7 baby steps

Dave Ramsey’s 7 Baby Steps Reviewed

There is no doubt that if you have done a little Google searching for minimalism and saving money, you have probably come across the name “Dave Ramsey.” Dave is a veteran in the personal finance industry and has helped thousands turn their lives around through his Financial Peace University courses. He has sold countless books and still runs a weekly radio show to this day.

I have always admired his no-nonsense and sometimes sarcastic take on the common financial practices of us Americans. He does a very good job of getting you to realize that the person in the mirror is the cause of your money woes and that you are not powerless to start making necessary changes.

So just how has Dave Ramsey helped so many people, and what is a “Financial Peace” university? At its most basic level, it is a seven step program with very straightforward rules and guidelines. Let’s take a look at the 7 baby steps:

 

Baby Step 1: Start a $1000 Emergency Fund

There are some things in life that we simply cannot plan for. The car breaks down, your bank account gets hacked, you need to hire a lawyer for whatever reason. What would you do in this situation? Would you have the cash to cover one of these occurrences? Dave advises you to make this your top priority before you even touch any debt.

Now most people would  think “Wait a minute! Wouldn’t that $1000 be better put towards paying down debt to speed up the process?” And you would be right to think that, but there is a more important factor to be considered. The emergency fund will provide a cushion for you when you go into debt-destruction mode. You don’t want to make to take on more debt to fix an emergency while you are trying to work your way out. The first step is meant to provide you with a contingency plan.

 

Baby Step 2: Pay Off Debt

Step 2 is where the fun begins. It becomes time to tackle that head head-on and say goodbye to it forever. I have personally struggled with debt myself  and let me tell you, paying it off is very liberating. No longer seeing that monthly bill for an amount you owe gives you peace of mind and more room to breathe.

So how do you prioritize which debt to tackle? You’ll use the debt snowball to knock out your debts one by one, from SMALLEST to largest. Pay off the first one. Then add what you were paying on it to the next debt and start attacking it. When you start knocking off the easier debts, you’ll see results and stay motivated to dump your debt. As each debt is paid off, your cash flow will increase and the bigger debts will be gone sooner than you think. Before you know it, you’re debt-free!

 

Baby Step 3: Save 3-6 Months Expenses

Wow look at you! You’ve paid off all that nasty debt and owe nothing to no one. It’s probably the best you have felt in a long time, but you want to know what’s next. Remember that whole “contingency” idea mentioned in baby step 1? The next step aims to provide you with an even larger cushion.

Unfortunately in this modern age of outsourcing and hungry grad students willing to take whatever salary they are offered, jobs have a much higher turnover rate. It is not completely foreign for a loyal 20-year employee to be let go without so much as a “Thank you for your service.” Completing step 3 will allow you to pay the bills and survive in the event of a layoff or injury that compromises your income.

 

Baby Step 4: Invest 15% of Income for Retirement

When you make it to step 4, you’ll be one of those people who others say “have it all together.” You have the emergency fund, no debt, and months of expenses in the bank. Now is the time to focus on the future. We were not meant to work forever, nor may our bodies allow us to. You’re likely going to retire one day, which requires a substantial amount of money to do so.

This step is all about building long-term wealth. Take 15% of your gross household income and invest it first into 401(k) plans and then Roth IRAs. If your company doesn’t offer a retirement plan or match your contributions, then go straight to the Roth. Spread the money across four types of mutual funds: growth, aggressive growth, growth and income, and international. Even a couple hundred dollars a month invested now can make you a multi-millionaire.

**Disclaimer: I am not a financial adviser and this is only a review of the program. Always consult with a financial advisor before investing.**

 

Baby Step 5: College Fund for Your Kids

If you have read my blog, you can probably guess I was conflicted on this baby step. College no longer holds the value it once did, but certain degrees are worthwhile for gainful employment. This step is meant to provide future financial assistance (if you have children) for that purpose. One thing I liked is that Dave explains in his book that college is not a guaranteed path to success, and that pursuit must be evaluated before the fund is used towards it.

