How to Manage Your Money the Dave Ramsey Way

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Posted on: 18th Jul 2014

One of the most important skills that each and everyone of us must possess in order to achieve true happiness is how to earn, save, invest, and multiply money. There are many good (and not-so-good) self-help books and courses that aim to teach strategies needed for managing ones money. Yet, there is one financial education program that stands out above the rest. Author, radio personality, and financial trainer Dave Ramsey has been teaching countless numbers of individuals, through his Financial Peace University, a plan that he himself devised and utilized to reach his own financial freedom. He calls this plan The Seven Baby Steps. Let�s review each of them in the proper order.

Baby Step I (Start a $1000 Emergency Fund)
An emergency can happen to anyone at any time, and for unexplained reasons. When it happens, the last thing that anyone wants is to be unprepared for the unexpected events that are sure to follow. Dave Ramsey believes that you will need to save at least $1000 in your emergency fund. Then, when an unforeseen event occurs, you will have the comfort of knowing that you�re covered. An emergency fund will cover such unexpected events such as vehicle engine trouble, home damages, medical issues, and other types of problems.

Baby Step II (Pay Off Current Debts)
There is no such thing as good debt. Some debts are essential. The rest are outright horrible. If you�re making payments on a private home that are manageable and within your budget; then this type of debt is considered necessary for housing purposes. On the other hand, if you are carrying loads of credit card and student loan debts, then you are carrying liability that serves no particular purpose other than to make your life totally miserable. Dave Ramsey suggests that you begin by listing all of your debts (not including your home mortgage). Then, Dave advises that you start chipping away at each debt starting with the smallest balance first. The idea is that when you succeed with paying off the smaller ones, this will motivate you to pay off the others. You�ll begin to see your results snowball, and will stick with your debt payment plan.

Baby Step III (Put Away 3-6 Months for Expenses)
If you lost your job tomorrow, would you have enough savings to cover your household expenses for at least the next three to six months? If not, then you must begin a full emergency fund immediately. This step involves gathering all of your monthly expenses including home mortgage, home utilities, vehicle payments, childcare, and so on. Make sure you include every single monthly expense regardless of how big or small it is. Then, multiply this by six months; which will be your maximum number of months. The total will be the amount of money you will need to offset your expenses for six months in the event that you should lose your current income. Dave Ramsey suggests keeping this money in a money market account. Keep in mind that you will only touch this money when a personal financial loss occurs. It will not be used as either an investment, or entertainment fund.

Baby Step IV (Save 15% of Household Income)
Once you�ve completed the first three baby steps, then you are ready for baby step four.
The idea is that, at this point, you will have no required payments except two. The first is your home mortgage. The other is your fully funded emergency fund, which you will keep paying into for as long as you earning income. At this stage, you will begin building wealth. Ramsey suggests saving 15% of every dollar that you earn, and investing it into Roth IRAs and pre-tax retirement plans. Make sure that you save just 15%. No higher, no lower.

Baby Step V (Create a College Fund)
If you have children, it is very likely that you�d like for them to attend college. The worse thing that many college undergraduates face after completing their studies is massive amounts of student loan debt, and the obviously painful obligation to pay it all back. This is where this baby step comes in. Dave says that you must first set a college fund savings goal. Make sure to factor in such economic items as interest and inflation. Save the funds in some type of government regulated college savings plans such as an ESA or a 529. You can read more about this by referring to The Seven Baby Steps.

Baby Step VI (Pay Off Your Home as Soon as Possible)
With this baby step, you are coming into the home stretch of realizing you dream of becoming completely debt-free. By now, you�ve long paid off all of your other debts, and are now going for the knock-out punch; wiping out your mortgage. Paying off your home is sure to be one of the happiest experiences that you will ever encounter throughout your financial journey. Dave Ramsey states that you should pay as much as you possibly can each month that is reasonably manageable from your household budgeting standpoint. Keep adding more and more each month so that you can pay off your house sooner than scheduled. As a note, make sure that you will not be hit with a prepayment penalty from your mortgage company for having paid off your home early.

Baby Step VII (Build Wealth and Give Away Some of It)
Many wealthy people get to a point in their financial lives where earning and saving money is no longer important. Such affluent individuals like Bernie Marcus, Bill Gates, Warren Buffet, and the late J. Paul Getty decided that they would begin the process of leaving money for future generations. In a word, their decision was to give it away. You don�t have to possess millions or billions of dollars to give away money. You just need to be open to the idea that the money you give away will serve as a blessing to those who might be less fortunate. You can donate the money to your favorite charity. You can give away money during fundraising events for cancer research or child welfare. In sum, give away some money, and be a blessing.

Conclusion
These Seven Baby Steps have helped millions of average everyday individuals get out of debt, and realize their dreams of a financially free lifestyle. Take the time now to visit, Dave Ramsey�s website for more insight on how to reach financial peace for both you and your family.

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How to Manage Your Money the Dave Ramsey Way

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