I finished listening to the 2nd of 3 CDs in the audio-book Total Money Makeover today. On this CD Dave Ramsey gives an overview of the first couple steps in his “Baby Steps” program which is designed to getting your finances under control. He begins by emphasizing the necessity of creating and living by a written budget.
The problem I have is that he really gives no details on how to set up a budget or how to follow one. He definitely tells you that you must have one, he just forgets to tell you how to do it – or at least in this book. I suppose he has another book that teaches this pre-step.
Once the budget is put into action, Ramsey says we need to start taking the “Baby Steps” required to get our finances in order.
The first (or was the budget the first?) step to getting financially fit is to start building an emergency fund of at least $1,000 as quickly as you can. This means paying minimum payments on credit cards and nothing into your retirement plan until this first $1,000 has been set aside. The primary reason this is so important is that otherwise any emergency that comes while paying off your accumulated debt would force you to break stride and most probably put the emergency expense on a credit card.
The second step is to pay off all debt (except the home) as quickly as possible using a process he calls the “debt snowball.” Rather than paying off high interest rate debts first, Ramsey suggests paying debts with the smallest balance first. You pay the minimums on all the other debts and keep them current. Every other dollar you can possibly scrounge is used to pay off your smallest-balance debt. When that debt is gone, you move to the next debt on your list, so that the amount you are able to pay “snowballs” as debts disappear.
“All the money from old debts and all the money you can find anywhere goes on the smallest debt until it is gone,” advises Ramsey. “Every time the Snowball rolls over, it picks up more snow and gets larger, until by the time you get to the bottom, you have an avalanche.”
Ramsey then began discussing step #3, building your emergency fund up to at least three months of living expenses.
Paying off your credit cards and loans is about getting yourself out of debt now, building your emergency fund is about staying out of debt forever.
“You start the emergency fund with $1,000, but a fully-funded emergency fund will usually range from $5,000 to $25,000. The typical family that can make it on $3,000 per month might have a $10,000 emergency fund as a minimum. What would it feel like to have no payments but the house, and $10,000 in savings for when it rains?
And it will rain… The emergency fund, Ramsey says, is not to be used to pay for things like Christmas (“Christmas is NOT an emergency!”) and clothing. You should have budgeted for these predictable items in advance. (He just doesn’t go into how this might be done.)
Well, I have one more CD to listen to on this audio-book. So far it seems that the information given is from the 10,000 foot level – great view but no detail. I want to have someone answer the nuts and bolt questions. Hopefully this product is not simply an infomercial for his other products.