If you’re new to budgeting and money management, Dave Ramsey’s principles are a great start for you to manage money better.
Specifically, his 7 Baby Steps are a great path to follow on your debt-free journey, so you can reach your money goals faster and start celebrating your success.
Your finances reflects the choices and decisions you make with your money, and your wins reflect better choices.
Ramsey’s step-by-step guide makes it easy to track your progress and see how smart decisions boost your financial health. First, let’s take a look at the 7 Baby Steps and how they work.
Did you know that 60 percent of Americans don’t have enough money to cover a $1,000 emergency? An emergency fund relieves you of stress, you don’t have to worry about a large expense that came up suddenly.
No matter how carefully you plan, life has a way of throwing curve-balls. Unexpected pet illnesses that warrant a veterinarian visit, when your car breaks down, flight tickets for family emergencies and other inevitable situations.
Being financially prepared will cut down on stress and you would rather be focused on the emergencies themselves.
If you’re unprepared, you could get caught with expenses that wreck your budget and throw your finances off track for months.
Ramsey advocates putting a little bit of money aside each week or each month to start building an emergency savings. This stops you from reaching for credit cards or going into debt in the event of a sudden expense.
You don’t need much to get started. If your budget is tight, try putting aside $10 each paycheck. Once you get comfortable with saving, bump the amount up to $50.
If you save $50 every two weeks, it will only take you 10 months to build a $1,000 emergency fund. An emergency fund turns an an emergency into an inconvenience.
The snowball method lets you tackle your debt one step at a time. Start with your smallest, most manageable bill and pay it off. From there, move on to the next one.
As you pick up momentum, you’ll start paying off each debt — just like a snowball rolling downhill. Research has proven that this method can help people modify their habits by encouraging them to focus on paying off their debts.
Are you saving for retirement? About 66 percent of Americans between the ages of 21 and 32 say they haven’t put any money aside for their golden years.
When it comes to retirement, it’s never too late to start saving. Ramsey says after you have paid off your debts, you should put at least 15 percent of your gross household income into a retirement account. You can start with a 401(k) so you get matching funds from your employer.
Ramsey recommends a 529 Plan for college savings. These are tax-advantaged plans that let you set money aside for your child’s tuition.
Each state and the District of Columbia has its own 529 Plan, so you’ll want to read up on the requirements for your state.
Should the money be used for non college related expenses, the owner of the 529 college savings plan account pays ordinary income tax and a 10% additional tax penalty on earnings.
It’s a big goal, but paying off your home can provide you with additional funds you can put toward your retirement and your children’s college education.
Once you’ve paid off your debts, you can allocate some of your income toward extra mortgage payments.
By paying off your mortgage early, you pay much less interest in total. The interest fees will disappear once your mortgage is paid off. Channel that money to other investments.
You put more money in your pocket rather than sending it to your mortgage lender.
So why should you use Dave Ramsey’s 7 Baby Steps? Here are five reasons to incorporate them and manage money better.
For some people, the phrase “manage money better” alone can sound intimidating. If financial matters make your head spin with images of math and flowcharts, you might get turned off on the idea of taking charge of your finances.
But Ramsey’s 7 Baby Steps are quite simple. They don’t involve complicated math, and you don’t need to have any in-depth knowledge about stock markets or algorithms to make them work for you.
Anyone can make a budget. And anyone can save a few extra dollars each week. By taking on your financial challenges one by one, you avoid burnout.
Saving and budgeting are about money, but they’re mostly about changing your habits. According to a Forbes analysis, several studies show that focusing on smaller debts first can be motivating.
Specifically, people who paid off more manageable debts first were more likely to continue paying off other debts.
The debt snowball strategy in Step 2 of Ramsey’s Baby Steps helps you see the results of your hard work, so you stay motivated to keep the momentum going.
When you’re paying off debts, you’re less likely to take on more debt by spending frivolously. Whereas you might have charged a new purchase to a credit card in the past, now you’re likely to save up first and pay cash.
This can be a great feeling, and the Baby Steps help you recognize the power in saving.
Americans have a lot of credit card debt. According to Value Penguin, the average household carries about $5,700 in revolving debt. The longer you take to pay off a credit card bill, the more interest you’ll pay over time.
Minimum payments can keep you trapped in a cycle of debt for years. For example, if you owe $5,000 on a credit card with an 18% interest rate, and you make a $100 monthly minimum payment.
It will take you a whopping 94 months (almost eight years) to pay off your debt. Worse, you’ll pay $4,311 in interest — almost as much as the original balance.
When you lack an emergency fund or any kind of savings, it can be tempting to reach for a credit card. If you do this over and over again, you can quickly get into a debt spiral that can end in bankruptcy.
Ramsey encourages everyone to start with a $1,000 emergency fund — and then build a bigger three-to-six month fund when you’re in a position to do so.
Saving money doesn’t have to be a chore. If you follow Dave Ramsay, you know that he’s a proponent of celebrating your financial wins.
For some people, this might mean saving up to pay cash for new living room furniture. For others, it’s paying off bills and then using the extra money to finance a dream vacation.
If you follow the steps and start tackling your debt, you might celebrate by finishing your basement or finally starting the home remodeling project you’ve been planning.
Ramsey’s Baby Steps help you find a reason to get out of debt and start saving money. For some people, it’s knowing they’ll have enough money to maintain their lifestyle when they retire.
If you pay off your house early and build a comfortable retirement fund, you can look forward to travel or other hobbies you enjoy.
Similarly, staying out of debt and focusing on building a college fund for your kids can motivate you to save more and spend less.
By implementing Dave Ramsey’s money principles you leave a legacy of financial responsibility as well as changing your family tree.
Once you’ve achieved a debt-free lifestyle, you can turn your vision toward creating an inheritance that will help your children manage their money better and achieve their own financial goals.