Dear Dave,
I like your plan, and I’m ready to get control of my finances. Should I catch up on past due bills before saving $1,000 for the beginner emergency fund you recommend in Baby Step 1?
Samantha
Dear Samantha,
This is a great question, because it gives me a chance to walk you all the way through the Baby Steps plan.
Make sure your necessities are taken care of first. I’m talking about food, clothing, shelter, transportation, and utilities. Then, get current on anything you owe or make payment arrangements for your past due bills. Once you have these things taken care of, it’s time to take your first Baby Step.
You’ve already mentioned getting $1,000 in the bank for a starter emergency fund. That’s Baby Step 1. After that, begin your debt snowball. That’s Baby Step 2, and here you’ll pay off all your debts from smallest to largest, except for your home. Attack the first balance on your list by paying as much as you can each month, while making minimum payments on your other debts. When you’ve paid off the first one, add what you were paying on it to the payment on your next debt and start attacking it. In Baby Step 3, you’ll save up and increase your emergency fund from $1,000 to a full three to six months of expenses. Trust me, you’ll be surprised how quickly you can save money when you’ve got all that debt out of the way!
Once you reach this point, it’s time to really start looking at the future. In Baby Step 4 you start investing 15 percent of your income for retirement. College funding for any little ones is next in Baby Step 5, and Baby Step 6 is a big one—pay off your house early.
But Baby Step 7 is the real deal. When you’re able to build wealth and give with extreme generosity, you’ve reached the pinnacle of smart money management. Good luck, Samantha!
—Dave
* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 14 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.