Bible Money Matters » Financial Peace University

Dave Ramsey’s 7 Baby Steps Review: Get Out Of Debt, Build Wealth And Give.

Peter Anderson — Thu, 05 Mar 2009 13:08:17 +0000

Over the past couple of weeks we’ve been doing an in depth look at Dave Ramsey’s Baby Steps plan for getting out of debt, building wealth and giving. The plan really is a pretty simple one, some might say it’s common sense, but it brings home a lot of concepts that a lot of us don’t normally think about.

I thought it might be helpful to go over the baby steps one more time before we close out the series to take one last look at them, and how they can help you.

Dave Ramsey’s 7 Baby Steps

Here are the steps – one through seven. If you want a more in-depth look at one of the steps, just click on the link below to go to the page with the full explanation of that step.

Step 1 – $1,000 to start an Emergency Fund
Step 2 – Pay off all debt using the Debt Snowball
Step 3 – 3 to 6 months of expenses in savings
Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
Step 5 - College funding for children
Step 6 – Pay off home early
Step 7 – Build wealth and give!

7 Baby Steps, so where does it all start?

Baby Step 0: Getting Started, Making A Decision To Change

Before getting started on the Baby Steps plan you may not have ever thought about working on your finances before. You just kind of let your money happen to you. To get started on this plan you have to make a conscious decision to care about where your money is going, and to live responsibly and within a budget. For many of us, this will be a quite the shift.

For some people they won’t want to make a change until they’ve hit rock bottom, facing a foreclosure or bankruptcy. Hopefully you’re getting started before reaching that point. Whatever point you’re at, just remember that you’re not alone, and you’re making this change to make your family’s lives better. It won’t be easy, but nothing worth having ever is!

Commit yourself to living within a budget, and to creating no more consumer debt! As long as you’re creating new debt, none of this plan will work! Once you’ve made the decision to make a change, cut up the credit cards, get on the same page with your significant other (if you have one), and move on to step 1!

Baby Step 1: Save A $1,000 Baby Emergency Fund

Baby step one is where you start building up an emergency fund for your family to cover any incidental and emergency expenses that might come up while you’re paying off all the debt you’ve created.

Some people don’t feel secure with only $1,000, and depending upon your circumstances, you may need slightly more. But $1,000 is a good starting point, and for most families will be more than adequate to cover the little expenses that come up for every family.

Get “gazelle intense” about saving that first $1,000. Most people will get it saved in the first 1-2 months of the plan.

Baby Step 2: Pay Off All Debt Using The Debt Snowball

In baby step 2 the family starts their debt reduction portion of the plan. This is often the hardest part of the plan for most families, especially if a large amount of debt has been created.

To get rid of the debts Ramsey has put together what he calls the “Debt Snowball”. In this plan you setup a debt repayment plan where you pay your necessities first (food, clothing, shelter, transportation), and then you pay the minimums on all of your debts. Once the minimums are paid, you pay as much extra as you can on the smallest debt. You continue doing that every month until the smallest debt is paid off. Once that debt is paid you “snowball” all the extra money created by paying that debt off into the next smallest debt. You continue doing that until all of your debts are paid off.

Some people can get the debt paid off within a few months, where others can take a few years. In either case it will sometimes be helpful to get part time jobs, sell stuff and do other things to temporarily create extra income to help pay off the debts. Once the debts are paid off you can quit those part time jobs because you’re debt free except the house!

Baby Step 3: 3-6 Months of Expenses In Savings

In baby step 3 you continue building that emergency fund that you started in baby step 1. Starting from the baby emergency fund of $1,000 you build your reserves until you have 3-6 months of expenses saved in an easily accessible savings account. Depending upon your family’s expenses, the amount you’re saving up will be different, and some people will prefer to build up more than 6 months of expenses depending on their desired level of risk, and what they feel comfortable with.

Remember, you’re saving up this money to help eliminate much of the risk that comes from the “little murphies” or life’s unexpected events that just seem to pop up. Things like car troubles, medical expenses and job losses. When you have the emergency fund buffer, it makes these life events seem more like bumps in the road instead of horrible car wrecks.

Baby Step 4: Invest 15% Of Income in Roth IRAs And Other Pre-Tax Investments

After you’ve saved up your 3-6 months of expenses it’s time to get cracking on investing and saving for your retirement. Dave Ramsey suggests saving at least 15% towards retirement, and saving it in a Roth IRA or other pre-tax investment. The order he suggests saving for retirement is this:

Company 401k or other plan up to the match
Roth IRA for you and your spouse
Back to the 401k or other plan

Some people debate on whether 15% is enough to invest, or what types of investments are the best. For me I believe the key is just to get started investing, and do it now!

Baby Step 5: College Funding For Children

After saving 15% of your income for your retirement, it’s time to save for your child’s education! Some people think that this step should come before step 4, but Ramsey stresses the point that your child will have other options to help fund their education if they need to including scholarships, grants, working part time and other things. If you don’t fund your retirement, however, you’ll never be able to get that money back! Fund retirement first, and then your children’s college.

Some good places to save for your kid’s education include:

Education Savings Account (ESA):
529 Plan

Other options exist as well, but the above options are the best.

Baby Step 6: Pay Off Your Home Early

Once the children’s college is paid for, it’s time to start making extra payments on your house! There are a lot of good reasons to pay off the house, including:

Less Risk: With no house payment and a fully funded emergency fund, there aren’t many things that can happen (like a job loss) that can threaten your well being.
Peace Of Mind: With no house payment you’ll be free to do a lot of things with your time and money that you might not have been able to otherwise.
Interest Savings: By paying off the house early you’ll save thousands in interest. The earlier in the life that you pay the mortgage off, the better you’ll do!
Less Stress: With no worries about losing a house, paying off debt, or small expenses coming up, you can live a more stress free life!

Paying off your house will free you up to do so many things with your time and money! It’s like getting a raise since you’ll have all that extra money every month. With that extra money you can save, give and live like no one else!

Baby Step 7: Build Wealth And Give

The last step of the baby steps is the one that gets me the most excited – building wealth and giving!

When you are debt free and you have no large payments like a mortgage, it frees you up to begin building wealth, and it allows you the freedom to help others with the blessings that you’ve received.

As a Christian I feel called to give to others, and getting to baby step 7 is something I look forward to because it will allow my wife and I the ability to help others out even more than we are now! We are stewards of everything that God has given us, and God wants us to give because giving to others makes us less selfish people, and better in every aspect of our lives. Less selfish people are more successful in relationships, business and in life in general. Plus, we are happiest when we are serving and giving!

Conclusion

Thanks for taking the time to look at Dave Ramsey’s 7 baby steps with me, it has truly been a lot of fun for me.

