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Personal Finance 101 – Saving for your Kids’ College

Tsh — Mon, 05 May 2008 01:00:43 +0000

This is the sixth part in my series on Dave Ramsey’s Baby Steps, a proven personal financial plan. My goal is to explain a really solid money management plan in plain ol’ English, for intelligent yet financially “average” home managers.

Photo by arnoldo

O
nce you start funding 15% of your income towards retirement, and once you’ve fully funded your Emergency Fund (and any other big purchases you’re saving for – like a Car Replacement Fund), it’s time to start funding your kids’ future education.

This does not mean you can now afford to save up for the most expensive private school out there, nor does it mean your chid doesn’t need to contribute personally towards his future. But it does mean you are financially free enough to provide at least some towards a college education – at least a start towards entering university life debt-free (and hopefully staying that way).

Here are the nuts and bolts of Baby Step #5 in Dave Ramsey’s plan – put money towards your children’s college fund.

Dave’s Rules for College

These are pretty straightforward:

1. Pay cash. The average college student today graduates with about $15,000 in student loan debt after spending 3-4 years in an apartment. What a heavy weight strapped to a graduate’s shoulders fresh out in the job market! If you’re able to help your child avoid that burden, then do so.

2. And If you have the cash or the scholarship, go. As in, to college.

Student loans are so normal these days; there’s a prevailing myth that you can’t possibly go to a university without them. But they’re just not worth it. Even with the low interest rate most federal student loans have, you just never know what the future holds. I know I’d hate to corner my kids into having to pay for their education after they’ve received it. What if they’re offered some really great opportunity after graduation that pays very little (or not at all), yet is invaluable to their career or overall well-being? What if they want to settle down and become a wife and mom right away? These things would be so much harder to do with student loan debt.

Dave says this:

“If you’ve planned your savings goals and don’t have much room in the budget for college, don’t panic. Knowledge is just part of the formula to success. With what you are able to save, those precious kids can probably get a good degree if they will suffer through lifestyle adjustments and get a job while in school. Work is good for them.”

I wholeheartedly agree. I worked part-time all through college, and while I hated it at the time, I can look back and see the enormous life and business lessons I learned from those long shifts waiting tables. These life lessons are just as much a gift as the money you contribute to your kiddo’s education. Consider giving them that valuable experience.

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Where to Save the Money

Dave recommends putting college tuition funds in either an Educational Savings Account (ESA) or a 529, which are state plans and therefore different depending on your state of residence. College tuition goes up faster than regular inflation – 7 percent for college versus 4 percent for most everything else. This means that in order to keep up with tuition rates, you’ll need to earn at least 7 percent per year to keep up with the tuition increases.

With an ESA funded in a growth-stock mutual fund, your money will grow tax-free when it’s used for higher education. You can currently invest $2,000 per year, per child in an ESA (if you make under $200K a year) – and if that ESA averages 12 percent, you’ll have $126,000 in tax-free education funds by the time they’re ready for college.

If you make more than $200,000, or for some reason you want to contribute more than $2,000 a year (possibly the case if your kids are older than 8), then 529s are for you. There are lots of different 529 types out there, but Dave only recommends a “flexible” plan. He says you could pick from virtually any mutual fund in the American Funds Group or Vanguard or Fidelity and probably be okay.

Application Time

How this applies to you depends on your circumstances.

• If you don’t have kids, it doesn’t apply to you at all because you can’t open ESAs or 529s for people who don’t exist. But seeing as this is Simple Mom, I’m guessing most of my readers are parents.

• If you you’re not debt-free (Baby Step #2), you don’t have three to six month’s of expenses in savings (Baby Step #3), and you haven’t started contributing towards your retirement (Baby Step #4), then you’re not ready to start saving for your kids’ college. Under Dave Ramsey’s plan, you’d hold off contributing to your kids’ college fund until you completed the previous Baby Steps.

This makes sense – why would you save for your kids’ education and not your retirement? In doing so, you’re strapping your kids down with having to take care of their parents down the road. I’d rather not do that and have them work for part of their college funding.

