We recently have been working on creating a budget to help us save money in 2014. Many of us are looking for ways to dig out of debt, save money and be able to do the things we want to do! As we are making a budget, another important aspect of saving money is knowing what to do with your extra money in your budget. Dave Ramsey recommends the following baby steps to pave your path to financial freedom:
Baby Step 1: Save $1,000.
This is your emergency fund. This is such an important step because life happens. Everyone has unexpected expenses and you need to prepare for them. Your heater breaks in your car, you have a flat tire, you have a child that breaks his arm, or your spouse loses his job. These are unexpected emergencies. (Dave calls them Murphies after Murphy’s Law). The $1,000 you save for your emergency fund is set aside for that. Instead of using a credit card to charge these emergencies (and accrue more debt), you will be able to pay cash and get out of the vicious cycle of paying off a little debt and adding more to it.
Dave says you need to get your baby emergency fund established right away. You can do this by paying the minimum payment due on your bills and using the extra to put in your savings, sell as many items as possible (Craigslist, Facebook, and garage sales all are great for this), cancel cable, use your tax return, or lower the expenses you have on your cable or cell phone. Trust me, if you get serious about this, the money will accrue quickly. After you have your $1,000 you are ready to move to Baby Step 2.
Baby Step 2: Pay Off All Debt Using the Debt Snowball.
This step is to pay off all of your debt EXCEPT your home using Dave’s debt snowball. Here’s how you do it:
- List your debts (EXCEPT the house) in order from smallest balance to largest balance. Your top priority is the smallest balance.
- Dave recommends not to worry about the interest rate UNLESS 2 of the balances are similar and then you can pay off the higher interest first. Dave points out that this is not about the math! The point is to start paying off some debt! By paying off a debt will give you more motivation and keep you excited about getting out of debt!
- To start the snowball you will take the money you were using to build your emergency fund and any other money you can find to pay off the lowest bill. (More Facebook, Craigslist, and garage sales anyone?) After the first debt is paid off you take the money you were paying on that debt and apply it to the second lowest balance debt. After the 2nd debt is paid off you take the money from the first debt and second debt and any extra and apply it to the third debt, etc. You are building momentum and cash to pay these debts off. I can tell you from personal experience this works! Depending on how much debt you have this can take a little or a long time. Don’t be discouraged! It’s easy to get into debt, it’s much harder digging yourself out of debt. After all debt but the house is paid off you will move to Baby Step 3.
Baby Step 3: Completing Emergency Fund By Saving 3-6 Months Worth of Expenses.
The purpose of completing your emergency fund by saving enough money to cover 3-6 months worth of expenses is to keep you covered in case of a job loss, medical issues or larger expenses. When you complete this process you will already be saving for licensing your vehicles, having a Christmas fund set up, and will have other categories in your budget for insurance, property taxes and other large expenses that are not regular monthly expenses. This money is for emergencies only so it needs to be kept somewhere that you can easily get to it. Dave recommends a money market account. Remember, you should also be saving for new cars to pay with cash, house expenses and repairs, etc so when it’s time to replace or repair, you have the cash you will need to not accrue debt!
Baby Step 4: Fully Fund Your Retirement Savings.
When you reach step for you no longer have any debt payments except for your home. You will also have your 3-6 months of expenses saved up in your emergency fund. Now is when Dave recommends saving for retirement and building wealth. Dave recommends putting 15% of your household income into Roth IRA’s and pre-tax retirement plans like a 401k at work.
Baby Step 5: Fund Your Children’s College Education.
At this point is when Dave recommends saving for your children’s education. This is where you need to figure out how much you will need to save. Dave says to figure out how much you should be saving each month at 12% interest and you should 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! Dave recommends using Education Savings Accounts and 529 plans.
Baby Step 6: Pay Off Your Home Early.
Now that you have no other debt, you can use all your extra and pay off your house early!
Baby Step 7: Build Wealth & Give!
This is where you change your legacy! With no debt you are free to give and bless others. Save for yourself, for your family, and give to others. All of these can be done simultaneously! You will be able to retire, you can start scholarships, or help your favorite charities. Dream big!
Just a quick note, life happens all the while you are working on these baby steps. When you have an emergency and need to replenish some of your emergency fund, stop where you are at and start over at the correct step. Dave’s steps work if you get discouraged visit his website. There are lots of tools, encouragement, and listening to his radio show will also keep you focused.
Here are some other posts that might help you on your debt-free path:
- Introduction: Why Should I Create A Budget & Where Do I Start?
- Part 1: Income Sources
- Part 2: Expenses
- Part 3: Creating A Cashflow Part 1: The Four Walls
- Part 4: Creating A Cashflow Part 2
- Creating An Irregular Income Budget
- 5 Easy Tips To Organize Your Life & Save You Money
Have you enjoyed what you read here today? Do you have friends or other women you know that could benefit from this resource? If so, please do me a favor! I have included the links below to share with other intentional women! They’ll be glad you did!