I really do believe that his plan is a good one, and can help others as it has helped my wife and I. If you’re looking at your checkbook and accounts and you have a mountain of debt – don’t delay! Get started on getting out of debt today! Step one is only a decision away!

Live like no one else today so that tomorrow you can live like no one else!

This article was written by Peter Anderson. Peter Anderson is a Christian, husband to his beautiful wife Maria, and father to his baby boy, Carter. He loves reading and writing about personal finance, and also loves a brisk game of tennis every now and again. You can find out more about him on the about page or check out his design site at http://www.logosforwebsites.com. You can also follow him on Twitter at @moneymatters.

Dave Ramsey’s 7 Baby Steps: Step 7 – Build Wealth And Give!

Peter Anderson — Thu, 26 Feb 2009 15:07:07 +0000

Last time we looked at Baby Step 6, paying off your home early. We talked about how much freedom paying off your house would give you, allowing you to really save for retirement, give and live like no one else! Today we’ll be closing out the baby steps with a look at building wealth and giving to others. In my opinion giving to others is of the best reasons to build wealth. You always get back more than you give!

Dave Ramsey’s 7 Baby Steps

Step 1 – $1,000 to start an Emergency Fund
Step 2 – Pay off all debt using the Debt Snowball
Step 3 – 3 to 6 months of expenses in savings
Step 4 - Invest 15% of household income into Roth IRAs and pre-tax retirement
Step 5 - College funding for children
Step 6 – Pay off home early
Step 7 – Build wealth and give!

Baby Step 7: Build Wealth And Give

Baby steps 1-6 are all about getting your financial house in order, paying off debt, and then planning for the future. Step 7 looks at what Dave Ramsey likes to call the “Great Misunderstanding”. The misunderstanding, in Ramsey’s eyes, is the mistaken belief that many people hold that the way to have more, is to hold on tightly to what they have. In reality, it doesn’t work that way, generous people tend to be more prosperous. The reason? Giving to others makes you less selfish, and less selfish people have more of a tendency to do better in both relationships and in wealth building.

He gives an example to think about the concept – if you take your money, and close your fist around it, you have that money and it’s not going to get away. On the other hand, you can’t receive more money in your hand either, it’s closed up tight. When you freely give with an open hand, however, your hand is already open and is ready to receive blessings as well as give.

The idea of holding money with an open hand might seem to violate common sense. We feel that if we don’t hold on tightly to our money and our relationships, they will slip away. I’m not saying literally hold your money with an open hand – it represents our attitude toward money. When you give, you open yourself up. You allow the dollars to leave and the freedom to enter.

Giving works because it is in your personal blueprint to be a giver, and you unleash good things in your life that you will never see until you learn the art of unselfish giving. Giving lifts us out of ourselves; we take our eyes off our rights, our problems, and our stuff. The new view gives us renewed vision and hope. Giving is powerful. – Dave Ramsey

So once you’ve reached the point where you have all your debts paid, and you’re blessed enough to be building surplus wealth, do yourself a favor, and start giving to others. You’ll be surprised at how freeing and wonderful it can be! Not only will you be giving blessings to others, but you’ll be receiving blessings in return (and not always in a monetary sense).

There are men who gain from their wealth only the fear of losing it. – Antoine Riverolli

Surplus wealth is a sacred trust to be managed for the good of others. – Andrew Carnegie

Reasons Why We Should Give

When you talk about giving, there are a lot of good reasons why we should do it. Here are a few:

As a Christian, I believe that everything is God’s, and as a result, we are only stewards of everything we have. Psalm 24:1 says “The earth is the Lord’s, and the fullness thereof”. We need to be good managers of what we’ve been given, using it for the good of others. The fact that that the money is someone else’s (God) make’s it easier to give away too, doesn’t it?
Giving makes us less selfish people. Giving makes us more Christ-like.
We are designed in God’s image, and because of that we are happiest when we are serving and giving. Ever notice how fulfilling it is to serve others?
Giving can be praise and worship in which we show our gratitude to God for everything he has given us.

Get Creative About Giving!

When you’re giving, you don’t always have to wait until your financially secure because giving doesn’t have to be related to money. There are a lot of ways you can give of yourself and your time that are just as valuable. Here are some ways that you can give, both with money, and without!

Help a single mother buy groceries or pay a couple of bills.
Volunteer time at your church serving others.
Give an extra large tip to a waiter or waitress.
Spend time with people at a local nursing home, talking and listening to them, playing music for them or just playing games with them.
Pay for someone’s meal behind you in line at the fast food restaurant.
Serve meals at a local food shelf, and eat with them when you’re done serving.
Give to a local charity.

Those are just a few ways you can help. Your own giving is only limited by your creativity. So get started!

What are some creative ways that you’ve given to others around you. How does giving make you feel? Let us know in the comments!

Dave Ramsey’s 7 Baby Steps: Step 6 – Pay Off The Home Early!

Peter Anderson — Mon, 23 Feb 2009 14:01:44 +0000

Last time we looked at Baby Step 5, college funding for your children. We talked about how and when you should save for their education. Today we’ll be looking at taking extra money and paying off your home early. Before we jump in, once again, here are the 7 Baby Steps.

Dave Ramsey’s 7 Baby Steps

Step 1 – $1,000 to start an Emergency Fund
Step 2 – Pay off all debt using the Debt Snowball
Step 3 – 3 to 6 months of expenses in savings
Step 4 - Invest 15% of household income into Roth IRAs and pre-tax retirement
Step 5 - College funding for children
Step 6 – Pay off home early
Step 7 – Build wealth and give!

Baby Step 6: Paying Off Your Home Early

After having saved for your retirement and putting money away for your children’s college expenses, the next thing Dave Ramsey suggest doing is paying extra on your mortgage, and paying off the home early.

To start with Ramsey suggests getting no more than a 15 year fixed rate mortgage, that is no more than 25% of your income. If you don’t already have a 15 year fixed mortgage, now may be a good time to refinance your home with the “Making Home Affordable Refinance Program“. A 15 year mortgage may mean higher payments, but it also means you’ll be paying the loan off earlier, and you’ll be paying less in interest. Pay it quicker that 15 years, and you’ll save even more because most of the interest is paid at the front end of the loan period.

By paying off the mortgage early you’re also going to be giving yourself a huge peace of mind knowing that your house is paid off, and if the worst happens, you’ll be able to get by on a whole lot less. After all, the house is paid for!

Arguments For Paying Off The House

There are a lot of arguments surrounding this baby step, and whether it really is the best thing to do psychologically and financially. I know I won’t solve that debate here today, but I thought I would look at some of the points in favor and against this plan, so you can make the decision for yourself.