• If you are at the stage of saving for your kids’ college, then Dave recommends sticking to mutual funds through an ESA or 529. And do what you can afford without feeling guilty if you can’t fully fund their education. That’s never been part of the definition of a good parent.

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Our Personal Plan

As of now, our plan when we’re at Baby Step #5 is to provide a “matching promise” for our kids – we’ll match whatever they’re able to save, up to what an ESA allows at the time. And if they don’t have enough saved by the time they’re ready for college, we will highly encourage them to not take out student loans. They’re just not worth it.

I’ll end with another quote from Dave:

“Regardless of how you save for college, do it. Saving for college ensures that a legacy of debt is not passed down your family tree. Sadly, most people graduating from college right now are deeply in debt before they start. If you start early or save aggressively, your child will not be one of them”

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Free Giveaway: The Total Money Makeover!

Tsh — Mon, 21 Apr 2008 08:43:53 +0000

This giveaway is now closed. Thanks for entering!

To those of you hopping over from Bloggy Giveaways – welcome to Simple Mom!

For this season’s Bloggy Giveaways, I’m giving away ONE reader one of my favorite books, The Total Money Makeover by Dave Ramsey. Since this blog is about simplifying the job of home management, I can’t help but recommend Dave’s financial philosophy, plan, and products. He can’t get much simpler when it comes to personal finance! I highly encourage you to follow his ideas for your family’s financial game plan.

Hence – I’m giving away the book.

The “fine print”:

• To enter, leave a comment at this post. In your comment, tell me your all-time favorite dessert. (And you’re crazy if it doesn’t involve chocolate.)

• Be sure your comment is linked to a valid e-mail address.

• To be entered twice, subscribe to my feed, then leave a second post telling me you’re a new subscriber.

• You have until Friday, April 25 at midnight Pacific Standard Time (U.S.) to enter.

• All entries worldwide are welcome! I’m willing to ship to my fellow non-U.S. residents.

• I’ll do a random drawing and announce the winner here on Simple Mom on Saturday morning, April 26.

If you’re new to Simple Mom, I encourage you to take a look around, contact me if you have any questions or thoughts, and subscribe via RSS or e-mail!

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Personal Finance 101 – Saving For Retirement

Tsh — Fri, 21 Mar 2008 21:27:03 +0000

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It has taken me awhile to get to Baby Step #4 in my Dave Ramsey series. This is mostly because I don’t understand a lot of it. Don’t get me wrong, I understand the step:

#4 – Invest 15% of your income into retirement savings.

Understanding it – easy-peasy, Japaneezy. Knowing the best way to do it – not so much. Not by a long shot. I’m still researching it for our family, and I’m simply not at a place where I’m confident enough to write about the various methods of accomplishing this step.

I understand the importance of doing it, the why behind the what. I want to retire with my hubby where we’re not a burden to our kids. We have no desire to throw in the metaphorical towel of life and kick back in Miami, we want to bless those around us doing whatever we’re called to do, no matter our age or health. This will take money. Not a lot, hopefully, but enough.

Here’s the nuts and bolts of Dave’s advice:

What we teach is to invest 15 percent of your pre-tax income for retirement once you get to Baby Step Four. You should start with contributions to the 401(k), putting in just enough to get the company match, then max out the Roth IRA. If you get no company match, then start retirement investing with the Roth. The reason is that a Roth IRA grows tax-free and is a better option than the 401(k), which grows tax-deferred. It’s a three step process; first contribute what your 401(k) matches, then the Roth, then go back to the 401(k) and contribute until you hit 15 percent. Don’t get too enamored with the full-service investing stuff … just do basic mutual funds.

Dave is into mutual funds more than any other type of investment (except possibly real estate, but only when bought with 100% cash). He recommends only mutual funds with at least a 10-year track record of doing well, averaging around 12% (which some people out in the blogosphere balk at, saying 8-9% is more realistic). With a somewhat predictable inflation rate of about 4%, you’re ideally looking for an 8% return on an investment (12% – 4% = 8%).

Bankrate has a good calculator to help you determine your basic retirement needs. Here’s a snapshot from their site:

In this example, if you’re 30 and would like to retire at 65 with an annual income of what would be $30,000 today, with a conservative 8% rate, you’ll need to save a total of almost 2 million dollars. That would be around $132,000 invested.

