dave Ramsey isn't all about math. His specialty is?personal?finance. Without a mortgage payment, and no other debts, you can become very wealthy, very fast. Paying off all debt, including mortgages, eliminates a large amount of risk from our lives. If you are thinking of buying a house consider a 100% down plan - paying for the entire purchase with cash. If you must finance the deal, consider a 15-year, fixed rate mortgage and then work to pay it off even earlier.
- Invest for Wealth. The final step in your total money makeover is to invest all remaining income for wealth. Without any debt payments, a large percentage of your income (your best wealth-building tool) can be invested above retirement account savings.