Two smart ways to save for your kids’ college are 529 college savings funds or Coverdell ESAs (Education Savings Accounts). These are both tax-advantaged savings vehicles that let you save money for your kids’ education expenses. Both 529 plans and ESAs allow you to save money in an individual investment account. But do your homework first!

 

Baby Step 6: Pay Off Home

When we talked about paying off all your debt in baby step 2,  it was not including your home mortgage. But what if that monthly expense could be done away with as well? Any extra money you can put toward the mortgage will result in tens of thousands of dollars of interest saved and months (or even years) of not having a payment hanging over your head.

As soon as that mortgage is gone, you’re going to have a much bigger gap between your income and your bills. With such a big gap, you can easily take on life changes of all kinds. Things are looking pretty damn good by now, huh?

 

Baby Step 7: Build Wealth and Give!

Most people want to be wealthy, it’s just a fact of life. Wealth provides mobility and security beyond what the middle class life will. How you will  build your wealth, is entirely up to you. There is a plethora of information at your disposal these days if you are more of a DIY kind of person, or you can find a reputable financial advisor to assist you.

Charity is another difficult topic. Giving your money away is hard to justify strictly in terms of one’s net worth. The reasons for it are non-financial. It remains one of those things that has to come from your heart. I do encourage everyone in this situation to find a charity that speaks to them in some way and try to get involved.

 

Summary of the 7 Baby Steps

The “7 baby steps” make up a pretty sensible personal finance plan. It’s not perfect and it doesn’t match everyone’s needs, but it does provide a roadmap that works for the financial situations of most people.

The challenge comes from the self-discipline that it takes to actually follow the steps. I view self-discipline, bad habit breaking, and good habit building as the greatest challenges of personal finance. Once you master those things and reach a higher level of self-control, not only does personal finance become easier, so do many other aspects of your life, including the ability to earn more money.

The baby steps are a good guidebook, but the real project is improving yourself.

You can get Dave’s book – “The Total Money Makeover” for a more in-depth guide to the plan!

american dream

How The “American Dream” Is A Modern Nightmare

The American dream. A house in the suburbs, two children, two cars, and maybe a family dog. It’s the image that’s been seared into the American consciousness via countless television shows: Happy Days, Leave it to Beaver, etc.

The desire continues to run strong in the American landscape. Anybody who has married friends can attest to this. Eventually, it’s out of the bachelor pad and into a suburban home with a manicured lawn.

Over the years, I’ve noticed that this dream is not important to American men. Most guys are content to get the most bang for their buck, whether that means living in an apartment complex, renting a room from a friend, or buying a cheap piece of land in the country. I’ve never met a man who actually dreamed of owning a home in the suburbs.

This desire—to own a suburban home—is dated. While there are some exceptions to this rule (like 1%), this is by and large the case. Americans dream of a future life in an affluent suburb. This raises some questions that all American men, particularly younger ones, should consider.

If you do a cursory review of the numbers, you’ll see the Mount Everest you’re being asked to climb. And you don’t need a PhD in Mathematics to figure out that it’s too expensive to pay for the “American Dream.”
Disagree with me? Well, let’s break down the numbers then…

1. The cost of an average American home is $300,000

This requires a down payment of $60,000 and a $1400/month mortgage payment for the next 30 years.

In January of 2017, the average cost of a home in the US was sitting at a hefty $300,000. So how will you afford this?
Well, first comes the down payment. As many homeowners know, it’s recommended to put 20% down on a property.

Anything lower than this comes with a slew of added costs and stipulations (such as PMI payments, limitations to the amount you can borrow, etc.). So 20% is the prudent move.

Well, 20% of $300,000 is a whopping $60,000! Do you have $60,000 in your savings account? Does your wife/ girlfriend have that money?
Most Americans don’t—not even close. In actuality, most young American men and women are entering their mid-twenties swamped with college loan debt. They’ve been scraping by for the last four to six years.

They’ve been eating Top Ramen and soda crackers. They don’t have $60,000 just lying around the house. If anything, they have $60,000 of debt—each.
But the average American doesn’t care. They must have their dream, regardless of the damage it produces.