Now if you’re following Dave Ramsey’s Baby Steps, you wouldn’t be on this step until you’re debt-free and have 3-6 months of living expenses in savings. So even if your company does a 401(k) match, he recommends stopping all retirement contributions until you’ve checked these steps off. That’s scary to most people, which he says is a good thing, lighting a fire under you to get the ball rolling.

We personally are not yet on Baby Step 4, so technically, we shouldn’t be contributing to retirement. But we are (shhh… don’t tell Dave). But it’s not much – 8% right now. Of course, we’ll definitely bump it up to 15% when we’re officially on this step!

Quite honestly, I don’t know much more about investing. But there are lots of good reading and resources out there, so I’ll point you in their general direction:

Here are the retirement-tagged posts over at No Credit Needed – they’ve been debt-free for a couple years, and so far, I like most of what is said over there.

Here’s a Practical Investing Guide for Beginners (that’s me!) at Being Frugal, guest-posted by Pinyo at Moolanomy.

And speaking of which, here are Moolanomy’s retirement-tagged posts. All worth reading.

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Personal Finance 101 – Sinking Funds

Tsh — Fri, 07 Mar 2008 19:07:26 +0000

As you know, our money strategy is to follow Dave Ramsey’s baby steps, and in my recent post explaining Baby Step 3, I mentioned “sinking funds.” It’s a simple financial strategy, and it’s not new, but it has enormously helped our family’s finances. And I encourage you to start using sinking funds even while paying off debt via the debt snowball.

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Simply put, sinking funds are a reserve of money set aside for some purpose. It’s a commonly used business and government practice, and it should be part of a healthy personal budget as well. If you think of your family as a company that you’ve been assigned to manage, it would only make sense to make sure you have funds readily available for the many things that surface on any given year.

Think of all those non-monthly payments or purchases you face on a regular basis. For some people, auto insurance shows up once or twice a year. What about new school clothes for your kiddos? These aren’t things you spend money on each month, but you still need to pay for them when they show up.

Nothing can screw up a debt-free plan quite like these irregular expenses. In fact, I’ll bet that’s how many people find themselves in debt.

“What? Christmas is only three weeks away? There’s no money in the budget – I guess we’ll have to whip out the Master Card.”

“Why oh why did our insurance bill arrive just when we had to pay for Sally’s recital costume? Looks like it’s Visa to the rescue again.”

If you know these irregular expenses are headed your way, it would only make sense to set aside a small portion of each budget towards them. This, in a nutshell, is sinking funds.

Christmas is an easy example. Let’s say you calculate a need of $500 for your Christmas holiday (gifts, decorations, cards, extra food – the whole shebang). It’s now March 7, about nine months away until the next season. If you didn’t start saving for Christmas 08 in January 08, that means you have nine months to complete your Christmas 08 fund – and 500 divided by 9 is $55.56. That’s how much you should list in “Christmas” as part of your regular, monthly budget.

(A side note: some people prefer to budget according to their paycheck, not just by the month. If this is you, and if you get paid biweekly, then you’ll calculate how many paychecks you anticipate from now until Christmas, and divide into that number, not the months.)

Sinking funds is an easy enough concept. But like many things in life, it’s one thing to use this method on paper; it’s quite another to put your money where your… idea… is. Sinking funds can get really fuzzy and confusing when they’re all lumped together in one savings account. Even when you keep detailed monthly records of what dollar is assigned to what, all this can rapidly become overwhelming. At least it did for me.

That’s why sinking funds didn’t work for us… until recently. Thanks to ING, we can open as many savings accounts as we want, and it doesn’t cost us a dime. We can even customize each account with a different name, and we can seamlessly automate transfers from our checking account to our various savings accounts.

We currently have five savings accounts, respectively named “Emergency Fund,” “Giving,” “Holidays & Gifts,” “Vacation,” and “Work Expenses.” Each month when our paycheck arrives, we have ING automatically transfer a set amount from our checking account into each of these accounts. Most of the money stays parked in these accounts for months at a time, until expenses arise that fit these categories.

