In case you don’t know by now, Dave Ramsey is one of those financial gurus I was talking about before. He is all about “gazelle intensity” (paying off debt very aggressively) and he came up with a list of easy instructions on how to become debt free and what goals you should be pursuing along the way to obtain the ultimate goal, financial peace (and wealth). I don’t necessarily agree with everything Dave preaches, and therefore I don’t follow his plan to a T, but I do think that he does have a lot of great advice that is worth sharing.
Baby Step One – save $1,000 in an emergency fund. Dave says to keep this money liquid (easily accessible), but keep it separate from your checking account (because it will disappear if it’s in with the rest of your everyday money). Dave recommends that you hustle and put together this baby emergency fund right away (like within a month). Everyone thinks it’s pretty hard to save $1,000 in a month (hello, I make $2,200 take home and more than half goes to bills!) but it’s actually not as hard as you might think. Personally, I just pulled as much as I could from my pay checks and then pushed myself to finally get around to listing my old iPhone for sale and surprise surprise, I actually sold it, for $560. All this time, that money was just sitting there doing nothing! The point I’m trying to make is pinch every penny for a few weeks and sell your old crap to get the $1,000 (it will declutter your house anyway, which is always a good thing!)
Baby Step Two – so you’ve finally got baby step one done, whew. So what next? Baby step two of course! Dave Ramsey wants you to really get “gazelle intense” and knock out your debt (except your mortgage). All of your debt. As in, everything. Even those pesky student loans that you’ve had on deferment forever. So, what does gazelle intense even mean? It means that you’re going all out to make paying off all of your debt happen as quickly as humanly possible. You’re going balls to wall to pay off all your debt. Personally, I totally agree with baby step one – I think everyone should have $1,000 in the bank. It’s baby step two that I have issues with. I’m all for paying off debt, but it’s the level of intensity that bothers me (I like to enjoy my life). But I’ll make a whole other post on Baby Step 2 later because I would love to share my opinion and stories on it from my personal debt free journey (trust me, it’ll be worth the read), but now I’m going off on tangents. Baby step two is crucial because if you have an emergency come up like the loss of a job, you won’t have to go in debt to get through it, because you’ll have the cash.
Baby Step Three – three to six months of expenses in savings (keep this liquid also). It sounds absolutely crazy to have this kind of cushion. How in the world could I ever save $24,000 on my and my husband’s measly $4,000 a month take home pay? It’s not as hard as you might think once all your debt is paid off! If you’re anything like my boyfriend and I, we are taking home $4,400 (net income) a month between the both of us. $2,900 of that income is going towards bills. About $2,300 of the $2,900 is going towards bills that are debt and the other $600 is going to the phone bill and other household utilities. If all our debt was paid off and we were saving that $2,300 a month, we would be able to save our six months ($26,400) in 11.5 months, not bad. On top of that, Dave says to save six months of expenses not income. Once your debt is paid off, your expenses will be significantly less (between utilities, property taxes, food and gas, we’d be closer to $1,800 a month total, so only about $10,800 total for six months. This means at $2,300 savings per month, we only need to save for about 4.5 months!) Plus, seeing your bank account balance grow is even more rewarding than paying off old bills. Once your debt is paid off, this step is a piece of cake.
Baby Step Four – invest 15% of income into Roth IRAs or pre-tax retirement. Discussing all of the options for retirement could probably take up a dozen blog posts on it’s own, so we won’t get into retirement account options now, but the point of this baby step is to invest 15% of your household income into retirement. This step is going to ensure that you remain debt free well into your golden years because you can’t live on social security alone, it’s just not enough.
Baby Step Five – personal development funding. College funding, down payment for a house, etc.
Baby Step Six – pay off your home early. This one is self explanatory. Pay off your house, early, end of story. This takes most 5-7 years to do.
Baby Step Seven – build wealth and give. Max out your 401k/retirement in this step so that you can continue to live debt free well into your retirement years.