Dave Ramsey's Baby Steps


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Rather than go off on a tangent from the inflation thread, I thought I'd start something here.

Here are Dave Ramsey's "Baby Steps."  If you don't know who Dave Ramsey is, ask.  I'll be happy to introduce you.

1. $1000 emergency Fund.
2. Pay off all debt except the house.  Use the "snowball" methodology.
3. Increase your emergency fund to 3 to 6 months of expenses.
4. Invest 15% of your income to retirement.
5. Fund your children's college funds.
6. Pay off your home.
7. Build wealth and give.  (I call this one "Live like no one else".)

I modify this because I've finally bought into the idea that money is not just about the math.  It is about psychology and emotion.

So, in creating accounts, I create the following:

1. A savings account for each child.  I regularly contribute a small amount to these accounts.  So if they've grown out of their clothes, or need school supplies, or what to take a special class, etc.  I take it out of those funds.  If there isn't enough, I say, we can't afford it.
2. I have three "savings accounts" for different purposes:

  • Emergency Fund
  • Unemployment Fund
  • I'm saving to buy something big that I want.

And I fund them in that order.  If an emergency comes up.  I stop contributing to the other funds and I fund only the emergency fund.

3. I try to keep a high balance in my checking account for monthly expenses.  This is NOT the emergency fund.  It is the amount that I expect to deplete each month with regular expenses.

By separating these in this manner, I avoid seeing a lot of money in one account.  I'm forcing myself to see that I have small numbers in my accounts.  I'm also forcing myself to acknowledge that some of these accounts are virtually empty.  Psychologically, it makes me think that I don't have enough money at any point.  So, I tend to avoid spending money.

I had all of these fully funded at the beginning of 2020.  By the middle of the year, I was broke.  By my first paycheck in June, I was just scraping by.  As of this month, I'm recovering.  It seems like I'm filling these accounts again.  But they are far from full. 

Part of my restraint is that we've been getting by on fewer cars.  My son crashed a car in October (I believe).  And we were unable to replace it.  We did not consider this an emergency.  It is the "I'm saving to buy something category.  So, we have two cars with four drivers, often needing to go to different places.  We manage.

I'm not sure if the 15% for retirement includes company match into 401(k) or not.  But I've got a plan to have enough at retirement.

I also don't fund my kids college funds.  I'm not sure if they will be going to college thanks to college politics nowadays.  Only two of them have said they want to do something that will require college.  I think the others, so far, can be very successful with online certifications and so forth.  For those going to college.  I have a different idea.

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I'm a fan of Dave Ramsey.  Mainly because I know so many people who got persuaded into his methods, did the work, and feel like they've been freed from slavery and stupidity.  

Best thing ever: My kid's high school personal finance course is basically his course, without any mention of his name.  I think I've been successful in inoculating my kids from the seductive draw of debt.   Time will tell.

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I enjoy Dave Ramsay as well, and used to listen to his nightly radio show several times a week. The only modification we have made is in steps 4 and 5. I contribute 5% to my 401k to get the full employer match, but everything else that we make that we consider "excess" goes toward our mortgage...and that means everything. We follow prophetic counsel to get out of debt. We don't go on vacations other than camping, we drive old/used cars that we can pay cash for, and never buy name brand items...only store brand food at case lot sales or clothing at discount stores. It is true that we haven't had as much "fun" as other families our age have, (I am currently 34)  and to many outsiders looking in we may seem poor. But barring disaster, we will have our home paid off at the end of next year. Not many people can say they are completely debt free in their mid thirties. That will enable us to have more fun with our children as they reach their late youth/early teenage years, and allow me to start maxing out my retirement plan starting in 2023.

We are also not planning on funding our kids college tuition. They need the growth that comes from hard work, and the satisfaction of earning something yourself. Coincidentally, I have asked some youth in our ward to speak on that very topic in 2 weeks. There are many cheaper options than schools charging 30-40k per year. My parents didn't pay for my education, and things are going great for me...though it was hard at the time. I worked 2 jobs throughout college and paid for each semester up front. Dating and parties were almost non-existent. Twice I had to skip a semester to earn more money...but even though I graduated 1-2 years later than some of my friends, I was able to graduate debt free.

I do not say this to boast, but to demonstrate that by making sound plans, working hard, and saving what you earn rather than immediately spending it, you can come out on top in the long run. Tragedies happen, but that is the purpose of the 3-6 month savings account...a safety net. The snowball effect also works well. It takes discipline to not spend that extra money once a particular debt is paid off, but it saves you a ton on interest in the end. So many millennials my age, (and many gen Z'ers) cry about the world being unfair and staked against them with regards to the price of homes, education, etc... It is simply not true...you just need to practice provident living and have some discipline.

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Re college tuition—our plan is that when each kid turns 15 we put aside $250/month for that child until their 22nd birthday. That’s $21K which we are willing to use to assist with a mission, a wedding, and/or college or trade school—but when it’s gone, it’s gone.

The down side, I suppose, is that since it may be used for non-educative purposes we can’t really put it in a 529.

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