When we need funds for these categories, we simply transfer the needed amount back into our checking account and use the amount for that expense. Very easy.

I should mention that during debt elimination, the type of sinking funds you have should be limited to the necessities. For the most part, you don’t need to focus on a family vacation or a new couch when your overarching financial goal is debt freedom. So limit sinking funds for things like quarterly and annual bills and necessities. When you’re debt-free, then you can start saving for the extra stuff.

And like I said, I think sinking funds are crucial especially during a season of debt reduction. The last thing you want to do is accrue more debt. With a Baby Emergency Fund of $1,000 and some basic sinking funds in place, it becomes so much easier to know exactly how much you can pile on your debt snowball.

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Personal Finance 101 – The Fully-Funded Emergency Fund

Tsh — Thu, 06 Mar 2008 11:55:43 +0000

This is the third part in my series on Dave Ramsey’s Baby Steps, a proven personal financial plan. My goal is to explain a really solid money management plan in plain ol’ English, for intelligent yet financially “average” home managers.

The third step with Dave Ramsey’s Total Money Makeover is to fully fund your emergency fund. This is probably the easiest step to understand, though it’s not the easiest to actually DO.

If you’re on Baby Step #3, this means you’re debt-free. And when you’re debt-free, it’s a lot easier to start spending money on the little things that really add up, be it worthwhile things like a family vacation. You write your monthly budget, and you don’t owe money to anyone, which means you see a lot more dollars on the income side. But don’t let it slip through your fingers. Pay yourself first. This will be your cushion between you and Murphy, your guarantee that you have absolutely zero excuse to ever take out debt again.

If you’ve been working the Baby Steps, and you paid off your debt using the debt snowball method, that means you can simply start putting the same amount of cash that you were giving to someone else and put it in your savings account instead. If you paid your last Visa payment in February to the tune of $500, just start redirecting that same $500 into your savings account come March. You’re already used to the same lifestyle on the same budget – just keep it up a little while longer and get that emergency fund nice and loaded.

Q: How much should I have in my Emergency Fund?

A: Take note – a fully-funded Emergency Fund should be 3-6 months of your living expenses, not your income. And it should probably be the expenses you’d deem important during a true emergency, not your everyday expenses when life is normal. Ask yourself what you’d pay when you were suddenly facing a job loss. You’re probably looking at your mortgage or rent, utilities, groceries, gas, internet service, and phone service (or just your cell phone). If you’re in the midst of a true emergency, you probably would cut out (or at least pare down) eating out, entertainment, major gift giving, and big purchases that aren’t life and death. That new dress can most likely wait until the emergency has passed.

With this info, let’s pretend using these low-end numbers:
mortgage – $800
utilities – $200
groceries – $300
gas – $150
internet service – $50
cell phone – $75
TOTAL = $1,575

$1,575 x 3 months = $4,725
$1,575 x 6 months = $9,450

With these numbers, you’re looking at somewhere between $5 to $10K. If these were my numbers, I’d play it safe and aim for an even $10,000. Remember that every household is different, so you know what’s important to you. Play with your numbers.

Q: What constitutes an emergency?
A: A job loss, major medical issues, a blown transmission, or some other unexpected event is an emergency. Christmas, prom dresses, and a weekend on the coast are not. It’s perfectly fine to save up for those things, but not in your Emergency Fund. Save for those separately, after your Emergency Fund is finished (this is called “sinking funds,” which I will write about soon).

Q: Where should I park my Emergency Fund?
A: It needs to be completely liquid, which means you need to have instant access to it. Dave says a basic savings account is fine. This is what we personally have – and we also figured we might as well get a decent interest rate while it’s sitting there. I did some research and learned about online banks – banks that have no traditional building, they only exist in cyberspace. If that sounds kinda scary, you’re not alone, but millions of people use internet banks, and since we started, we’ve never looked back.

Because they don’t have overhead fees, they can offer much higher interest rates than your standard brick-and-mortar institution. As an example, our “regular” credit union currently offers a rate of 0.69% on their savings accounts. Our internet bank currently offers 3.40% on their savings accounts – not enough to build wealth, but hey, might as well make money while we’re banking.

