The Dave Ramsey Method

Image result for google image total money makeover

As I’ve mentioned before on the blog, we use the Dave Ramsey method of budgeting and finances. If you want to know more about Dave Ramsey, I recommend starting with his book- The Total Money Makeover. This is the book that really lays out the budget-specific parts of his financial plan.

We chose the Dave Ramsey plan for a couple of reasons.

  1. Someone my husband worked with recommended it – We weren’t really looking for a budget or financial plan, but someone recommended this book to my husband and after we both read it, we really felt inspired by the plan (note- not inspired enough to actually commit for another 2-3 years, but inspired to at elast start thinking about money)
  2. It’s a financial independence plan (not just a budget)- My husband and I are fiercely independent people, so neither of us really liked being financial beholden to others. But growing up, my experience was that was just a way of life. You had credit cards and debt and car payments and a mortgage and that was just normal. Dave Ramsey’s idea that you pay for things in cash and not buy them if you can’t pay cash was revolutionary to me (which sounds super sad in retrospect, but there you go). In any case, his plan is all about getting rid of debt, not just organizing your life and finances around paying for your debt.
  3. It’s behavior based- The principles that Dave outlines in his book (more on that in a minute) are based on behavior. His book uses behavioral principles, rather than solely financial best practices. His reasoning is that all the good finance in the world won’t help someone with a behavior problem, so you need to address the behavior problem to sort out the finance problem (I’m dramatically oversimplifying here, but that’s the basic gist). This principle is so true of pretty much anything that presents a challenge to someone and I’ve found myself applying this principle to other areas of my life beyond budgeting.

The Dave Ramsey Plan

I’m going to be concise and gloss over a lot here, but these are the basic tenets of the Dave Ramsey plan (with more attention given, by me, to the beginning of the plan). You are supposed to follow, in order, the baby steps that Dave lays out.

Step 1: Save $1000– Did you know that 60% of Americans wouldn’t be able to cover an unexpected $500 bill? This is the point of this baby step. Emergencies happen and the first thing you have to have in place is some easily accessible cash to cover that.

Step 2: Debt snowball– This is where the magic happens. In this step, you make a list of all your debt (not including your mortgage) and list it from smallest to largest. Then, any extra money you can cut from your current spending gets applied to the smallest debt first. The idea is to get something paid off quickly and get what Dave calls “quick wins.” Then, you take whatever you were paying on that debt and apply that amount to the next smallest. And so on. Hence the snowball- each paid off debt snowballs more money into the larger debts.  This step is controversial for a lot of people, because you pay off debts in order from smallest to largest and ignore all other details (like interest rate). So you could theoretically be paying a student loan with a low interest rate first over a credit card or car loan with a higher interest rate.  It seems counter-intuitive, but the psychological win of actually paying something off helps motivate you further. And it’s true! Paying off debt makes me want to pay off more debt.

Step 3: Build a true emergency fund that covers 4-6 months of basic expenses.  Basic expenses include housing, utilities, transportation and food.  The essentials. What you would need to get by until you found another steady source of income.

Step 4/5: Fund retirement and fund college savings accounts. These are the steps that happen only once your debt has been paid off. The idea here is that you put nothing  toward any of these accounts until the debt is gone (more on that tomorrow). Dave always says “pay yourself first,” hence the reason that funding retirement comes first.

Step 6: Pay off the house!

Step 7: Build wealth and give back

Ahem. We’re obviously a LONG way away from steps six and seven.  But hopefully one day I’ll be able to come back here and tell you all that we’re there. But not yet.

That’s it, my friends. The Dave Ramsey plan in a nutshell. Deceptively easy and simple. Check back in tomorrow- I’ll be talking about our take on the Dave Ramsey plan.

 

Advertisements