Personal Finance Challenge #44: The Dave Ramsey Way

There are many ways and methods espoused by different personal finance experts on the best way to live your life and use money for your benefit.

In these next two blog posts I am going to talk about two people from two different sides of the spectrum. The first is Dave Ramsey who has probably helped more people gain control of their finances then anyone else on the planet. The second is Jacob Fisker of ERE (Early Retirement Extreme).

Dave’s plan is outlined in his book, The Total Money Makeover, and includes just seven steps to set you on your way to financial freedom.

Jacob’s plan is outlined on his blog and also in his book of the same name, Early Retirement Extreme, and includes a “21 Day Makeover” to set you on your way to financial freedom.

Dave’s work is for the masses, people just getting into personal finance, and for those where even taking a few basic steps will vastly improve their financial situation.

Jacob’s work is for people who want to go deeper. Who truly want to maximize every dollar they have, and stretch it as far as it can go. People who would be interested in Jacob’s work are more likely to be closer to accomplishing all of Dave’s seven steps instead of simple just starting them.

With all that being said, here is the Dave Ramsey Way…

1. Start and build a $1,000 emergency fund – Life happens, and unexpected situations often set you back financially. A loss of a job, a major car repair, etc. Dave says that, “It’s not a matter of if these events will happen; it’s simply a matter of when they will happen.”
2. Pay off all debt using the Debt Snowball – Ramsey says to list all your debt expect your mortgage, and pay off the smallest balance first. If two balances are the same, pay off the one with the higher rate. It is important to follow the steps in order. If you don’t have an emergency fund you are likely to just get yourself into deeper debt when an emergency occurs.
3. 3 to 6 months in expenses savings – This is simply building a bigger emergency fund for a long job layoff or similar event. If your monthly expenses are $2,000 a month then you will want to save $6,000 to $12,000 in a savings account.
4. Invest 15% of household income into Roth IRAs and pre-tax retirement – At this point your only debt payment should be your mortgage and any extra money you have should go into investments. It is important not to increase your standard of living at this point just because you feel like you have more money without all the debt payments. Stay the course.
5. College Funding for Children – If you have children and want them to go to college then a college fund is a necessity. Remember this step only comes after you are able to put 15% into retirement.
6. Pay off Home Early – Put all extra money into mortgage payments. One extra payment a year can take off as many as 5 years from a 30 year mortgage. Two extra payments a year can turn that 30 year mortgage into a 20 year mortgage. With that being said, you should try to time the pay off of your house with the age of your retirement. Example: You are 50 years old and have 20 years left on your mortgage, but you would like to retire at 65 instead of 70. One or two extra payments a year should help you to pay it off by your desired retirement date or earlier.
7. Build Wealth and Give! – Ramsey really likes the idea that you live well within your means and bless others, including your own children and family, with your abundance.

The first two or three steps are the big ones that completely change peoples lives. To pay off debt and accumulate money in the bank takes some hard work and some willpower. It is easy to spend everything you earn, but spending less then you earn really creates some amazing opportunities in life.

This is our 44rd challenge in The Personal Finance Challenge Series…