If you are thinking, why should you use the Dave Ramsey method?
First of all, let us understand who is he and why Dave Ramsey snowball method works to get rid of debt.
Who is Dave Ramsey?
Dave Ramsey is a celebrity who speaks on a Dave Ramsey radio show, and podcast. His listeners mostly fall into normal working-class folks who try to come out of their consumer debt which sinks them.
Many of these folks live paycheck to paycheck, Can’t have the means to set aside some money to save or put in an emergency fund, then how will able to afford the fees of a financial planner or financial advisor?
In times of help, they look for it. There comes Dave Ramsey
Dave Ramsey method helped tens of thousands of people to come out of their debt and saved their marriages by getting their finances in order.
I am a big fan of his work, especially his conviction against consumer debt which messes with people’s lives, No need to keep with the Jones, etc.
His principles are rigid, like grandma’s approach to money. His solutions may not be a “one size fit solution” for all, but they certainly it help.
Dave Ramsey Method: Baby steps
- Save $1000 in emergency fund
- Pay off the debt using the snowball method
- Save 3 to 6 months of emergency fund
- Invest 15% for retirement
- Save for your kid’s college fees.
- Pay off your home early
- Build wealth and give
Save $1000 in emergency fund:
Why $1000 in the emergency funds?
Nearly 56% of Americans don’t have $1000 in their bank accounts to meet an emergency needs.
When they don’t have the fund to meet their emergency needs, they get into credit card debt or take a personal loan, and finally ask their family members or friends. One or the other way, they are making their debt hole deeper( assuming they are in debt already).
Start to save as much as possible to reach the $1000 in a bank savings account or money market funds. This fund would be enough to pay off your most emergency needs. It would also act as a shield to keep you away from taking on new debt.
Pay off the debt using the snowball method:
If you are neck deep in debt, chances are good you might have heard about Dave Ramsey snowball method on the internet or other video streaming platforms like Youtube.
Dave Ramsey snowball method is an incredible way to shave off debt when you carry multiple debts at the same time.
First thing, You need to list down all your debt like credit card debt, car loans, and student loans (except mortgage loans).
Start making extra payments toward your least debt regardless of interest rate while making minimum payments on all the other debt.
This would soon wipe off your smallest debt, which gives you the confidence to pay off your big debts. Then take those extra payments and start attacking the next debt which has less principal.
That’s why Dave Ramsey snowball works & claims “personal finance is more of behavior than intelligence”
Want to know how to save on your interest payments? click here.
Save 3 to 6 months of emergency fund:
The need for creating an emergency fund is more important than ever due to sudden layoffs in various industry, rising healthcare costs, etc.
Dave Ramsey method emphasizes on creating emergency fund over investing.
If your family has a single earner, then you should aim to accumulate 6 months of expenses as an emergency fund.
If your family has two income earners, then aim for 3 months of expenses as an emergency fund.
Park these funds in low-risk, high-liquid asset instruments like money market funds or bank savings accounts.
Reasons for an emergency fund
- Even if you lose your job, your half-year equal expenses in an emergency fund would be taken care of. This will give you enough time to find the next job.
- Car Breakdown – If your car is breakdown or needs to repair, the money in the emergency fund will fund these repairs.
- Health Issues – You can take medical treatment even if your insurance company is delaying making the hospital payments.
- House repair – If there is any repair related to housing like piping, roof, electrical items, etc. You can use the funds in an emergency fund.
Invest 15% in retirement
Saving for retirement is another important one. People are expected to live longer than before due to advance healthcare treatments.
We can’t simply rely on governments, and kids to support us in our retirement. You need to take things into your hands. The safest bet is by investing in a low-cost index fund.
When I say 15 % of your paycheck to retirement, simply take your monthly take home and multiply by 0.15. That is the amount you need to contribute towards your retirement.
Do you know $100 invested in an index fund 32 years ago, would be worth $2147 today? Such is the potential of index fund return.
Save for your kid’s college fee
If you wish to give a good start for your kids, then help them by providing good education.
Education doesn’t necessarily should come up with expensive fees like Ph.D. in philosophy with six-figure student loan and finally working at Mc Donald. You have seen how young folks are burdened with student loans at their young age.
Education will provide them with better career opportunities but it doesn’t need to drown them in debt.
Lending hands to your kids would definitely give them a good start at the early stage in their life.
Caution: If your retirement is around the corner, it’s better to safeguard your retirement account rather than break it for your kids. It’s not being selfish or hard-hearted, it is about making the right decision.
Pay off home early:
Once your debt is over by using step 2, now you can start to pay off your mortgage loan.
By aggressively paying your mortgage, You may save thousands of dollars in interest from paying to the bank.
Being debt free and the freedom it gives you is great. Also having a fully paid house gives you security & stability.
Build wealth & give
Once you accumulated wealth & it’s time to receive a blessing by giving to a local charity, church, or any other worthy cause.
Now you can put more contributions towards your retirement account to build wealth & also you can share generously with others by leaving an inheritance to your kids & their kids.
Dave Ramsey method believes wealth is accumulated and can be shared with others.
This we call ” leaving a legacy”
Thank You for reading! If you have other views or thoughts, please do let me know in the comments.