So where do we bank? We use ING Direct, which is renowned for its customer service. I’ve been amazed how easy it is to manage our accounts with them, so much so that it’s now our primary banking source. I highly recommend them. There are many reputable online banks – here’s a great resource for starting your research.

Q: How long will this take me?
A: It obviously depends on your interest rate and how much you can deposit monthly, but if you were able to save $1,000 in an ING savings account that earns 3.40%, you’ll reach $10,000 in nine months. Sounds like a chunk of time. It’s worth it, though. Just think – your emergency fund will be set! You can then start saving for some fun things, and except for those emergencies when you have to truly dip into that fund, you no longer have to set aside funds for a “rainy day.” You’ve already done it.

Here’s ING’s nifty little calculator to plug in your own numbers.

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Personal Finance 101 – The Debt Snowball

Tsh — Tue, 26 Feb 2008 13:31:43 +0000

Baby Step #2 in Dave Ramsey’s Total Money Makeover is really the crux of the plan. It’s the one that stands out as – well, weird. It’s different than most financial plans out there. It goes completely against the grain of what today’s culture feeds us (my favorite line is “there’s good debt, and there’s bad debt”). It’s this – be debt-free.

He’s not kidding. He’s not talking about just credit card debt, or only consumer debt, or just high-interest debt. He’s talking about ALL DEBT. Become totally debt-free. This even includes your house, although that’s not until Baby Step #6. He says that our goal is to not owe a single dime to anyone.

When I first heard this, I found it absolutely overwhelming, and to be honest, it’s what turned me off to him at first. I couldn’t imagine even hoping for a paid-for house, much less being able to do it. We hardly have any debt, but my husband and I never made wealth building a goal in our life – we honestly never thought of ourselves as “average Americans.” We wouldn’t be surprised if our typical income is always below average, seeing as we could be in full-time ministry for most of our lives. And that’s okay with us. We’re fine with it.

So that’s a big reason I brushed off Dave Ramsey’s plan at first – it didn’t seem like it was for us. It was for people who cared about making a lot of money.

I’ll spare you all the details of God changing my heart on the matter, but He did. In short, He reminded me that He does care about how we steward the money He gives us, and that we are no different than the people who work in “regular jobs.” We are to do well with what we have, no matter how much it is. I could go on and on about my change of heart, but in a nutshell – I now see us as people who should and could do well financially. It’s important to our family future.

Moving on – back to Baby Step #2. He recommends paying off all your debts using the Snowball Method – paying the minimums on all debts except one, which you pile on any extra funds you have. When that one is paid off, you take the money you piled on the first debt and put it towards the second. Then you do that with the third, and so on and so on, until all your debt is gone. All except the house, that is. You pay that off a little later. There’s a lot out on the internet about the Snowball Method, so I won’t reinvent the wheel. A few examples are here, here, and here.

One thing that differs with Ramsey’s Snowball Method than other similar methods out there is that he recommends paying off the debt with the lowest balance first, not necessarily the one with the highest interest rate. Even though it mathematically makes sense to pay off your high-interest debt first, he says there’s something psychologically and motivationally charging when you pay off the small balance debts first. You feel like you’re crossing things off your list. You’re shooting down the little guys so you can get to the big kahuna faster. When you pay off several debts within a few months, you feel like you can do this. When you start with a big debt that could take years, you could easily lose steam.

There’s also a relatively new trend out in the blogosphere called snowflaking – gathering all the little funds you find here and there throughout the month and putting it towards the current debt you’re focusing on. The money really adds up, the way a snowball is comprised of lots of tiny snowflakes. There are stories out there of people finding $400 in change in the couch cushions, so to speak. Once you start looking for any and every bit of extra money you have, it pops up out of nowhere. It really does.

So, to reiterate where we are in a Plain Jane way…

Baby Step #1 – save $1,000 fast, which becomes your Baby Emergency Fund. It will only stay this small while you’re on Step 2.

Baby Step #2 – eliminate all debt except the house using the Snowball Method.

