Dave Ramsey has been working like a maniac to help people out with his plan to teach everyone how to live debt-free since 1992! It is an ambitious mission, but it is one he takes seriously.
Our Catalyst for Change series could not be complete if we did not highlight the accomplishments of the man who helped us to pay off $50,000 worth of debt in only six months. Yep, you read that right. It was a freaking magical experience!
We were able to do this because Dave Ramsey helped us get focused and start acting intentional with our money. His use of a no BS and no fluff advice really forced us to wake up and get our act together.
Learn about how we manifested the money:
Manifesting Money: The Law of Attraction [What Happens When You Believe]
Who is Dave Ramsey?
Dave Ramsey is a personal finance guru who utilizes tough love to get his message out there. He is a man on fire!
In the early 90s, he hit the airwaves and started educating listeners about the dangers of debt and the importance of a personal budget via FM radio.
He comes from a time when PC (politically correct) did not exist.
The format of The Dave Ramsey Show is simple: Listeners call in to his show, and he provides grumpy old man with strong biblical principle advice. Dave Ramsey’s type of self-help shocks the airwaves and keeps people tuned in to find out what’s next.
Before we started paying off our debt, I would listen to Dave’s show whenever I just happened upon it. I would listen with a bit of disgust because I thought I knew better.
Hasn’t this fool heard of “good debt” was always my thought!
I would see grumpy coworkers working the Dave Ramsey plan and think how miserable they were. Paperbag lunches and carpooling seemed like a horrible way to live.
The thing is, the plan never lasted long. Before I knew it, my ill-tempered coworker was happy as hell again as they swiped their credit card to buy lunch for both of us. Yep, they gave up!
So for me, I always saw the Dave Ramsey plan as a diet – – short-term!
Then one day, Rob and I woke up and realized we worked more than forty hours a week just to make payments! With our lack of involvement in our finances, we designed a paycheck to paycheck life.
So you may be asking yourself: What made your story different? How were we able to pay off our debt so quickly?
Read on for more info…
What is the Dave Ramsey Plan?
After the build-up of the magical Dave Ramsey Plan which showed us how to pay off $50,000 in only six months, I am sure that you are thinking that it must be really complicated and full of a bunch of nerdy math.
Nope! It is super simple, and math is just a small part of the plan!
I am positive that personal finance is 80 percent behavior and only 20 percent head knowledge. Our concentration on behavior—realizing that most folks have a good idea of what to do with money but not how to do it—has led us to a different view of personal finance. Most financial people make the mistake of trying to show you the numbers, thinking that you just don’t get the math. I am sure that the problem with my money is the guy in my mirror. If he will behave, he can make the money thing work. The math of wealth building is not rocket science; it is simple—but you have to DO IT! – Dave Ramsey, Total Money Makeover
Is it really that simple? You just have to DO IT?
Yes, yes, yes! It is really that simple!
The plan takes a holistic approach to money where you focus on:
- Saving money
- Cutting costs
- Increasing your income
- Tracking your money
- Creating a monthly budget
- Saving for retirement
- Building a relationship with your partner (when applicable)
How were we so successful with the plan?
We were at a point where we were not going to compromise. We had celebrated our 25th anniversary, and our youngest moved out. We were in a full-blown identity crisis and knew our debt was holding us back.
We wanted to start living our dreams and checking experiences off our bucket list, but we did not have the money to fund those dreams.
We mutually decided we wanted a life-changing experience and not just a financial diet and so we started running through our numbers. We opened joint bank accounts and started prioritizing by identifying the things that really bring us joy. We then decided those expenses would never be cut.
Living a frugal DIY life did not sound appealing, and neither one of us wanted to turn into the unhappy coworker; brownbag lunches and carpooling were out of the question.
So how were we so successful? We were so successful because we were ready to design the life of our dreams!
The Dave Ramsey Formula for financial peace
When Dave was 26-years-old, he had amassed a net worth of a million dollars, a monthly income of $20,000, and about $4 million in real estate. The problem? He had a ton of short-term debt.
The short-term debt caught up to him, and over a two and a half years period, he lost everything and had to file bankruptcy. With a new baby at home, he was devastated. He needed to figure his stuff out big-time!
He realized his story was not unique. He started paying attention to his finances and hanging out with people who knew how to make money. Before he knew it, he was sharing his knowledge with others.
He ended up writing the book Financial Peace and started selling it out of his car. The book, Financial Peace, set the roadmap for his massively successful debt pay off program called The Baby Steps.
In my first book, Financial Peace, there is a chapter entitled “Baby Steps,” the premise of which is that we can do anything financially if we do it one little step at a time. – Dave Ramsey, Total Money Makeover
What are the 7 Baby Steps?
From small beginnings to the Ramsey empire we know of today, net worth: $55 million, Dave has changed lives one step at a time. Dave is a real success story of an individual who took their lemons and made lemonade.
