Although financial guru Dave Ramsey is, and has been, financially secure for many years, he isn't shy about talking about how at one point, he lost everything. Coming back took a lot of soul-searching, and a lot of work. After forming the Lampo Group in 1992, he began teaching others how to live debt-free via books and a radio talk show. Ramsey's Total Money Makeover program made its first appearance in 2003. Although the program is not for everyone, going through the program's seven baby steps can help interested people beat debt and build wealth.
Establish an Emergency Fund
Since the goal of Ramsey's Total Money Makeover program is to live debt-free, stop using short-term bank credit and credit cards. Instead, build a $1,000 emergency fund to keep unplanned emergencies from adding to your debt load as you're working to pay off debt. If you need ideas for ways to fund the emergency account, Ramsey's suggestions include to get a second job, hold a garage sale, stop going out for dinner, downsize to basic cable services, start carpooling, stop smoking and shop at resale shops.
Pay Off Debt in Descending Order
List all your debts -- except for your mortgage -- in descending order from the smallest to the largest and start paying off the smallest ones first. Forget about how much interest you're paying unless two debts have the same balance but different interest rates. Ramsey refers to this process as the "debt snowball." He says by paying off small debts first, you'll start seeing results sooner and maintain the motivation necessary to continue paying off the rest.
Increase Your Emergency Fund
Once you are debt-free, increase the balance in your emergency fund so it covers three to six months of living expenses. Because this is an emergency fund -- not an investment -- maintain the fund in a savings or money market account to ensure you have easy access to it if a financial emergency arises.
Start Building Wealth
With no short-term debt and a fully funded emergency fund, complete the next step by investing 15 percent of your income into Roth IRAs and pre-tax retirement plans, such as a 401K or traditional IRA. Unlike pre-tax retirement plans, a Roth IRA is an individual retirement account you fund with after-tax dollars, so when you start withdrawing money at retirement, you pay no income taxes.
Focus on Your Children
To start saving money for your children's college education, set up an Education Savings Account, or a 529 plan; insurance plans; zero-coupon bonds; or a pre-paid tuition plan. Ramsey suggests that you set a savings goal based on saving money at 12 percent interest, which is why ESA or 529 plans are the best savings options.
Pay Off Your Mortgage
Dedicate tax returns, miscellaneous funds and as much of your disposable income as possible to eliminating your mortgage. Options for increasing payments include paying more each month, adding one extra payment per year and making bi-weekly payments. When making extra payments, make sure your lender applies the money to the principle.
Share Your Wealth
According to Ramsey, "hoarding money is not the way to wealth." So keep building wealth by investing in real estate or the stock market. At the same time, make life better for other people by building an inheritance for your loved ones and donating money to your favorite charities. Be sure to research the organization before making any donations to ensure that both the organization and its cause are legitimate.
- DaveRamsey.com: About Dave
- DaveRamsey.com: The Seven Baby Steps
- DaveRamsey.com: 9 Ways to Build Your Emergency Fund
- CNN Money: What is a Roth IRA?
- SavingForCollege.com: Coverdell ESA vs. 529 Plan: Which to choose?
- Bankrate: Save Money by Paying Off Mortgage Early
- CharityChoices.com: How to Decide - Thoughts about Choosing Charities to Support