For those who might be unfamiliar with the quiet success of radio talk show host Dave Ramsey, the man has crept up the list of the Talkers.com list of the “100 Most Important Talk Show Hosts” to land at #6. Ahead of him are only the REAL heavies, with last names like Limbaugh, Hannity, and Beck. Jason Hartman recently sat down with Ramsey’s lead financial counselor, Chris Hogan, to discuss the philosophy of managing personal finances. All of Mr. Ramsey’s advice is based on Christian and common sense principles. We’ll hit the highlights of the discussion here but don’t miss Jason’s interview of Hogan on The Solomon Success Show #28.
According to the Ramsey model, there are seven small steps you should take to get your personal finances under control, the theory being that small initial successes allow you to build into larger successes over time. Here are his 7 Steps to Financial Peace (taken from DaveRamsey.com).
Baby Step 1 ($1,000 emergency fund)
An emergency fund is for those unexpected events in life that you can’t plan for: the loss of a job, an unexpected pregnancy, a faulty car transmission, and the list goes on and on. It’s not a matter of if these events will happen; it’s simply a matter of when they will happen. This beginning emergency fund will keep life’s little Murphies from turning into new debt while you work off the old debt. If a real emergency happens, you can handle it with your emergency fund. No more borrowing. It’s time to break the cycle of debt!
Baby Step 2 (Pay off all debt using the debt snowball)
List your debts, excluding the house, in order. The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first. The point of the debt snowball is simply this: You need some quick wins in order to stay pumped up about getting out of debt! Paying off debt is not always about math. It’s about motivation. Personal finance is 20% head knowledge and 80% behavior. When you start knocking off the easier debts, you will see results and you will stay motivated to dump your debt.
Baby Step 3 (save 3 to 6 months of expenses in savings)
Once you complete the first two baby steps, you will have built serious momentum. But don’t start throwing all your “extra” money into investments quite yet. It’s time to build your full emergency fund. Ask yourself, “What would it take for me to live for three to six months if I lost my income?” Your answer to that question is how much you should save. Use this money for emergencies only: incidents that would have a major impact on you and your family. Keep these savings in a money market account. Remember, this stash of money is not an investment; it is insurance you’re paying to yourself, a buffer between you and life.
Baby Step 4 (Invest 15% of income into Roth IRAs, etc)
When you reach this step, you’ll have no payments—except the house—and a fully funded emergency fund. Now it’s time to get serious about building wealth. Dave suggests investing 15% of your household income into Roth IRAs and pre-tax retirement plans. Don’t invest more than that because the extra money will help you complete the next two steps: college savings and paying off your home early. Why shouldn’t you invest less than 15%? Some people choose to invest a small amount, if anything, because they want to get a child through school or pay off the home in a hurry. But the kids’ degrees won’t feed you at retirement, and if you throw all your money into your mortgage at this point, you’ll end up having to sell the house and buy the book 72 Ways to Prepare Alpo and Love It. Bad plan.
Baby Step 5 (College funding for children)
By this point, you should have already started Baby Step 4—investing 15% of your income—before saving for college. Whether you are saving for you or your child to go to college, you need to start now. In order to have enough money saved for college, you need to have a goal. Determine how much per month you should be saving at 12% interest in order to have enough for college. If you save at 12% and inflation is at 4%, then you are moving ahead of inflation at a net of 8% per year!
Never save for college using:
- Insurance
- Savings bonds (only 5-6% growth)
- Zero-coupon bonds. (only 6-8% growth)
- Pre-paid college tuition (only 7% inflation rate)
The best way to save for college is with Education Savings Accounts (ESAs) and 529 plans. Remember, college is possible without loans!
Baby Step 6 (Pay off your house early)
Now it’s time to begin chunking all of your extra money toward the mortgage. You are getting closer to realizing the dream of a life with no house payments. As you attack this last debt, you will gain momentum much like you did back in the second step of the debt snowball. Remember, having absolutely no payments is totally within your reach!
Baby Step 7 (Build wealth and give)
It’s time to build wealth and give like never before. Leave an inheritance for future generations, and bless others now with your excess. It’s really the only way to live! Golda Meir says, “You can’t shake hands with a clenched fist.” Vow to never hold your money so tightly that you never give any away. Hoarding money is not the way to wealth. Save for yourself, save for your family’s future, and be gracious enough to bless others. You can do all three at the same time.
As you can see, by the time you work your way through these seven steps you’re going to find yourself sitting quite pretty in the world of personal finances. Imagine a life without money stress! Ramsey pursues a multimedia approach to getting his message out. His daily radio show is heard on hundreds of stations around the country. You can find one near you here. There is also a wealth of information at DaveRamsey.com about iPhone apps, personal appearances, financial peace classes, etc. The bottom line is that if you want to make a change for the better in your financial life, there’s probably something Ramsey can do to help.
Many churches offer video classes of Financial Peace University (FPU), where Ramsey himself teaches how to implement the baby steps and more, usually followed by a discussion led by church leaders. Ask your church administrator about the possibility of bringing FPU to your city. But before anything, check out Jason’s interview with Chris Hogan. This can be life-changing stuff if you give it a chance.
The Solomon Success Team
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