Dave Ramsey’s 7 Steps to Getting Out of Debt and Building Wealth
The Total Money Makeover: A Proven Plan for Financial Fitness by Dave Ramsey has helped millions of people become debt free. Right now we are in a financial crisis that was caused when people stopped being able to pay for their houses. Too many people had their homes foreclosed on all at once.
The key to not letting this happen again is us as a nation taking control of our finances. We need to stop buying things that we can’t afford and get out of debt. As Dave says, 100% of foreclosures happen to people with mortgages. If you own your house, they can’t come take it from you. I won’t describe these as easy steps, because it is going to require effort on your part. However, they are proven to work. These steps will help you become debt free and build wealth.
1. $1000 Emergency Fund
The first step is to build a one thousand dollar emergency fund. This is to help stop using credit. To get out of debt, you have to cut up the credit cards. This small fund is your safety net from the world.
2. Get out of Debt
The second step is to get out debt except for your house. Pay off car loans, college loans, credit card debt, and anyone else you owe money. Dave’s method is to start with the smallest debt and move up. If you do this, you quickly get positive reinforcement that will motivate you to continue, and each debt you pay off frees up more money each month to help pay off the next.
3. 3 to 6 Month Emergency Fund
Now that you are debt free except for your house, you need to have a 3 to 6 month emergency fund in place. You need to be able to take care of all of your expenses for a significant amount of time. This will give you much more peace of mind in stressful times like these when you aren’t sure if your job is safe.
After you have built up your emergency fund, you need to start funding your retirement. Dave suggests putting 15% of your gross pay into Roth IRA’s and 401k’s. No more and no less at this point.
5. Kid’s College
If you have kids or are planning to have kids, this is the point where you need to start saving for their college. If you don’t, you can move on to step 6, which is…
6. Pay off the House
Pile everything extra you have at this point into the mortgage. Pay it off as fast as you can. When you are done, you can scream “I’m Debt Free!” The grass in the backyard feels different between your toes when you own it.
7. Spend, Save, Give
Dave says money is for 3 things. It is for having fun, building wealth, and giving away. At this point you can now afford to do lots of all 3. Have fun with it, continue to invest it, and be generous with it.
I highly recommend The Total Money Makeover(aff) to everyone. I have read it about a half dozen times now and I am currently following these steps to becoming debt free and building wealth. They really do work.