A lot of people know the value of getting financial tips from experts. There are several reliable sources online that you can look into for help. Being financially literate is important because you need to manage your money wisely. This is the only way that you can make smart decisions and keep yourself from making mistakes that will land you in a compromising position.
Actually, the problem is not really about getting the financial literacy that will help you manage your money. The challenge is in filtering the information that you will find to choose the one that you will follow. One thing that you can do is to look for the financial expert that will suit your needs. For instance, if you are in debt, you want to make sure that you get financial tips from someone who is an authority in debt.
Going along the line of that example, let us focus on one expert that is quite vocal about his tips to get out of debt – Dave Ramsey.
7 baby steps to achieve financial peace from Dave Ramsey
The main premise of Dave Ramsey’s teaching is about how you can get out of debt. Not only will he teach you to solve your credit problems, he will also give you advice about how you can set yourself up to avoid debt in the future.
Here are the 7 baby steps that he promotes from his website.
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Put aside $1,000 in your emergency fund. First things first, Dave Ramsey wants you to put a thousand dollars in your emergency fund. Even before you can do anything else, make sure that you have this amount stashed away for unexpected situations. It is never clear how an emergency will happen so you might want to be ready for it as soon as you can. This will keep you from incurring more debt as you try to get rid of your current.
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Use the debt snowball. The next step is to pay all your debts through the Snowball method. This is when you list your debts according to priority – with the lowest balance on top. The whole point is to pay the minimum for all the debts and any extra will be sent to the first debt. That will help you pay it faster. Once paid, you rollover the amount to the next priority. You continue this until all debts are paid off. Ramsey believes in this because it allows the consumer to experience early success in their debts. That will motivate them to completely pay off the other debts.
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Boost your emergency fund to cover 3-6 months of expenses. The ideal emergency fund for Dave Ramsey is 3-6 months worth of expenses. Once steps 1 and 2 are done, you are encouraged to add money into your emergency fund.
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Put 15% of your household income and invest in Roth IRAs and pre-tax retirement. At this point, Ramsey believes that most of your debts should be paid off and you have a healthy emergency fund. If you have debts, it is only on your home – since it will take quite some time to finish paying that debt off. Now is the time to build your wealth. The two places that you are encouraged to invest in is your Roth IRA and retirement fund.
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Build up your kids college fund. This can be done simultaneously with the 15% investment. Start putting aside money for the college fund of your child – to keep both of you from getting loans in the future. Ramsey suggests that parents choose a savings option that will earn them 12% interest on their account. This will put them ahead of the 4% inflation rate. He suggests that you consider Education Savings Accounts or the 529 plans.
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Aim to pay your mortgage faster. The next baby step is to pay your home loan faster. Any extra money you have must be put into your mortgage payments. This is probably the last debt that you have at the moment so try to concentrate on this now.
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Grow your wealth and give. Lastly, Dave Ramsey encourages consumers to build their wealth and give some of it to charity. This is how he believes you will really enjoy your life and feel fulfilled.
What we think of Dave Ramsey’s financial advice
So what do we think about Dave Ramsey’s financial tips? Here are some of our thoughts.
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We agree that building up your emergency fund is a great first step but we think that while you are building it up, you have to keep paying your dues. That is how you can ensure that your debts will not worsen.
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Relative to the emergency fund is the 3-6 months worth of expenses. This may come up short – especially with the length of average unemployment and the high cost of medical expenses.
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Another comment that we have involves the debt snowball. No doubt this is an effective solution for debt. However, this is only great for those who can afford to pay more than the minimum payment requirement of their debts. If the consumer cannot afford it, they have other options like debt settlement or debt consolidation.
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Paying off the mortgage faster is a great advice but is only applicable for people who do not have prepayment penalties on their loan.
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We also want to add that you should protect your family beyond what your emergency fund can provide. That means investing in insurances and knowing your benefits from the government. These will also help you in times of emergencies.
All in all, we conclude that Dave Ramsey’s 7 baby steps is a great way to achieve financial peace. However, you may want to alter it a bit to suit your specific financial situation. With all experts, you must always use your head and gut instincts to determine if you should follow and advice strictly or you should get bits and pieces here and there.
