While I’ve been somewhat critical of Dave Ramsey and his “Debt Snowball” in the past, he’s definitely helped an awful lot of people get their finances in order. Thus, I thought that it might be worth spending a bit of time talking about Dave’s “Baby Steps” for getting out of debt and improving your finances. Here they are:
Step 1: Save up $1, 000 to start an “Emergency Fund”
Step 2: Pay off all debt (except the house) using the “Debt Snowball” (smallest to largest)
Step 3: Save up three to six months of expenses in savings
Step 4: Invest 15% of your household income into Roth IRAs and pre-tax retirement accounts
Step 5: Save up college funding for your children
Step 6: Pay off your home early
Step 7: Build wealth and give! Invest in mutual funds and real estate
Pretty sound advice, although some might argue that paying off your home early isn’t a good idea if you have an ultra-low mortgage rate. After all, it’s quite possible that investment returns will far outpace what you’re paying in interest. Either way (whether you choose to make extra mortgage payments or invest the difference) I’d suggest that you “Make it Automatic” (as David Bach would say). That way you don’t have to worry about a lack of discipline getting in your way.
As it turns out, Dave has a handy-dandy pdf of his Baby Steps that you can print out and hang on your fridge to keep yourself motivated. If you’re looking for additional details, I suggest that you spend a bit of time digging around daveramsey.com. You can also check out one (or more) of Dave’s books.