Dave Ramsey has been on the airwaves helping people get control of their finances for years. I greatly respect him and admire how is work has helped many people over the years. Anyone who followed his advice would end up doing great financially in their life. Despite my high confidence in him I don’t exactly follow his plan. Call it being smart, stupid, or something in between, here is my reality.
The seven steps below are Dave’s Simple yet robust baby steps to financial freedom and why I follow or don’t follow the rules to the letter.
- Baby Step 1: $1,000 cash in a beginner emergency fund
- This is just what I did.
- Baby Step 2: Use the debt snowball to pay off all your debt but the house
- When I started the really trying to follow Dave Ramsey I had a car loan of about $15,000 and multiple credit cards. I paid off my credit cards every month and paid no interest on them because of it ever. However, I decided to cut up all my credit cards and cancel them like he suggested. It was only a few weeks before I realized that it is really helpful having a credit score, especially if you are a renter.
- Since then I have paid off my car loan but reopened some credit cards so that I can maintain a credit score. I live in apartments for the time being and many apartment buildings do not even look at you if you have a bad credit score. Also, when I have to rent a car, get a new utility set up, apply for a new job credit scores are important and used by many.
- I maintain a good credit score in the 750 range by simply having multiple credit cards that I pay off every month. I even use credit cards for daily spending but write down each expense in my digital envelopes on my phone using Simple.com. So, I only spend what I have allowed in my budget for that pay period.
- Baby Step 3: A fully funded emergency fund of 3 to 6 months of expenses
- I think this is one of the most overlooked keys to financial stability, and it is more difficult than it sounds. For example, if you were only saving 10% of your income it would take about 2.5 years just to get the 3 month emergency fund.
- I keep about 2-3 months of expenses in the form of cash in checking accounts.
- Currently I am working on getting an additional 3-6 months set aside in a conservative brokerage account allocation. I am using all Exchange Traded Fund’s. I buy four of the funds at TDameritrade and one at Charles Schwab. I buy them at the respective brokers because there is no commission to buy them at the brokers that I do.
- 40% BLV (Vanguard Long Term Bond Fund, purchased at TdAmeritrade for free)
- 30% MGK (Vanguard fund that tracks the performance of CRSP US Mega Cap Growth Index, purchased at TDAmeritrade for free)
- 15% BIV (Vanguard Intermediate Term Bond Fund, purchased at TdAmeritrade for free)
- 7.5% DBC (Commoditiy index purchased at TdAmeritrade for free)
- 7.5% SGOL (Gold fund purchased at Charles Schwab for free)
- Each year on my birthday as these funds decline or increase in value I buy and sell to match this allocation. This allocation could also be good for something like saving for a house down payment. Since, May 2007 it has grown at a rate of about 5.26% and declined only about 22% during the crash of 2008.
- Baby Step 4: Invest 15% of your household income into retirement
- I am on the low end of the 3-6 month emergency fund, but have started putting 15% of my paycheck and my wife’s into our respective 401(k)’s. I find this easier and more time tested than IRA’s because I cannot mess with the money as much myself and the savings is automatic.
- Whatever extra money we can save I have been managing myself in some higher risk investments that Dave would not recommend.
- For most people, aka people that are not as interested in this topic, I recommend investing using an automatic method that takes your money and puts it in mutual funds that you select every month and having a separate 3-6 month cash savings like Dave Recommends.
- Baby Step 5: Start saving for college
- This step doesn’t currently apply to me, but I hope to get to the point that when I do have kids that setting aside money for college each year won’t be too hard.
- Baby Step 6: Pay off your home early
- Again not directly applicable to me and I think it may still be 5 years or more before I look at buying a house. So, right now I just shoot for a high overall savings rate.
- Baby Step 7: Build wealth and give generously
- Right now I give 10% of my income. Eventually I want to give 2% of my net worth away every year and live off of 2%, which depending on how you look at it is way more generous or way less generous than I am right now by giving 10% of my income.
There it is. That is how I have for better or worse bent Dave Ramsey’s plan to my life.
I highly recommend using Simple.com for a free checking account and using their budgeting capabilities to have digital envelopes. Use this link to join and we will both get a free wallet.