I’ll admit right up front that I am a total Plain Jane. I am learning about personal finance at the moment, and am in no position yet to offer advice. But as I learn more and more, and build up the ability to draw conclusions on my own, I can say that so far, there really is very little I disagree with Dave Ramsey. You can pretty much take his advice and go with it. I highly recommend catching his radio show – I listen almost daily, and I live overseas. The first hour of his show is a podcast on iTunes, which is how I listen.

That said, there are also lots of good personal finance blogs out there. I’ve got a number of them linked in my sidebar, and the Money Blog Network can lead you to more than enough reading material out there.

But on top of it all, I highly recommend buying Dave Ramsey’s The Total Money Makeover and devouring it. It’s very easy reading. I read it in a weekend. And I have two kids under 3, so if I can devote the brain cells to the book, anybody can. (And if you buy it via the link above – hint, hint – the proceeds go to maintaining this blog.)

I’ll move on to Baby Step #3, fully fund the Emergency Fund from Step 1, sometime soon. For now, I’ll leave you with a quote from Ramsey’s book about Baby Step #2:

“If you think this Debt Snowball stuff is cute and you might sort of give it a try, it won’t work. Total, sold-out, focused intensity is required to win. Aiming at the goal and nothing else is the only way to win.”

“Many people find a way to shorten the time [to finish the Debt Snowball] with sheer intensity, and God tends to pour blessings on people going in a direction He wants them to go. It is as if you are walking or running at a fast pace, and a moving sidewalk suddenly appears below you to carry you faster than you own effort would. The Debt Snowball is very possibly the most important step in your Total Money Makeover for two reasons. One, you free up your most powerful wealth-building tool, your income, during this step. Two, you take on the entire American culture by declaring war on debt. By paying off your debt, you make a statement about your stance on the issue of debt.”

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Personal Finance 101 – The $1k Baby Emergency Fund

Tsh — Tue, 19 Feb 2008 21:43:15 +0000

This is the second part in my series on Dave Ramsey’s Baby Steps, a proven personal financial plan. My goal is to explain a really solid money management plan in plain ol’ English, for intelligent yet financially “average” home managers.

As I mentioned a few days ago, I’m going to tackle the topic of about Dave Ramsey’s Baby Steps over the next few weeks. The concept is still a bit new to me, so a big reason I’m writing is for my personal benefit – to clarify my thoughts and convictions, to succinctly hone our plan, and to reveal any fallacies.

That said, the Baby Steps were created for the regular Jane – the person without a BS in business or finance, the person who does their taxes online (without a CPA) and wants, more than anything, to just gain control over their personal finances. That’s me.

The essential thing to understand about this financial plan is that its purpose is for you to live debt-free. That means getting out of debt and staying out of debt, for the rest of your life. No longer using debt for anything. Ever. Not school, not braces, not weddings. The only debt Ramsey’s okay with is a fixed-rate 15-year mortgage with at least a 20% down payment (although he even advocates buying real estate with 100% cash down, if you’re able). This means cutting up your credit cards. You don’t need them anymore – even “for emergencies” – if you’re on this plan. Baby Step 1 is your new plan for emergencies. Toss the cards. I’ll discuss the evils of debt in more detail on Baby Step 2. If you can’t quite give up credit cards yet, you’re not ready to move on. Stop there.

Moving right along. Baby Step Numero Uno – quickly save $1,000. Quite a few people probably already have this and then some (I’ll explain in Baby Step 2 what to do with the “then some”), and for others, this might be the most they’ll have ever saved up in their life. But the important key here is to save it up quickly. This step is not supposed to take long because you’ll lose momentum. Ramsey recommends getting a little side job, selling something on ebay or craigslist, or seriously cutting back on a spending category of yours for a short while. Step 1 should take one to two months max. Start getting ready for that garage sale.

$1,000 should feel like a rather small emergency fund – that’s because it is. Ramsey says having a smallish safety net (although it is still a safety net) helps with the urgency needed to get out of debt. $1K should be enough to cover those basic emergencies that might come up – plumbing issues at home, air conditioning servicing, gasket and zip-zorp replacement on your car (I obviously know vehicles). But the sooner you get through Baby Step #2 – getting out of debt – the sooner you get to the third step, which is fully funding your emergency fund. That will get you through more serious, potentially longer-term emergencies (such as unemployment). You want to get there as soon as you can, so hurry up and get that baby emergency fund so you can plow your way out of debt and then really save.