Points in favor of paying off the mortgage early:

Interest Savings: You’ll be saving thousands of d0llars in interest payments on the mortgage. For example, on a 200,000 dollar mortgage over 30 years, with an interest rate of 6%, you’ll end up paying over 250,000 in interest. Cut that to a 15 year mortgage and you’re only paying 115,000 in interest. The faster you can pay the mortgage up front (when you’re paying the most interest), the less interest you’ll pay!
Less Risk: By prepaying your mortgage you’ll have less risk in your life because you’ll have a paid off house. When you have a paid off house you have a lot less to worry about because you know you’ll at least have a place to live as long as you cover the few bills you have left. Plus, trying to beat the the benefit of pre-paying the house by investing the extra money instead means added risk because investing isn’t a sure thing. (As we’ve seen for sure these past few months.)
Peace Of Mind: Having a paid off house means having peace of mind. I don’t think the importance of that can be underestimated. Having debt of any kind can really be a extra weight on your shoulders, and it can weigh you down. Don’t underestimate the psychology of personal finance, and that burden is very real. Remove it and you will feel a lot more free to save, invest, build wealth and give!
Less Stress: You’ll have less stress when having to deal with a job change, or wanting to have a spouse stay home to raise the children. Because you have a paid off house you’ll only have a few small bills to worry about. You’ll have walkaway power – power to walk away from any job you don’t love or enjoy because you only have minimal expenses!
It’s Like Getting A Raise: Without having to pay that large bill every month, it’s like getting an instant raise! You can take the extra money every month -and start investing!

While reading about the baby steps on another site, I read one story of someone who has paid off their mortgage. It really emphasized why paying off a mortgage can be a good idea.

A friend of mine is in his mid-thirties and paid his mortgage off completely. This allowed his wife to quit work and stay at home to raise their three children. They have no other debts, and he recently took a lower paying job because it brought him more satisfaction at the end of the day. He wasn’t trapped by an enormous mortgage, or saddled with other debt. Being debt free allowed his family to make these decisions to live the life they want to live, not live the life they are force to live to just to repay debt.

Being debt free brings freedom, and sometimes that’s better than a few extra dollars made through investments.

Arguments Against Paying Off The House

I’ve read a lot of arguments against paying off the house on other blogs. I have to admit that many of them make a good argument against paying off the house. Some of the better ones:

Liquidity And Flexibility: By not prepaying your mortgage and instead investing the money, you are more liquid in your holdings. Your money is more accessible if it is in investments as opposed to in a house. This can give you some flexibility if you need the extra money. Of course, having your 3-6 fully funded emergency fund should preclude needing any large amount of money right away.
Investing Returns Could Be Higher: If your expected returns on your investments will be higher than the interest and money saved by pre-paying, investing instead of repaying may be the better choice.
Inflation Works With You: As inflation goes up by 3-4% annually, by not prepaying you are in essence paying less for the house every year. You pay the same in 2039 to live in your house as you are in 2009. So basically you’re getting more for your money as time goes on.
Lack Of Diversification: One could argue that paying off your house first means you’re investing in only one type of asset, and unnecessarily means more risk. Better to invest in good mutual fund where your holdings are diversified, instead of investing in only one thing, real estate.

The arguments against paying off the house first do have some merit. It really makes the decision a tougher one.

My Conclusion.

When looking at all of the arguments in favor and against paying off your house early, both sides of the debate make valid points. That makes the decision on what to do a tough one.

On the one hand, the psychological and peace of mind benefits of paying off the house early are very apparent and powerful to me. I can’t even imagine how freeing it would be to pay off our house, and to have all that extra money every month to save, invest and give away to those in need. Complete debt freedom would be amazing!

On the other hand if you look at the numbers logically, not paying off the house early really does seem to make more financial sense. With a historical stock market return of almost 12% in the long run, there aren’t many cases in which prepaying the mortgage can make more financial sense. In fact, if you’re looking at a 15 to 20 year window of home ownership, in the past an investment in the S&P 500 index would have been a better investment 100% of the time!

Still, it comes down to weighing the benefits, the risks and balance sheets on both sides of the equation. For me, after considering both the financial and emotional/psychological sides of the equations, I’m still coming down on the side of pre-paying the mortgage. It just seems to me to be such a powerfully motivating goal to have – a debt free life. I really relate with the story I linked above about not having a house payment, and the freedom that brought to the family – being able to have one spouse stay at home, and having the power to walk away from a job that wasn’t ideal.

While I realize that some may do better financially by not paying off the house, to me it is more motivating to be living a life without debt and to have the freedom that goes along with that. The few extra dollars we might make by investing the extra money instead doesn’t matter as much to me. The answer may be different for you.

Another idea? Do a combination of the two paradigms, pay a little extra, and invest a little extra!

What do you think about paying off the house early? Do you think it’s a good idea or a bad idea? Which path are you choosing if you’re at that point? Tell us in the comments!

Next Time – Baby Step 7: Build Wealth And Give

Next time we’ll be looking at the last baby step. Baby step 7 talks about continuing to build wealth and stresses the importance of giving to others.

Dave Ramsey’s 7 Baby Steps: Step 4 – Invest 15% Of Household Income

Peter Anderson — Tue, 17 Feb 2009 18:24:12 +0000

Last time we looked at Baby Step 3, saving up 3-6 months of expenses to prepare for when you have a rainy day. Everyone will have unplanned for expenses, so it’s best to plan for it, and be ready!

Dave Ramsey’s 7 Baby Steps, and our progress.

Dave Ramsey’s 7 Baby Steps

Step 1 – $1,000 to start an Emergency Fund
Step 2 – Pay off all debt using the Debt Snowball
Step 3 – 3 to 6 months of expenses in savings
Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
Step 5 - College funding for children
Step 6 – Pay off home early
Step 7 – Build wealth and give!

Baby Step 4: Invest 15% Of Household Income Into Roth IRAs And Pre-Tax Retirement

For me, Baby step 4 is one of the more exciting steps in the process because it is the step where you really start to save and build wealth for your future! You’ve finally paid off your debts (except the house) and built up your big emergency fund, and now it’s time to save for your retirement!

Ramsey suggest saving 15% of your household income in good solid long term investments. No more (for now) and no less.

Why Should I Save 15%?

To give a visual demonstration of why Ramsey suggests that you save 15% for your retirement, I went to his website and used his investment calculator. I put some numbers into the calculator based on these factors:

Making $100,000 a year
Saving 15%
Starting at age 30
Saving for 30 years
10% return on the investments

When you put in those numbers above, it comes up with a return of well over 2.8 million dollars by the age of 60.

If you were to keep it going even for 5 more years until the age of 65, the account would grow to over 4.8 million dollars. That’s not half bad!

So how much money would you really need in order to have a comfortable retirement? Assuming that you would want 80% of your pre-retirement income to live on as many suggest, and a withdrawal rate of 4% per year and a 30 year retirement, you would need to have about 2 million dollars.

