Want to Eliminate Debt and Build Wealth? Dave Ramsey Can Help: A Synopsis of the Total Money Makeover
If you are in debt and feeling hopeless, then you are like many Americans. We live in culture that accepts that debt is just a part of life. Dave Ramsey, the guru that brought the world Financial Peace University and The Total Money Makeover says that it does not have to be. You do not have to go into debt. In fact, the best way to build wealth, according to Ramsey, is to be debt free. He has lead millions of people out of debt with his proven method and helped them begin the road to building wealth and enjoying financial freedom. Here's how.
Everyone's Doing It
Americans believe that it is necessary to go into debt for anything that is worthwhile. You have to get a loan to go to school, buy a car or buy a house. You get credit cards to help build your credit score and earn all of those really cool prizes that they offer. And who can blame you? Going into debt is just a part of adulting. The media bombards you with messages of how natural, normal or important it is to go into debt. Here are a few of the arguments.
You have to take out a loan to afford to go to school. Who, but a rich person, could afford to pay for tuition? That loan is an investment in your future. It is helping to pay for the education that will ensure you a good job and make you rich.
You need a car to get to work. In order to get a decent job, you need a decent car. The only way to get a decent, reliable car is to get a car loan. You do not want to surrender your available cash to purchase a car.
You must get a mortgage in order to have a home. It is better to buy then to rent even if you have to go into debt, because you will be building equity.
A credit card is a great way to build credit. Not only does it show the credit bureaus that you can be responsible and make regular payments, but you also earn rewards when you use your credit card.
Taking Baby Steps
There comes a point for many people when the debt becomes overwhelming. You feel like you are mortgaging your life away. Maybe you can no longer make minimum payments. Maybe you are just tired of owing people money or not having a cushion. Whatever it is, there comes a time when many people say, “Enough.” That is when people turn to Ramsey to find out how to turn their life around. Ramsey's plan, as detailed in his wildly successful The Total Money Makeover helps people get our of debt and begin building wealth. He dispels the myths about debt being necessary. In fact, he believes the best way to build wealth is to first be debt free. He used this plan to get himself out of debt as a young man and has since been showing other people how to do it. He calls his plan The Baby Steps. It is a series of seven steps that begins with building a small emergency fund and ends with people so financially comfortable that they can give money to worthwhile causes.
Baby Step #1: Save $1000
Dave starts off with budgeting. Sit down-- with your spouse if you are married-- and look at your income and your monthly expenses. Spend every cent on paper before spending it in real life. This includes everything from rent to debt payments to groceries. But by the time you finish your budget, every dollar will be accounted for.
Next, you will begin looking for ways to find excess money to apply to extra debt payments. It means drastically reducing your lifestyle, selling anything in your house that doesn't move and even taking on extra work. Whatever you do, the goal is to find extra money to start funneling into your debt.
Like many Americans, you probably do not have any savings. In order to prevent you from having to fall back on a credit card or take out a loan when an emergency comes along, Ramsey advises having a small emergency fund. He recommends $1000. The idea behind this is that it is a small enough amount that most people can put it together pretty quickly. It will also be large enough to cover most small emergencies like a car repair, home repair or doctor visit. This will provide you with a cushion while you attack your debt. If you must use the fund while working on your debt, then you set your focus on rebuilding your emergency fund before returning to the debt.
Baby Step #2: The Debt Snowball
Once you have your emergency fund in place, it is time to attack your debt with laser focus and intensity.You start with your smallest debt, whether it is a credit card, student loan or car loan. Do not include your mortgage. That will come later. Put the extra money you have gathered and put it into the smallest debt first. Because it is the smallest debt, it should get paid off pretty quickly.
This does two things for you. First, it gives you a little more extra money in your budget. The money that you are no longer applying to that little debt can now be directed to the next debt on your list, helping to get that debt paid off more quickly. Second, it motivates you. Once you have achieved one small goal of paying off one of your debts, it will get you motivated to keep going. You will be excited about paying off the next one and the next one until you have reached your ultimate goal of being debt free.
Baby Step #3: Step Up Your Emergency Fund
After you have worked your way through your debt snowball and are debt free except for your mortgage payment-- if you have one-- then it is time to strengthen your emergency fund. $1000 is fine if you are in a pinch but may not cover you if you run into serious trouble. You should build up three to six months worth of income. This should cover you in the event of a larger catastrophe such as a job loss. You will breath a lot easier once you know that you have a cushion to fall back on. It will also be your starting point for building wealth.
Baby Step #4: Retirement Fund
While working on your debt snowball you should have put any retirement contributions on hold. Now that you have your emergency fund fully funded, it is time to start funding long-term goals again so that you can avoid problems in the future. The first one Ramsey addresses is your retirement savings. He says that you should be putting approximately 15% of your income into retirement savings. Now that you have eliminated all of your debt, except for your mortgage, you should have the room in your budget to do that and still have room to breathe.
Baby Step #5: College Fund
If you have children and they are still at home, then you should be saving for college. There are a lot of ways to get a kid through college, but having money for tuition and fees sure helps. Ramsey is also a big fan of letting your child work while he or she is in college. And if you have started your journey to debt freedom too late to fund their tuition, he has suggestions for how to get them through. But, if you can manage to save something to help them out, that is ideal. The key, however, is to do it with out running up any debts for you or for them. You have gotten yourself out of debt, now is not the time to encourage your children to enter into debt. This is the point in the process that you make sure to start setting money aside for your kids' college funds.
Baby Step #6: Pay Off Your Mortgage
Once you have your debts paid off and are making room in your budget for the future, it is time to focus on getting rid of your house payment. You did the really hard work of getting rid of all of that other debt, how much harder could it really be to get rid of your final debt? And, really, how much would it change your life to have no house payment? Now that you have paid off your other debt then there should be quite a bit of room in the budget to start attacking the mortgage. A house payment is something most people expect to have until well into their senior years, if not forever. Having paid down your other debts, you now know this one is possible.
Baby Step #7: Build Wealth and Give Generously
Once you have everything else taken care of, then you are in a prime position for building wealth. You are no longer funding debts which offer you little to no return. You can rest easy knowing that your children and your retirement are taken care of. You have a sizable cushion against disaster. And, by now, you even have your home paid off. Now is the time to focus on investing and finding ways to build wealth. In the book, Ramsey offers suggestions on how to do that.
Ramsey is a big advocate of not loaning people money. When you loan someone money, it has a tendency to destroy a relationship, one way or another. If you can not afford to give someone money, then don't do it. You must have your own oxygen mask on before you can help anyone else with theirs. If you can afford to give someone money when they are in a tight spot and you want to do it, then go ahead and give them the money. Don't loan it, just give it. You will preserve the relationship that way. The point, however, is that, when your own needs are met, you will be in a position to give back by helping other people.
One of the things Ramsey does for some callers to his radio show is allows them to attend one of his Financial Peace University courses for free. His stipulation to them is that once they have achieved financial freedom, they must pay for someone else, who needs the help, to attend. In this way, people who have benefited from his courses can pay it forward.
Achieving financial freedom is possible. Even when debt seems insurmountable, there is a way. It is not easy, but it is possible. If you are looking for a way to get out of debt and build a stable financial future, Dave Ramsey has a method that is proven. Millions of ordinary people over the last 25 years have used it to get out of debt and build wealth so that they can live the life of their dreams. Believe it or not, so can you.
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