So they’ll look to borrow the down payment money from a family member or friend. This is quite common. However, this trend is on the decline. A weakened economy is reducing the wealth of the average American, and fewer older parents have $60,000 to part with.

But let’s just say, for the sake of argument, that you manage to get the $60,000 down payment. You secure a generous gift from Uncle Joe, who has dementia and two months left to live.

You put $60,000 down on a house worth $300,000—the loan with be roughly $240,000 when you get the keys to move in. Now, the current interest rate on a thirty year fixed income is 4.3%. If you go to bankrate.com, you can calculate the following numbers yourself. You’ll find that a 30 year mortgage at 4.3%, on a total payment of $240,000, comes out to roughly $1300 a month.

2. The house needs to be remodeled and a new car needs to be purchased. You’re now paying roughly $2,000/month

Do you think your old couch from college, the one you’re perfectly fine with, will suffice? You silly child. The entire inside of the house needs to be remodeled (even though fewer friends seem to visit you these days).

The list here can get quite long: sofas, flat screen televisions, dining room tables, hardwood floors, new beds, kitchen remodeling, re-tiling of the bathroom, backyard pool and accompanying jacuzzi, garden landscaping, etc.

What’s the cost for all this? Well, there’s not an official number, but let’s just say it’s pricey. Many couples take out a second mortgage to pay for it. Others will put the tab on the credit card.

I personally know of one couple who spent $150,000 to remodel their house. We can say, conservatively, that the new modifications for the home will cost an extra $300 a month.

Also, a new car (or cars) needs to be purchased. Can’t be seen in a sub par vehicle. You wouldn’t want to endure that, would you? So you pay $10,000 more than you normally would to please an escalating ego.

Purchasing a quality vehicle, of course, comes with a hefty monthly payment. Let’s be conservative and say another $300 a month, on top of the second mortgage you took out for the remodeling.

So remember that $1,300 a month you were paying? Well, with the remodeling costs, along with the new vehicle, add another $700 a month to the bill.
You’re now paying $2,000 a month.

You’re growing more uncomfortable with this. It’s more than you wanted to spend. You notice that you’ve recently developed acid reflux. Also, clumps of your hair have been collecting in the shower drain. And you’re starting to drink earlier in the day. But here comes stage three. Your wife/ girlfriend tells you she’s pregnant.

3. Having two children will cost another $2,000 a month; you’re now paying $4,000 a month

She wants to have two children—a boy and a girl. However, now that your finances are imploding before your eyes, you’re having second thoughts.
How much is this going to cost, anyway?

A recent article by Parenting.com, entitled “The Cost of Raising a Baby” breaks the news to us: “the average middle-income family will spend roughly $12,000 on child-related expenses in their baby’s first year of life.

By age two, parents are up to more than $12,500 per year.” This cost does not diminish, but stays pretty consistent. Wisegeek.org chips in with, “it costs almost $200,000 US Dollars (USD) to raise a child from birth to age 18.” $12,000 a year comes out to an extra $1,000 a month.

So, if you have two children, that’s an extra $2,000 to add to the mix.
That’s $4,000 a month to buy the American dream: a suburban home, remodeling, new transportation, and two children. I repeat, $4,000 a month!

4. The Reality

How much do you need to make to pay for all this? Well, more than $75,000 a year. The website, my360.com, states this point-blank in their article, “You Cannot Afford a $350,000 Home with a $75,000 Household Income!”

And there’s the rub. You see, the average American household only makes $50, 502 a year. So, if you’re an average American family, you’re still $25,000 short, at a minimum, from owning a piece of the American dream.

Financially, the “American Dream” is any man’s nightmare. It’s far too expensive. So it’s best to circumvent the whole thing by not making it a priority or even a desire.

Remember that bad financial decisions affect the trajectory of your life. Money provides opportunities: to travel, to invest, and more importantly, to fund YOUR dreams.

If you squander all your income on a suburban house, your dreams will be like that song from Kansas—“Dust in the Wind.”

Please forward this article to all the young people you know. Lord knows, they won’t hear about it in their Economics 101 course.