If you invest 15% of your 100k income, that would allow you to withdraw $112,000 a year for 30 years. (which assumes the money would still continue growing at a rate of at least 8% while you are withdrawing) That is 12% more than your pre-retirement income! 4.8 million would allow for $192,000 per year!

Now if you were to invest 10% using the same assumptions you’d end up with substantially less money, 1.5 million over 30 years, and 2.4 million over 35 years. Still not bad, but maybe not as much as you might want to have that comfortable retirement. At the 30 year point you’d have enough to withdraw 60% of your income, and at 35 years you’d have 96% of your pre-retirement income.

All of these numbers are of course assuming that you don’t have money coming from social security. I have my doubts it will last until my own retirement. That is obviously up for debate, and hopefully the system will be fixed. But why depend on it if it might not be there?

The point of all this to me is that 15% is usually going to be more than adequate to get you to where you need to be. 10% may not be, depending upon how much of your previous income you want to live on, and how much time you have until retirement. The longer you have until retirement, the bigger the gains you’ll see through compounding interest! Play it safe and start saving 15%. You won’t be sorry!

Another caveat – if you’re older and have less time until retirement you may need to be investing a higher percentage than 15%. You started late, so you have some ground to make up! Starting earlier? You might not need to invest all of the 10%. But why not do it anyway!

Dave Ramsey doesn’t suggest investing more that 15% because the extra money will allow you to complete the next two baby steps – paying for your kids college and paying off your home early. Stay tuned for those baby steps in upcoming posts.

What Should I Invest In?

Once you’ve decided on how much you want to invest, the next step is to decide on what types of investments you should be holding. Ramsey suggests:

If you receive a company match in your 401(k), 403(b), or TSP; invest in those plans, up to the match, first. Once your contribution equals the company match, fully fund a Roth IRA for you and your spouse. If you’ve maxed out your contribution to your Roth IRA and still have money to invest, invest the rest in your 401(k), 403(b), or TSP.

So the order is:

Company 401k or other plan up to the match
Roth IRA for you and your spouse
Back to the 401k or other plan

In your company 401k, Roth IRA or other investment, Dave suggests allocating your investments with a good mix of mutual funds. His preferred plan is to allocate 25% to each of the following types of stocks in your funds:

Growth
Growth & Income
Aggressive Growth
International

When choosing your funds he says

Always choose A shares (front end load); funds that are at least 5 years old or older with a solid track record of acceptable returns within fund category.

For a full look at Dave’s investing philosophy, please check out this post.

What do you think about this baby step? Will 15% be enough for your retirement? Do you think you should save more or less?

Dave Ramsey’s 7 Baby Steps: Step 3 – 3 To 6 Months Of Expenses In Savings

Peter Anderson — Mon, 16 Feb 2009 15:18:45 +0000

Last time we looked at Baby Step 2, paying off all your debt using the debt snowball. You take your bills, rank them in order from smallest to largest, and proceed to pay them off with intensity!

To review, here are the 7 Baby Steps.

Dave Ramsey’s 7 Baby Steps

Step 1 – $1,000 to start an Emergency Fund
Step 2 – Pay off all debt using the Debt Snowball
Step 3 – 3 to 6 months of expenses in savings
Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
Step 5 - College funding for children
Step 6 – Pay off home early
Step 7 – Build wealth and give!

Baby Step 3: 3 To 6 Months Of Expenses In Savings

Baby step 3 builds upon the baby emergency fund you established in baby step one, and takes it to the next level. In step 3 you are building a fully funded emergency fund of 3-6 months of living expenses. The reason for building up this reserve? With this reserve you’re building your safety net against major life events so that you never have to go into debt again.

When you have your 3-6 months saved there aren’t very many things that can happen that you can’t pay cash for outright. Lose your job? You’ll be able to cover the mortgage long enough for you to find a new job. Have to get unplanned surgery? Your emergency fund will cover your portion of the bill (make sure you have good health insurance!).

Emergency funds help you to get rid of the risk of unplanned for events, and prepare for the future.

Why Build An Emergency Fund?

Often times people think it’s just a waste to build an emergency fund that is so large. It just seems to be overkill. Why not use the money for something else?

Personally I can think of a lot of reasons why it’s a great idea.

Things Happen: Unexpected expenses WILL come up, and it’s better to have planned for it than to stick your head in the sand. If you don’t plan for those things they’ll end up happening at the worst possible times. Your heat will go out in the middle of winter, or you’ll end up in the emergency room for an unknown allergy. I’ve realized more and more over time that emergency funds are necessary because life happens and small unexpected expenses WILL come up. When you have the money saved these things are an annoyance, but not the end of the world.
Manage Stress: When you have an emergency fund saved, life is a lot less stressful. You don’t have to worry about what you’ll do if a negative event falls in your lap. You just pay to get it fixed.
Risk Is Reduced: When you have an emergency fund (along with other things like health insurance, disability insurance and life insurance), you have a lot less risk of having a bad situation turn into a catastrophe. A medical problem won’t turn into bankruptcy, and a job loss won’t turn into a foreclosure. In other words you’re making sound decisions to plan for problems, before they happen. You manage the risk that comes along with those major negative events, and stop them from turning into life changers.

How Much Is Enough?

The decision of how much money to save in your emergency fund is one your family will need to talk about. The amount may vary depending upon your living situation, number of children, job stability and other factors. The baseline that Dave Ramsey speaks of is 3-6 months of expenses.

So if your family has a minimum of $3000 in expenses every month after cutting out all the un-necessary bills, your 3-6 months of expenses would come out to anywhere from $9000-$18,000.

How many months you save will be dependent on your situation. At our house since we like the peace of mind that comes with the emergency fund, we want to have at least 6 months saved, if not a little bit more.

If you’re single and have a relatively low level of needed income every month, you may be able to get by with only 3 months of expenses.
If you’re the only bread-winner bringing home an income for a family of 5, then you may want to err on the side of caution and keep a buffer of 6 months of expenses (or more).
If you’re expecting a major life event in the near future (layoffs, surgery), you may want to start stockpiling cash in advance, and save even more than the 6 months if possible.

Where Should I Put My 3-6 Months Of Savings?

Where you save your emergency fund is really up to you. The only thing I would say about this is to make sure that you put the money somewhere that you can get at it right away if you need to.

My personal preference for a good place to save the money is a good high-yield savings account, like the ones offered by ING. Another option is to keep the money in a good money market account or at a local bank branch. Whatever you’re comfortable with, as long as the money is liquid and available quickly.

Don’t put your emergency savings in things like real estate, investments or other things that could be tied up for a while without you being able to get at the money. Keep it liquid!

Next Up: Baby Step 4 Invest 15% Of Household Income

Next time we’ll look at saving 15% of your income once you have a fully funded emergency fund. This is where the fun starts happening – when you’ve paid off your debts and you start saving for the future and building wealth!

