David Ramsey changed my life. Before David, I never had much money saved, and could never keep it in savings. I had revolving debt. I paid late fees. I paid silly amounts of interest. I worried about losing my job. I was at the mercy of my own bad financial management. It was like a crazed controller handled my accounts, and I was him.
After a friend introduced me to the seven steps, my finances turned around. I paid off my revolving debt (my credit card provider lowered my interest rate down to a fraction as the debt disappeared, and they recently canceled my card for non-use). I have had money for emergencies, and have not had to use credit for much at all.
These are the seven steps: They must be done in order!
1. SAVE AN EMERGENCY FUND OF $1000. (I’m not comfortable with less than $2500 with a family, but I didn’t have $1000 at the time, either, so I started with that). Pay the minimum on all debts and save everything else, spending nothing you don’t have to, until you have $1000 in a savings account. The money is off limits except for a real emergency. You must, again, do these steps in order, and this is first. If this fund is not there, the next emergency will place you further in debt, not further away. If you tap your emergency fund for a real emergency, back up and start at #1 again.
2. USE THE DEBT SNOWBALL TO WIPE OUT ALL PERSONAL DEBT EXCEPT A MORTGAGE. Start with the smallest debt and pay on it hard until it’s gone, but pay only the minimum amount on the rest of your debts. When the smallest debt is paid off, move to the next smallest debt, but increase the payment to include what you were paying on the smallest debt, and so on. However long this takes – months or years – stay on it – and resist the temptation to pay the largest debt or the debt with highest interest first. Pay hard on the smallest debt, so you can use the snowball. Stock investors use the snowball method to grow their stock portfolio – you’re using it to shrink your debt. Besides, paying down debt is emotional, too. Seeing debt after debt drop off is like winning a battle. Starting with the largest debt or else fighting on all fronts at once (focusing on interest rate), is a recipe for despair. Do not attempt step 2 until you have completed step1. Don’t go to step 3 until you complete step 2.
3. BUILD A GENUINE EMERGENCY FUND. Deposit enough money to live 3-6 months without a job (in case you become ill, unemployed, or your business falls into the sea.
4. FULLY FUND ALL PRETAX RETIREMENT AND BECOME FULLY INSURED (Life, Long-Term Care, etc.)
5. IF YOU HAVE CHILDREN, BUILD A COLLEGE FUND
6. PAY YOUR HOUSE OFF EARLY. Even an additional $100/month added to your payment can shave 10 years off of your mortgage.
7. BUILD WEALTH. You can revisit Ramsey’s methods when/if you reach this point. You may never finish the seven steps. You may have to start over several times, but you will learn how to manage your money, and what it means, and you will grow in confidence and focus and be better off than ever before.
There have been a few books and authors that have changed my life. David Ramsey, Timothy Ferris, Thomas Friedman. I started with Ramsey, and my family has been happier and healthier ever since.