“Baby Steps” to Financial Fitness
Thes are finance expert Dave Ramsey’s famous ‘baby steps’ for financial fitness, courtesy of the San Antonio Express-News:
Baby step 1: Start a $1,000 emergency fund.
If you don’t already have one grand on hand, save for it. That means paying yourself before you pay the bills. In fact, you should give, save and then pay the bills. Oh, and this emergency cash is for just that — emergencies only.
Baby step 2: Pay off all debt with the ‘debt snowball.’
This is probably the toughest step of the bunch. List all your debts from least to greatest. (Don’t worry about interest rates.) When you’ve eliminated the smallest debt, add its payment to what you pay on the second debt until that is paid off. Then add those two payments to what you pay on the next debt, etc.
By compounding payments, you get out of debt faster — Ramsey figures two years on average with exception of the mortgage. Naturally, don’t incur debt during this period.
Baby step 3: Three to six months of expenses in the savings.
You should be debt-free at this point (except the house), so the money you spent paying credit cards can now go to building up this emergency fund.
Ramsey figures it takes six months to save ‘Murphy repellant’ — insurance to turn any financial crisis into mere inconvenience. Ramsey suggests money market accounts; they’re accessible and usually don’t penalize for early withdrawal.
Baby step 4: Invest 15 percent of household income into Roth IRAs and pre-tax retirement.
Ramsey loves Roth IRAs and 401(k)s. No surprise, he’s a big proponent of mutual funds as long-term investments. He suggests investing 25 percent in each of these fund types: growth and income, growth, international and aggressive growth.
Baby step 5: College funding for children.
Research the true cost of higher education (tuition, room and board, etc.).
Now the hard part: Pay cash. Why? Because the average college student graduates with almost $28,000 in student loan debt, plus $6,000 in credit card debt.
To bypass loans, go with an ESA (education savings account) or education IRA funded in a growth stock mutual fund. (Again, start early.) Avoid savings bonds and pre-paid tuition. Their rate of return is too low.
Baby step 6: Pay off the home early.
Don’t fall for home equity loans or mortgage tax deductions. Instead, pay off the house pronto with a 15-year fixed mortgage, with payments no larger than a fourth of your take-home pay.
At this point, you should have paid off your debts and saved a three- to six-month emergency fund. That means the money you were paying in those can now go toward eliminating the mortgage. (This would constitute the ‘early’ part.)
Baby step 7: Build wealth and give.
‘(Wealth) makes you into more of what you are,’ Ramsey says. Jerks become bigger jerks; givers become more generous. Ramsey favors the latter, noting that giving is probably the most fun you’ll ever have with money. And if you’ve made it this far, you should have plenty to give.
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