Do you think saving up 3-6 months of expenses is enough? How much do you have saved in your large emergency fund?

Dave Ramsey’s 7 Baby Steps: Step 2 – Pay Off All Debt Using The Debt Snowball

Peter Anderson — Fri, 13 Feb 2009 15:40:03 +0000

Last time we looked at Baby Step 1, saving up an emergency fund of $1000. You’re saving up that money for a variety of reasons, but mainly because you know you’re going to have little “emergencies” popping up all the time, and the baby emergency fund will help keep you from going further into the hole while you’re on the way to paying down debt. As a review once again, here are the 7 Baby Steps.

Dave Ramsey’s 7 Baby Steps

Step 1 – $1,000 to start an Emergency Fund
Step 2 – Pay off all debt using the Debt Snowball
Step 3 – 3 to 6 months of expenses in savings
Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
Step 5 - College funding for children
Step 6 – Pay off home early
Step 7 – Build wealth and give!

Baby Step 2: Pay Off All Debt Using The Debt Snowball

Now that you’ve got your $1000 emergency fund saved, it’s time to move on to step 2, paying off all your debts using the debt snowball. This step could easily be one of the longest in your 7 baby steps. If you’re dealing with a lot of debt from school loans, car loans, credit card debt and other things you may be in baby step 2 for a couple years or more. If you only have a few small debts, you can be out of baby step 2 a bit quicker. Remember, the key here is that you are paying off your debts – because it is the right thing to do. You made those obligations, and you need to stick by them. Bankruptcy should only be entered into in a worse case scenario – and you’re probably not there.

The wicked borroweth, and payeth not again: but the righteous showeth mercy, and giveth. Psalm 37:21

So how does the Debt Snowball work? First things first – if you have done your quickie budget as we talked about last time, you’ll probably have a good idea of where you’re now standing in relation to your income, expenses and debts. If you haven’t done that yet, take the opportunity to do it now! Download your quickie budget from Dave Ramsey’s site here.

Once you’ve got all of your income, expenses and debt listed, follow these steps to get rid of your non-mortgage debt. (Mortgage debt is paid off separately in another baby step, so exclude it for now)

The Debt Snowball:

Put all your debts in order from the smallest balance to the largest.
After your necessities are paid, pay the minimum payments on all of your debts.
Put any surplus money towards paying off the smallest debt first.
Pay off your smallest debt, get a psychological boost from knowing you’re one step closer to being debt free!
Once the smallest debt is paid off you roll the money you were paying on that debt over to the next largest debt.
Wash, rinse, repeat until all your debts are paid off!

Pretty simple, right?

Controversy Surrounding The Debt Snowball

Over the past few years there has been quite a bit of controversy surrounding the debt snowball. The reason? There are those that say that Dave Ramsey is bad at math and that the debt snowball isn’t the best mathematical way to get out of debt. They say if you were to do it the BEST way, it would be to list your debts in order from the highest interest, to the lowest interest. Once they’re in order you pay the minimums, and put any extra money towards the highest interest debt. Some have called this the debt avalanche.

Mathematically their way IS the best way to get out of debt. Dave Ramsey has even admitted that the debt snowball isn’t the best mathematical way to get out of debt. But he still pushes it as the BEST way to get out of debt. The reason Ramsey believes the debt snowball is still better is because it takes into account the psychology of debt reduction.

His theory is that since you’re paying the smaller debts off first you’re getting a series of “quick wins” that give you that psychological boost you need in order to keep you motivated and keep you paying down your debts. The problem with paying the debts another way is that you don’t get that psychological boost from the quick wins. Too often you’ll end up burning out and giving up on debt reduction.

The debt snowball is more sustainable, and gives you the best chance of succeeding. You may end up paying a little bit more interest, but they’ve found that you’re more likely to actually succeed in paying off your debts with the debt snowball.

I obviously come down on the side of the debt snowball in most cases. I know there are those that will still prefer to use the debt avalanche or another similar hybrid debt repayment scheme. The important part to me is that you take control of your finances and start getting out of debt. Whether it is the debt snowball, the debt avalanche or some other method, just get started on getting out of debt. Whatever works for you!

As Dave Ramsey says, “You can’t go wrong getting out of debt“.

Keys To Not Going Into New Debt, And Paying Off The Old

If your debt snowball is going to be effective, you need to make sure you don’t go into new debt, and continue paying down the old. Here are a few ways you can do that.

Quit borrowing more money. No new debt!
Cut up credit cards, and become credit card free. I know it may feel weird at first, but it’s freeing!
Sell stuff. You have more than you need or use, so sell it and put the money towards debt!
Get an extra part time job. Take side jobs and earn extra income to accelerate paying off your debts. You won’t be doing these jobs forever, they can be temporary.

Get serious about paying off your debts, and take any extra money you have coming in, and put it towards your debts. You’ll have them paid off in no time!

Next Up: Baby Step 3 – 3-6 Months Of Expenses In Savings

Next time we’ll be looking at what you do after getting all your consumer debt paid off. (Hint: You’ll be saving up for a really rainy day by putting away 3-6 months of expenses!)

What’s your opinion of the debt snowball? Have you used it – or another system – to get out of debt? Tell us about it in the comments.

Dave Ramsey’s 7 Baby Steps: Step 1 – $1000 To Start An Emergency Fund

Peter Anderson — Wed, 11 Feb 2009 13:01:15 +0000

Yesterday we gave a brief overview of Dave Ramsey’s 7 Baby Steps, and talked about why it is so important to prepare yourself for the whole experience. You need to be ready to change your lifestyle, be ready to commit to no more consumer debt, and know that people are going to think you’re a little bit strange. But that’s OK because being normal means you’re broke!

Dave Ramsey’s 7 Baby Steps

Step 1 – $1,000 to start an Emergency Fund
Step 2 – Pay off all debt using the Debt Snowball
Step 3 – 3 to 6 months of expenses in savings
Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
Step 5 - College funding for children
Step 6 – Pay off home early
Step 7 – Build wealth and give!

Baby Step 1: $1,000 To Start An Emergency Fund

Once you’re current with your creditors, the first of the baby steps that Ramsey talks about is to save a $1000 emergency fund. What’s an emergency fund you ask? An emergency fund is your umbrella for when those rainy days come. Rainy days could include a good number of things:

Car repair
Emergency room visit or other unplanned medical incidents
Unplanned travel expenses (funerals, weddings, etc)
Job loss
When you don’t have enough for occasional expenses (like car insurance, property taxes)

You WILL Have Unplanned Expenses

Murphy’s law says that “anything that can go wrong, will go wrong“. Dave Ramsey likes to say that an emergency fund will help keep those “little murphies” from turning into new debt, especially while you’re trying to get rid of old debt.

