In case you aren’t familiar with his plan, it is broken down into baby steps.
DAVE RAMSEY BABY STEPS:
- Save $1000
- Pay off all consumer debt
- Save 3-6 months of expenses
- Invest 15% in retirement
- Save for kids college
- Pay off mortgage early
- Give generously
These baby steps are what his tips and plan are based around. The baby steps 1-3 are done one at a time and steps 4-6 are done together if you can. Then once you are to baby step 7, you are able to give generously!
1. MAKING A WRITTEN ZERO-BASED BUDGET
This is the first and most important step to ANY financial plan.
A written budget is the foundation for everything that you do with your money.
A budget will tell you what you and can’t afford. It will tell you exactly where and how to spend your money.
Now, when I am talking about a budget, I mean a zero-based budget.
This is slightly different than just writing down your income and expenses and spending what is leftover.
A zero-based budget means budgeting every single dollar. It takes a little more time but it is worth the effort.
2. USE CASH
Using cash saves you on average 15-20% just at the store. Studies have shown that we spend cash differently than swiping a card. We question the purchase differently and spend less when using cash.
Cash envelopes are a convenient way to organize your cash for each category and stick to your budget. Using cash helps you stick to your plan and stop overspending.
It is not necessary to use cash for every single bill. You would use cash for shopping and categories that you have a tendency to overspend.
Once you are out of cash in that category, stop spending for that category.
Some cash categories include:
- food
- animals
- miscellaneous expenses
- hair/beauty
- kids expenses
- eating out
- fun money
You can also get a discount at a lot of places for using cash. Especially on someone providing a service and even medical bills. All you have to do it ask, the worst they can do is say no.
I saved several hundred dollars on replacing my HVAC system by asking for a cash discount.
A lot of hospitals and doctors offices will also take a cash discount if you pay it in full, even if you have insurance.
3. TAKE CARE OF THE “FOUR WALLS” FIRST
When you are making your budget, you want to prioritize your spending. The “four walls” are the most important things that we need to survive and get to work. These things come before anything else.
The four walls include:
- food
- shelter (rent/mortgage, utilities, taxes)
- Transportation
- clothing
If you are behind on your bills, you catch up these things first. These items come before any debt payments.
So, make your budget then catch up on your four walls before moving onto the baby steps.
4. LIVE LIKE NO ONE ELSE, SO LATER YOU CAN LIVE LIKE NO ONE ELSE
This is one of the most known Dave Ramsey tips. Basically it means that you sacrifice and pay off debt now, so later you can enjoy your money like no one else.
Following his plan is not “normal” by today’s standards so, you live like no one else now so later you can live the life you want.
Basically, he is talking about sacrificing what you want now so you can have it later, without all the debt and stress!
5. YOU DON’T NEED A CREDIT SCORE
Dave says you don’t need a credit score or as he calls it a “I love debt score”.
Now this tip is in general good but it is quickly getting outdated. I do agree with not focusing on your credit score and going into debt in order to keep it high.
The key with your score is that it has to be good or zero, not somewhere in between. One big objection to this is “what about a getting a mortgage?”.
You can get a mortgage without a credit score. It just can’t be a bad credit score.
There are instances where you need a good score for jobs or insurance. So, it’s important to know how a zero score will affect you. Most jobs that look at scores, just don’t want a bad one.
So, generally speaking, this tip is still valid.
6. SAVE $1000 BEFORE PAYING OFF DEBT
Saving $1000 is the first baby step in Dave Ramsey’s plan. Making your zero-based budget and catching up on your four walls are groundwork for the baby steps.
Saving a $1000 starter emergency fund will help you avoid adding new debt while you are working on baby step 2. This won’t solve all your problems, but it will be a buffer while you work on other things.
It will help you cover minor things that will pop up while you are paying on your debt.
If your income is below the poverty line, you can save $500 for this step instead of $1000. However, keep in mind that you won’t be able to cover as much if something comes up.
7. PAY OFF DEBT AS FAST AS YOU CAN USING THE DEBT SNOWBALL
Paying off debt is baby step #2 in his plan. This step is meant to be completed as fast as you possibly can. The time it takes will depend on the amount of debt you have and your income.
It is crucial for you to stop using debt while you are paying off so you can actually finish this step.
The most effective debt pay off method for changing your behavior is the debt snowball.
The debt snowball method is paying off debts starting with the smallest balance NOT the highest interest rate.
This is effective because you get the small wins and can see your debt disappearing.
If you are intense about paying off your debt as fast as you can, generally speaking, the interest rate won’t matter. Most people using the debt snowball pay off their debts in 18-24 months.
There are instances where the interest rate may matter and most of the time that is with student loans. There are occasions that refinancing your student loans may make a difference. Especially if it will take you years to pay it off and have a high interest rate.
Be sure to use a debt snowball calculator to see how fast you can actually pay it all off. It is probably faster than you think. The calculators are also an easy way for you to make adjusts and see how much faster you can do it.
8. USE SINKING FUNDS
Sinking funds are just saving for certain known expenses that don’t come up every single month.
Examples of sinking funds include:
- Christmas
- Vehicle maintenance
- Property taxes
- Gifts
- Birthdays
- Vacations
- Medical expenses
- Animals
- Kid activities
These are things you should plan for and put in a separate account or cash envelope so that it doesn’t accidentally disappear.
Saving for these things in a sinking fund are so important because if you don’t it will make it harder to stick to your budget and avoid debt.
The more you can plan for the less of an emergency it because when it comes up.
There are a couple of ways that you can save for sinking funds. If you know what you want to spend on Christmas for example, you can divide it by 12 and save that much each month.
Or you can fill the fund as you get extra money in your budget.