A caveat – and this is important – this cash is for emergencies. A new dress for the company party, a weekend away, Christmas – none of those are emergencies (it’s on December 25 every year). Unless something serious comes up, it’s almost best to forget the money is even there. Leave it alone. It’s your safety net (since you’re not using credit cards, or any other form of debt, ever again).

At the same time, keep it liquid. You’re not investing here, so the goal is not the highest possible interest rate (in other words, no mutual funds or something with penalties for early withdrawl). A solid savings account with easy access is ideal. Many Ramsey-ites keep their emergency funds at ING Direct – their savings accounts currently yield 3.40%, and you can easily connect it to an Electric Orange checking account (which, coincidentally currently yields 2.25%). This is where we have our emergency fund.

So that’s Baby Step 1 in a nutshell. It’s the easiest one to understand, so it’s pretty basic. But it’s THE foundation to the rest of a well-tested debt-free financial plan that works, so you gotta have it. Put a thousand bucks in the bank as soon as you can, and don’t touch it once it’s there.

Missed other parts of my series?

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Personal Finance 101 – Dave Ramsey’s Baby Steps

Tsh — Sat, 16 Feb 2008 23:34:53 +0000

This is the first part in my series on Dave Ramsey’s Baby Steps, a proven personal financial plan. My goal is to explain a really solid money management plan in plain ol’ English, for intelligent yet financially “average” home managers.

I’m a firm believer in being debt-free. Not only do I think it’s honoring to God and good for the soul, it’s also a lot more fun. When you don’t owe anybody, you can use money as a tool that benefits your family (and not the bank), and you’re free to live in ways unimaginable when you’re in bondage to debt. You really can live simply and freely. Well, at the very least, it’s a lot easier than for the person in debt up to their eyeballs.

To be honest, I’ve been a bit lost in the fog for most of my adult life when it comes to personal finance. I never found tools that worked for me, I never made it a huge priority to be proactively involved in our funds, and quite frankly, I found the topic boring. I mean, I wanted to have enough money, but I didn’t want to learn how to deal with it. I wanted it dealt for me. Because crunching numbers and balancing accounts is BO-RING.

This past September, I discovered Dave Ramsey and his method of using Baby Steps to control personal finances. Now, we’re still still exploring and tweaking our personal philosophy, but so far, there’s not much the guy teaches that I disagree with. And best of all, he explains money in a way I – a regular Jane – can understand. I’m hooked, and what’s more, I now really like the topic of personal finance. I’ve learned a lot more outside the realm of just Dave Ramsey, and I’m learning more every day.

You can find tons of stuff on the internet about Dave’s method, and there are countless blogs that hype his teachings. So my Cliff Notes version of his thoughts won’t be new. But my plan is to walk through his plan on this blog over the course of a few weeks, for my clarity of mind, if anything. And maybe it will encourage someone out there.

I think I’ll summarize each of his “Baby Steps,”, walking through their basic benefit and end result, and possibly divulge a little of our family’s plan for each.

As an introduction, his Baby Steps are as follows:

Quickly save $1,000 in a Baby Emergency Fund.
Become debt-free using the “snowball method.”
Fully fund the Emergency Fund from step 1 with 3-6 months of your living expenses.
Contribute 15% of your income to retirement.
Fund your kiddos’ college education through an ESA or a 529.
Pay off your mortgage.
Invest money and give a bunch of it away – live like no one else.

As Dave often says, “Live like no one else, so that later you can live like no one else.” We hope we can. His financial plan lines right up with the idea of living simply. And if your goal is to live simply, Dave Ramsey could be your man. I highly recommend looking into his financial advice. You can download the first hour of his daily radio show for free on iTunes. I usually don’t miss it.

Missed other parts of my series?

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CURRENT SPONSORS:

Plan to Eat - meal planning made simple.
The Justice Conference - Justice hangs by a thread.
Lil' Soak - Sewing hope with handmade goods.
Treed - A simple, flexible, effective project planning tool.

Personal Finance 101 – Dave Ramsey’s Baby Steps is a post from Simple Mom

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