Today I begin Baby Step 2 of Dave Ramsey's Total Money Makeover. The seven steps of the makeover are as follows (paraphrased):
Baby Step 1: Save a $1000 emergency fund.
Baby Step 2: Perform the debt snowball on all debt except the home mortgage.
Baby Step 3: Complete the emergency fund - 3-6 months of net household income.
Baby Step 4: Invest 15% of gross household income into retirement accounts.
Baby Step 5: Save for your children's college education.
Baby Step 6: Pay off the home mortgage.
Baby Step 7: Have fun, invest and give.
This is an eye opening order of precedence for finances. An order of precedence, in the way I'm discussing it today, means the order in which you should do something. It's amazing how we are taught the incorrect order in which we should spend our money and everyone accepts it as ok.
For example, most folks buy a house, cars and other items on credit before having an adequate emergency fund. This causes us to live a paycheck to paycheck lifestyle which can be financially fatal when an emergency crops up.
Most of us make plenty of money but because we "tie it up" with payments for cars, houses, credit cards and so on we can't enjoy our income to the fullest potential.
I'm teaching my teenage daughter Life's Order of Precedence she should follow when executing her life plan. The following is a list of what we've discussed so far. The items with a period separator indicate things that can be happening simultaneously.
1.1. Save money for a car and your education
1.2. Get a great high school education
1.3 Discover what you want to do for a living
2.0 Get scholarships and grants for college
3.0 Go to college for your career choice
4.0 Get a job in your career.
5.0 Get adequate health, dental and life insurance coverage. Health and dental are far more important than life at the moment. Life insurance is really for when you are married or have debts that your family will need to pay when you're gone, but you won't have debt!
6.0 Don't get married until you've completed steps 1-5. If you want to get married, waiting until step 5 is complete should make life easier.
6.1 If you're having children, it's ok to have them now. I recommend not having a child unless you can put $2000 per year into an ESA (Education Savings Account) for them. This is just a suggestion and not the sole determiner for having children! They will appreciate it if you have over $100,000 waiting on them for college, believe me!
7.0 Save 6 months of income as an emergency fund
7.1 Save 15% of your gross income into retirement accounts.
7.2 Save money to pay cash for your house, if you're buying one, otherwise rent inexpensively until you do. Don't get a loan for your house! If you simply can not wait until you have saved enough cash for your house, then make sure you follow these 3 guidelines:
1. Pay no less than 20% down
2. Get a loan for no longer than 15 years.
3. Get a fixed rate mortgage, never an adjustable rate mortgage!
8.0 Enjoy your life!
Notice none of these steps involve debt. I'm teaching my daughter that debt is dumb, cash is king and the paid off mortgage has replaced the BMW as the status symbol of choice just like Dave Ramsey says at the beginning of his radio talk show.
If she were to follow these guidelines, I'm confident her life would be a very happy one, at least as far as finances go. I myself wish I had these steps explained to me when I was her age. I am now working on trying to undo what I have done financially these past 20 years.