Ramsey quotes a statistic about unplanned expenses on his site:

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

Ok, let’s look at that figure again. 78%! A majority of us will have a major negative event in any given ten year period! Even if you haven’t had that major negative event, I’m sure probably 100% of us have had those minor negative events pop up from time to time.

My wife and I had one of those major negative events last year when my wife went into the hospital for 3 weeks. We incurred upwards of 250,000 dollars in medical bills. Luckily we had good health insurance and most of the costs were covered. We had also already started Dave Ramsey’s program, so our total out of pocket cost was covered by our emergency fund that we had already saved up! Our situation last year is a great reason why emergency funds are such a good idea.

Why $1,000 For The Emergency Fund?

When it comes time to save up the emergency fund a lot of people wonder if $1000 will really be enough. My opinion is that it is. Most small emergencies will be covered by $1000, and only some major life events or other problems won’t be covered. Some people will still opt to save up a bit more.

My wife and I saved $2000 in our emergency fund because we felt a little safer having just a bit more in the bank. It turns out it was a good thing we did because our out of pocket medical expenses for my wife’s hospital stay were $1800. Granted, our situation was a major one, most unplanned expenses won’t be that big.

Figure out for your family if you think $1000 will be enough. Look at your circumstances, how many children you have, job circumstances, etc and decide on a number. Just make sure that you don’t set too large a number for the baby emergency fund because you can start short-circuiting your debt reduction plan if you try to save too much.

Make Sure To Keep Your Emergency Fund Available

When it comes to where you should put your emergency fund, I think it’s a good idea to make sure that you’re keeping it in a place where you’ll be able to access it quickly. Some good alternatives:

High Yield Savings Account: Put it in a good high yield savings account like the ones at ING. ING even offers some very flexible sub-account options so that you can split money up into different categories. (like emergency fund, vacation fund, summer camp, etc). This is what we’ve done.
Money Market Account
Local bank branch

The key here is to keep your money accessible and liquid, in case you have one of those emergencies where you need to get the money quickly.

Places I would not suggest putting your emergency funds include CDs, stocks, real estate, or other investments. Keep it somewhere you can get to it in a short period of time. The purpose of this money isn’t to gain a ton of interest, but instead to insure you against unplanned events.

Do a Quickie Budget

After deciding to change, and starting on your emergency fund, it’s probably a good idea to do your first budget. John Maxwell said:

A budget is telling your money where to go, instead of wondering where it went.

That quote is so true. If you’re not telling your money where to go (into an emergency fund), it will just disappear. Do a quickie budget, figure out what your income and expenses are, and then assign every surplus dollar a job.

At this point in the baby steps you should be paying the minimums on all your debts, and then saving as much money as you can towards your $1000 emergency fund.

If you need to sell things on ebay, get a second job, or sell your sacred comic book collection, just do it! Crank it out and get that $1000 saved!

If you need a good template to do your first quick budget, try out the one at Dave Ramsey’s site:

Dave Ramsey Quickie Budget – Download Here

Baby Step 2: Pay off all debt using the Debt Snowball

After saving up your $1000 emergency fund, the next baby step is to pay off all your debts using the debt snowball. Check out our next post for the details about how the debt snowball works!

Dave Ramsey’s 7 Baby Steps By The Numbers: Getting Started

Peter Anderson — Tue, 10 Feb 2009 16:42:21 +0000

I’ve been writing about personal finance for just over a year now. During that time I’ve written a lot of about Dave Ramsey and his class “Financial Peace University“, but I realized that I’ve never written in depth about his 7 baby steps plan to getting your finances in order and on track. So today I’ll be starting a series of posts about his system that I’d like to call “Dave Ramsey’s 7 Baby Steps By The Numbers”. In this series I’ll be going over the 7 baby steps in depth, talking about each one and going over what you need to do to achieve each step.

So first of all, who is Dave Ramsey, and what are the 7 Baby Steps? Dave Ramsey is a personal money management expert, radio talk show host and TV personality who over the years has helped thousands of people become debt free and change their financial lives forever. He gives no-nonsense advice to folks who have gotten in over their heads, and helps them to find their way out, in a responsible way. If you’re afraid of hard work, you may want to look elsewhere for your advice.

In addition to his best selling books and radio and tv shows Ramsey also teaches “Financial Peace University” at huge live events, and the 7 Baby Steps are an offshoot of the FPU class.

So what are the 7 Baby Steps?

Dave Ramsey’s 7 Baby Steps

Step 1 – $1,000 to start an Emergency Fund: Before you even get started on the rest of the plan, you need to save up a little bit of cash just in case small emergencies happen. Things like flat tires, doctor visits, and flying somewhere for a funeral will usually be covered by this small emergency fund.
Step 2 – Pay off all debt using the Debt Snowball: You list your debts from smallest to largest. Pay the minimums on all of your debts. With any leftover money you may have you pay extra on your smallest debt until it is paid off. You then roll that amount over to the next smallest debt.
Step 3 – 3 to 6 months of expenses in savings: Save up 3-6 months of expenses in case of extreme misfortune like a job loss, illness or other long term problem.
Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement: Save for your retirement.
Step 5 - College funding for children: After saving for retirement you can save for your children’s education and college expenses.
Step 6 – Pay off home early: Make extra payments on the mortgage to pay it off early.
Step 7 – Build wealth and give! (Invest in mutual funds and real estate): Continue building wealth through mutual funds and real estate, and give, give give!

Here’s Dave Ramsey doing a quick rundown of the 7 Baby Steps on his radio show:

[See post to listen to audio]

So those are the 7 Baby Steps. Pretty simple, yet effective. Even though it may seem like common sense to a lot of people, a lot of times people just don’t think about doing these things if they haven’t actually been told how to do them. So let’s get started.

Baby Step 0: Getting Started, Making A Decision To Change

Before I even get into the 7 Baby Steps, I think it’s important to start out by talking about just how key it is that you sit down, talk with your significant other (if you have one), and actually make a decision that you want to change.

A lot of people talk about how to change, but never touch on the fact that if you or your spouse isn’t ready to change, it isn’t going to happen. You have to want to change.

I know for my wife and I there wasn’t one moment where we decided that we wanted to change, it was just a gradual realization that we weren’t spending our money as wisely as we should, that we were accepting too much debt as a part of our financial plan, and that we craved the freedom of not carrying any kind of debt. We wanted to be free!

Getting to the point where you want to change might mean that you’ve hit bottom and declared bankruptcy, or it might just mean that you’re sick of not saving enough towards retirement. It’s a different point for everyone. But when you get there you’ll know.

No More Debt

Once you’ve made a decision to change, you need to be able to begin the change immediately and make a decision as a family that you aren’t going to incur any more consumer debt. Credit cards and home equity lines of credit are off limits now. No more high interest auto loans! If you want a new TV or a new kitchen countertops, you’re going to have to save for them. No more store credit cards to buy clothing at ridiculous interest rates!

