Thoughtful Thursday: Baby Steps

My husband posted this on our family blog last month.  The information is great for everyone no matter where you are in the debt battle.  Dave's book "Total Money Makeover" is available at most local libraries if you'd like more information and encouragement.  Two weeks ago we paid off our first debt and we are very excited to get started on the next step.

And no, we're not talking about the baby, although we could be. Videos to be posted shortly, because it's so fun to watch him move...

Anyway, the baby steps we're talking about are perhaps better known as "Dave Ramsey's Baby Steps", and they are his method for working on financial freedom and (eventually) building wealth. In keeping with Franny's other blogging efforts, I'm posting them here, or you can go right to Dave's website and find them there, with a wealth of other information, which we do not necessarily endorse. However, these seven steps we agree with mostly, and they are most likely very applicable to those of you who might be reading our blog. Anyway, here they are, with my own thoughts added.

$1000 Emergency Fund. Franny likes to call this the "Baby Emergency Fund" which makes it sound like it's for those surprise pregnancies, but it's not. It's a small emergency fund that needs to be kept away from your other money, usable only for emergencies. Only you can know what constitutes an emergency, but for our family it would most likely be something of a medical or vehicular nature... This is step #1 because if we have this money stashed away, we don't have to go into debt to solve those problems that will surely come.

Pay Off Debt. Except your house. Use what Dave Ramsey calls the "debt snowball." You're probably familiar with this concept, which entails using all your disposable income to pay off your smallest debt first. Once that debt is paid off, you roll all the money you were using on it to the next largest debt. And you continue on until all your debt is paid off, except your mortgage. For most people these debts are likely to be credit cards, automobile loans, student loans, home equity loans, etc...

Real Emergency Fund. As opposed to the "baby" one in step #1. You build off your $1000 fund and make it bigger. This would be cash reserves equal to 3-6 months of living expenses. The goal here is to use it for the same types of emergencies for which you'd use your "baby emergency fund", but it will cover you in the case of a longer-term financial strain (extended medical care, loss of employment, etc...).

Retirement. Dave Ramsey suggests 15% of your household income. I suggest that you do some research to determine what your retirement needs will be, and that you customize the amount to match what you expect you'll need. Either way, saving for retirement comes after you've saved up your 3-6 month emergency fund.

College Funds. For the kids. I don't suppose this needs much explanation, so we'll just point out that there are more pressing financial needs to be met first.

Pay Off Mortgage. Early, hopefully. The idea here, as usual, is that you use all your disposable income on paying off the mortgage early. Your mortgage is most likely your single largest drain on your personal family finances, and imaging living without it. Wow. A lofty goal to be sure, but one worthy of working on.

Build Wealth and Give. Invest for growth, give to charities, etc... I don't know much about this, since we're a long way off at our house, but we'll get there eventually.