I finished rereading Total Money Makeover: A Proven Plan for Financial Fitness, by Dave Ramsey. I originally read this book about five years ago, when it was given to me by my dad. This book is an easy read, and for a finance book, is actually very interesting. One of the aspects I most appreciate about this book, is that Dave breaks down a plan for financial fitness into “baby steps.” And yes, I’m going to call him by his first name, because after rereading this book, I feel like we are good friends who can discuss money openly without judgement.
First, figure out a budget. I know, it sounds boring and not fun at all. Figure out where your money is actually going, not where you think it is going. Make this budget realistic, and find a way to stick to it. Once you figure out your budget, you can begin Baby Step One: Establish a $1000 Emergency Fund. This fund is to be used for emergencies only. True emergencies, like your car broke down, or the home needs a repair. Apparently needing a new blouse or a cute pair of white cropped jeans no longer counts as an emergency. Adutling is hard. Dave discusses “Murphy’s Law” and that bad things will happen, and this emergency fund is what helps you stay on track for living a debt free life and building wealth.
The next Baby Step, is starting a debt snowball. Once you have established your budget, and understand all your bills and monthly expenses, you also realize exactly how much you are paying on debt and interest. What Dave suggests, is that you start off by paying off the smallest debts first and working your way towards the larger debts. Although some debts may have higher interest rates than others, by starting small and working bigger than you can feel a sense of accomplish and increase motivation to “Gazelle-like intensity.”
Once the ball is rolling, and you are living debt free (besides your mortgage) then you begin Baby Step Three: A fully funded emergency fund. Depending on your situation this emergency fund should be between 3-6 months of living expenses. It’s important here to truly look at what you would need, should there be a loss of income so that you are your family can survive a time of crisis and not go back into debt and have to start all over.
Baby Step Four: Investing. Dave recommends after you are debt free, and have a fully funded emergency fund, that you should begin to invest 15% of your income. Baby Step Five: College Savings, piggy-backs on step four, as he discusses smart ways to invest money in order to have the greatest amount of growth and return on investment. Dave discusses Mutual Funds, IRAs, ESAs (Education Savings Account), and also Flexible 529 plans to help invest in not only your future, but your children’s future.
Finally, in Baby Steps Six and Seven, Dave discusses ways to pay off your mortgage early to truly live debt free and the importance of giving and charitable donations. Dave recommends a 15 year mortgage over a 30 year mortgage as paying an extra $550 a month on a shorter mortgage can save you hundreds of thousands of dollars in the long run. Overall Dave lays out a simple plan which although it may be difficult to adhere to entirely, will help create financial independence. As the tagline for the book states “If you will live like no one else, later you can live like no one else.”
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