Cut up your credit cards, and draw a line in the sand. No more debt!

photo credit: SqueakyMarmot

My wife and I used to use our credit cards in a variety of ways. We would use them to pay for vacations because we wouldn’t plan ahead and save up for them in advance. We’d use them as a safety net for our household, instead of saving up a cash emergency fund. If we needed new furniture we would just finance it at the store, and pay it off over time. Once we made a decision to change, we realized that we couldn’t do that any more. We had to make a life change. Using the 7 Baby Steps we were able to make a change in the way we looked at money, and in the process change our lives for the better.

Prepare Yourself

When you’re starting on the road to financial freedom you need to brace yourself and realize that it isn’t always going to be easy getting out of debt and building wealth. There will be bumps along the road, and there will be times that you’ll want to quit. Your family and friends may even think you’re a bit odd for all the “strange things” you’re doing – like not using credit cards, not incurring debts to buy nice cars or not upgrading your house. You’ll seem abnormal, but that’s ok. Normal is being broke. Being debt free and financially sound IS strange. So you want to be strange.

Make a commitment today to simplify, and get started on the road to financial freedom! Join with me, won’t you?

Next in our series, baby step 1, “$1,000 to start an Emergency Fund“! In my opinion, this step is one of the most important, so don’t miss it!

Have you made a decision to make a change in your financial life? What steps have you taken to prepare yourself for this change?

Unintended Consequences Of Doing A Budget

Peter Anderson — Thu, 20 Nov 2008 16:06:55 +0000

Doing a budget has decreased our spending

photo credit: Jeff Keen

Within the past few months my wife and I have started doing a zero based budget where every dollar is allocated before it comes in. When the paychecks are deposited each and every dollar is assigned a job, whether it be paying bills, groceries, personal spending money or savings. Since we give every dollar a job, money doesn’t just “disappear” in the ether, and we have more money at the end of the month.

We’ve been using the envelope system for problem spending categories as well. Sometimes, even when you have a budget, you inadvertently spend more than you should in categories like groceries, eating out or miscellaneous spending. Using the envelope system is helping us to eliminate those overspending problem areas. We have a set amount of money in our envelopes every month for those problem categories. When the money runs out, we can’t spend anymore. It’s a nice concrete way to control our spending.

Unintended consequences of making a plan

One thing we’ve realized since we’ve been doing our monthly budget is that there are some great side benefits to doing the budget, besides the improvement to our bottom line. Here are a few:

We argue less about money: Since we have a budget, and we both know what our financial plan is, there is less opportunity to disagree and argue about money. We used to argue about each other’s personal spending money every month (her spending on clothes, my spending on electronic gadgets). Now we have a budget, and we both have a set sum we can spend every month without having to ask the other. That makes it easier to trust each other and not have to worry about spending on things we shouldn’t.
We are more peaceful about our financial situation: It’s so much easier to feel peaceful about your financial situation if you have a plan, and you know how much money is coming in and going out. Before we felt like we were doing ok, but there were also times where we felt like we were sinking. Now we KNOW where we are, and it gives us peace.
When bad things things happen, we don’t feel panic anymore: When life happens and an emergency comes up, we don’t have to feel panic anymore. We have an emergency fund, and are building up 3-6 months of expenses (as suggested by Dave Ramsey) and we know we can weather the storms that might come our way. Previously a large car repair bill or medical bill might have caused us to panic and feel like we weren’t in control. Now we have a plan for emergencies, and insurance to cover large expenses (like medical bills), and we are more confident in where we are.
We’re eating healthier: Because we’ve cut down considerably on eating out at restaurants the last couple months, it also means that we’re eating healthier. Previously we would eat out 5-7 times a week, and not only was it a budget drain, but we weren’t eating very good. Because our budget cut out a lot of that eating out, we’re making out own meals now, and making healthier eating decisions.
We’re able to help others: Because we’ve been taking financial classes, and because we’ve setup our own budget, we’ve been able to help others on their road to financial peace as well. People see us pulling out our envelopes to pay for things, and are naturally curious. This has allowed us to get them into doing their own budgets, and turning around their own financial situations.
It’s easier to say no. We don’t buy as much junk: Before we would just buy stuff because we liked it, or because it was on sale (why not?). Now, because we have a budget, it’s easier to say no to purchases because “it doesn’t fit in the budget”. This means we’re saving a ton of money on “stuff” as well as meaning we don’t have as much clutter around the house. Double benefit – more money, less clutter!

So those are a few of the unintended but welcome benefits that we’ve found as a result coming up with a financial plan, and doing a budget.

Are you doing a budget?

Is your family on a budget? Why or why not? If you are on a budget, what unintended consequences did you find once you started working your plan?

A Way To Control Spending: The Envelope System

Peter Anderson — Mon, 03 Nov 2008 16:51:49 +0000

We need a way to cut our spending

This past summer my wife and I took a class called “Financial Peace University“. The class is built around the teachings and personal finance framework put together by Dave Ramsey. Ramsey has made it his career goal to help people take responsibility for their financial life, get out of debt, and save for their future. The class is a very good one, and I suggest you check it out if you’ve ever had problems managing your finances.

Maria and I loved the class so much that we’re now helping to facilitate a class at our church by helping some friends teach the next session of Financial Peace University. One thing we’ve realized by teaching the class is that we’ve let our own finances slip the last couple of months as we were out of the country for a few weeks and dealing with other various issues of life. We just haven’t been doing our budget, and certain spending categories have gotten out of control. If we were going to be teaching this class, and being a good example to others there, we figured we had better get things in order, and get our spending back in line.

So how to cut our spending? One thing we neglected to do last time we took the class was to control our spending using what Dave Ramsey calls “The Envelope System”. We figured we could do a “virtual envelope system” using the computer and money software like Microsoft Money. We were wrong, and now we decided to give the actual physical envelope system a try.

The Envelope System – getting started with a budget

The first thing you have to do when you’re trying to control your spending is to set up a budget. If you don’t know where the money is going and what your set expenses are, it will be difficult to setup a working budget or envelope system.

Tracking our expenses was relatively easy because we log pretty much every dollar coming in or out in Microsoft Money. We have a good 1-2 years of history right at our fingertips. With that we were able to see exactly how much we were spending on set expenses (mortgage, utilities, taxes), as well as other categories where the spending was out of control (food, shopping).

Once you’ve got a good baseline for what you need to spend every month on the basics, you’ll want to set up a monthly cash flow plan, and give every dollar a name through doing a zero based budget. What that means is every single dollar of income that comes into the household will be allocated, and assigned a job. If you make $5000 of net income, all $5000 of that should be allocated either to an expense or savings category. That way you won’t have the extra money (after expenses) disappearing into the ether. It gets saved, or assigned to a debt, or gets some other job. Your money works for you instead of just melting away.

