A lot of you were telling me you liked the
post on money and budgeting. I have to say that reading Dave Ramsay’s book “Total money makeover” really changed my way
of thinking about money. I realized I could make money work for me by taking
simple but hard decisions at the same time. Dave Ramsay likes to repeat: “live like no one else now so you can live
like no one else later”. You have to decide to say no to things you would like
now so you can have them later when you can really afford them.
3 to 6 months of expenses in savings
Invest 15% of household income into a retirement product
College funding for children
•Pre-paid college tuition (only 7% inflation rate)
Pay off your house early
Build wealth and give!
I will be posting more posts from him in
the future, comment and don’t hesitate to write to me if you have questions!
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!
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 33 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 4Invest 15% of household income into a retirement product
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 a 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 5College 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. Remember, college is possible without loans!
Baby Step 6Pay 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 7Build 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.
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