Dave Ramsey’s 7 Debt Reduction Baby Steps
1. Save $1,000.
The first step is to pay the minimum on everything until you get $1,000 in savings. Go crazy and plan to get this money within the first month. This savings is the first level of emergency fund to protect you from little emergencies. If your income is very low you may settle for $500, or if your income is over $70,000 you might use $2,000. Remember, this first level fund is only for emergencies.
2. Kill the Debt.
Now is the time for killing all debt. Implement the debt snowball, and pay off all personal debt except your home. Get mad and stay mad until you get out. Remember, there is no energy in logic, only in emotion.
3. Add to Your Reserve.
At this point, the only debt you have is your home. So now it should be easy to save the rest of your emergency fund. The correct amount is three to six months of your expenses. Keep this money in a simple money market or bank account, but do no investing with this money. It is only there to protect you.
4. Retirement Planning.
Save 15 percent of your gross household income in retirement plans. You should begin with a 401(k) or 403(b) up to the match, then fully Roth IRAs. If your 401(k) or 403(b) doesn’t match then begin with Roth IRAs. These should all be invested in good growth stock mutual funds. The total saved in all plans should not be more than 15 percent of income at this Baby Step. At this Baby Step you should also review all your insurance to make sure you have enough coverage of all types. Also, with that emergency fund in place, it is easy to have $500 or $1,000 deductibles, which will drastically lower your premiums. Retirement plans can be confusing. Find out more information at daveramsey.com.
5. College Fund.
Now (and only now) is it time to start college funds. You feel guilty—I know—but don’t you dare do college funding until you get the first four steps completed. I know those little brown eyes make your blood run cold when you know that the college fund isn’t there, but the only way to build a strong house is to first lay the proper foundation, and guilt is not a building block. Just let those little brown eyes be a motivator to run—I mean, sprint—to this step.
6. Pay Off Your House.
I love this one. Now it’s time to take all the extra money you can scrape together to pay your house off early. It may take two, three, or even four years to get to this step, but once you’re here, you will be able to knock that house debt off very quickly.
7. Get Rich.
Let’s get rich, so rich that we spend our time trying to give it all away. With no payments and great basic savings plans in place, there is nothing left to do but build wealth and give it away. Using real estate, more mutual funds, variable annuities (for tax deferral), and opportunity money, you can now be the rich getting richer. When that $100,000 deal can be bought for $50,000, you will be there with the cash. Welcome aboard.
Taken with permission from Financial Peace by Dave Ramsey.