So to review, the first steps you’ll want to take include:

Figure out your regular monthly set expenses.
Figure out other variable expenses (like food, shopping, entertainment) and assign a realistic dollar amount for that category in the budget.
Put together a zero-based budget where every dollar of income and expense is allocated. Every dollar has a name and a job.

Setting up your envelope system

Once you’ve got a budget setup, and you know how much you want to spend on each category, it’s time to setup your envelope system. The idea behind the envelopes is that it helps you control your spending on certain problem categories by giving you a set amount of money each month in your envelope that you need to use towards that category. When the money is gone from the envelope, you can’t spend any more money on that category. If you absolutely need to spend more, you have to take money from another category to fill in the gaps.

We have a couple of big problem categories that we consistently overspend in. Eating out/restaurant spending and shopping spending. My wife and I love eating out, and in some ways eating out has become our way to connect with each other and entertain ourselves. If we have a date night we go out to a nice restaurant and enjoy an evening together. The problem is that we’re doing it way too often, and spending way too much money doing it. The solution? We added these problem categories to our envelope system. In the picture below you can see our envelope for “restaurants”.

We also set up envelopes for some other categories with variable expenses including groceries, shopping, entertainment and “blow money” (personal money we can spend for every and any reason). Whenever we get paid we are now going to withdraw money for each spending category and place that money in the envelope.

For example, if in our budget we allocate $400/month for groceries, we’ll withdraw $200 from the first of the month’s paychecks and put $200 in the envelope. Whenever we go shopping for food we can then only spend money from that “groceries” envelope, up until the point the money is gone. If we go shopping and the bill comes up to $201, we must take that $1 from another envelope, or put back $1 worth of food. For the last paycheck of the month, we’ll once again withdraw $200 for food and add it to the envelope. If we’ve only spent $100 the first two weeks we’ll then have $300 in the envelope. At the end of the month, if you have money left over, decide how to allocate that money – either putting it towards debt, or saving it.

Using this system may be a bit uncomfortable at first, especially if you’re using envelopes for a larger number of categories. We know of one couple who set up a ton of spending categories using this system, and then ended up withdrawing thousands every month and putting it into envelopes. We decided it would be easier to just choose some of our biggest overspending categories and withdraw the money for those. It comes out to about $800/month that we’re withdrawing and putting in envelopes.

So the envelope system boils down to this:

Set up a zero-based budget, and know how much you should spend in all categories.
Find some of your biggest over-spending categories, or places where the expenses vary quite a bit every month and set up an envelope for those categories.
Every paycheck withdraw enough cash to fully fund the envelopes for your envelope system.
Only spend what you have in the envelopes, and if you don’t have any money left , don’t spend. If you need to spend more, take it from another envelope.
Any money that is left over, either save or put towards your debt snowball (if you have debts).

While we’re still setting up our envelopes, we know from watching others use the system that it can have a dramatic effect on how much money you’re spending. Not only are you setting limits on yourself and actually living on a budget, you’re spending cash, which hurts more.

Studies have shown that when you use a credit card, even if you’re paying it off every month, you spend on average 12-18% more. Using cash for those problem categories will help you to rein in that spending, and force you to not spend more than you make.

What do you think of the envelope system? Are you currently using the system, and how does it work for you? Do you prefer physical envelopes or using “virtual envelopes”?

Links:

Bible Money Matters » Financial Peace University

Dave Ramsey’s 7 Baby Steps Review: Get Out Of Debt, Build Wealth And Give.

Dave Ramsey’s 7 Baby Steps

Baby Step 0: Getting Started, Making A Decision To Change

Baby Step 1: Save A $1,000 Baby Emergency Fund

Baby Step 2: Pay Off All Debt Using The Debt Snowball

Baby Step 3: 3-6 Months of Expenses In Savings

Baby Step 4: Invest 15% Of Income in Roth IRAs And Other Pre-Tax Investments

Baby Step 5: College Funding For Children

Baby Step 6: Pay Off Your Home Early

Baby Step 7: Build Wealth And Give

Conclusion

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Dave Ramsey’s 7 Baby Steps: Step 7 – Build Wealth And Give!

Dave Ramsey’s 7 Baby Steps

Baby Step 7: Build Wealth And Give

Reasons Why We Should Give

Get Creative About Giving!

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Dave Ramsey’s 7 Baby Steps: Step 6 – Pay Off The Home Early!

Dave Ramsey’s 7 Baby Steps

Baby Step 6: Paying Off Your Home Early

Arguments For Paying Off The House

Arguments Against Paying Off The House

My Conclusion.

Next Time – Baby Step 7: Build Wealth And Give

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Dave Ramsey’s 7 Baby Steps: Step 4 – Invest 15% Of Household Income

Dave Ramsey’s 7 Baby Steps

Baby Step 4: Invest 15% Of Household Income Into Roth IRAs And Pre-Tax Retirement

Why Should I Save 15%?

What Should I Invest In?

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Dave Ramsey’s 7 Baby Steps: Step 3 – 3 To 6 Months Of Expenses In Savings

Dave Ramsey’s 7 Baby Steps

Baby Step 3: 3 To 6 Months Of Expenses In Savings

Why Build An Emergency Fund?

How Much Is Enough?

Where Should I Put My 3-6 Months Of Savings?

Next Up: Baby Step 4 Invest 15% Of Household Income

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Dave Ramsey’s 7 Baby Steps: Step 2 – Pay Off All Debt Using The Debt Snowball

Dave Ramsey’s 7 Baby Steps

Baby Step 2: Pay Off All Debt Using The Debt Snowball

Controversy Surrounding The Debt Snowball

Keys To Not Going Into New Debt, And Paying Off The Old

Next Up: Baby Step 3 – 3-6 Months Of Expenses In Savings

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Dave Ramsey’s 7 Baby Steps: Step 1 – $1000 To Start An Emergency Fund

Dave Ramsey’s 7 Baby Steps

Baby Step 1: $1,000 To Start An Emergency Fund

You WILL Have Unplanned Expenses

Why $1,000 For The Emergency Fund?

Make Sure To Keep Your Emergency Fund Available

Do a Quickie Budget

Baby Step 2: Pay off all debt using the Debt Snowball

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Dave Ramsey’s 7 Baby Steps By The Numbers: Getting Started

Dave Ramsey’s 7 Baby Steps

Baby Step 0: Getting Started, Making A Decision To Change

No More Debt

Prepare Yourself

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Unintended Consequences Of Doing A Budget

Doing a budget has decreased our spending

Unintended consequences of making a plan

Are you doing a budget?

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A Way To Control Spending: The Envelope System

We need a way to cut our spending

The Envelope System – getting started with a budget

Setting up your envelope system

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