This success mainly in part because of the simplicity of his 7 Baby Steps:
- Save $1,000 for a Starter Emergency Fund
- Pay off all of your debt except for your mortgage using the Snowball method
- Build an Emergency Fund that could pay for 3-6 months worth of expenses
- Invest 15% of your income into your retirement
- Save for your kid’s college
- Pay off your mortgage early
- Build wealth and give
The 7 Baby Steps are not only simplistic in nature, but it is also a process that teaches you how to manage money and change your financial future. You just have to follow the plan!
The way you eat an elephant is one bite at a time. Find something to do and do that with vigor until it is complete; then and only then do you move to the next step. If you try to do everything at once, you will fail. – Dave Ramsey, Total Money Makeover
Pre-Babystep: Setting Up a Stinking Budget
Before you get stated with the baby steps, you need to set up a budget. I am sure you are thinking that things got ugly real fast! Setting up a budget – YUCK!
But hold on for a moment before you freak out too much.
Yes, I know, budgets have a really bad wrap, but the thing is, a budget is simply a plan to get you from point A to point B, from point B to point C, and so on. It is your accountability partner that will ensure you are meeting the goals you set for yourself.
You wouldn’t build a house without a blueprint, so why do you spend your lifetime income of over $2 million without a blueprint? – Dave Ramsey, Total Money Makeover
So before you start the Dave Ramsey’s 7 Baby Steps you must:
- Make a pledge to yourself that you are done borrowing money
- Create a household budget
Need help setting up a budget? Let us help!
Baby Step 1: Build a $1,000 Emergency Fund
If you are ready to get your finances in order, pay off debt, and build wealth, then this is the first step for success. You need to get energized and act with intention.
You will need to either…
- Find $1,000 FAST: You want to do this step super fast! This means work some overtime, have a yard sale or even pick up a side hustle.
- If you already have an emergency fund greater than $1,000: You are going to set aside $1,000 from your savings and use the remainder to make a lump-sum payment to your debt.
Before you get to wrapped up in the amount, you need to understand that this step is designed to make you uncomfortable; it is intended to ignite a fire under your butt and get you committed to changing your life forever.
Use all nonretirement savings and investments to pay down your debt. Clean everything out and become debt-free except for the house. Use all savings and investments that don’t have a penalty for withdrawal like retirement plans. – Dave Ramsey, Total Money Makeover
For us, we had some small investments and a savings account which allowed us to make a large one-time payment of $16,200 toward our debt. IT WAS TERRIFYING!! We were all in and hellbent on paying our debt off as fast as we could.
The power of focus is what causes our Baby Steps to work. When you try to do everything at once, progress can be very slow. When you put 3 percent in your 401k, $50 extra on the house payment, and $5 extra on the credit card, you dilute your efforts. Because you attack several areas at once, you don’t finish anything you start for a long time. – Dave Ramsey, Total Money Makeover
Baby Step 2: Pay off your Debt Really Freaking Fast
So now the real magic begins! Now is the time to settle your past and pay off everyone you own except for your house loan.
Dave Ramsey teaches the Debt Snowball Process. All you have to do is…
- List out your debts, except your home, in order of the smallest payoff amount to the largest payoff
- Organize your list with the highest interest rate first
That will be the order in which you will tackle your debt. Smallest balance first and work your way up. To do this, you will pay extra on the smallest debt and the minimums on all other debts.
Each time you pay off a debt, you will take the scheduled payment from the debt and add the payment to the payment on the next debt on your check list.
Rinse and repeat!
The only time you will change the order of paying off your debt is if you are in trouble: IRS, foreclosure, etc.
The Debt Snowball
The reason the plan teaches you to pay off your debt from the smallest to largest balance, regardless of the interest rate, is so you can get some wins in your corner. These wins will help you build momentum and pay off your debt even quicker.
With your budget in place, you take any “extra” money after all of the minimums are paid every month to the smallest debt on your list.
To find extra money you will want to…
- Review your paycheck withholdings: For us, we were carrying debt, yet contributing to our 401k every payday. Dave recommends suspending all of your elective retirement contributions while you are paying off your debt. When we were paying off our debt, we reduced our 401k contributions to our employer match. Although Dave would not agree, we decided this was an area we would modify to meet our goals. Now that our debt is paid in full, we have doubled our contributions!
Other things you may want to review from your withholdings are any insurance, donations, or an excessive amount of income taxes. Be sure to speak with your tax consultant because you do not want to give Uncle Sam an interest-free loan and wait for a big tax refund.
- Work a side hustle: If you are short on cash, then you have no other choice then to increase your income. A side hustle is often an easy way to keep your day job and increase your income.
- Ask for a raise: What will it hurt? If you don’t ask, you may be missing out.
When we were going through our debt pay off journey, we set a target date of November 2018. Our momentum and excitement helped us to exceed this goal. We were able to pay off our debt by May 2018.
Baby Step 3: Build up a 3-6 Month Emergency FUnd
Now that you have your debt paid off, the time has come to take your Starter Emergency Fund from $1,000 to three to six months worth of expenses!
This is the point of the program where you really start focusing on long-term financial health because now is the time you start making sure you never have to borrow money for “stuff” again! The Emergency Fund is a great way to make sure when unexpected happens, you are prepared.
So how much money does Dave recommend? He recommends three to six months of expenses. This includes your necessities such as food, water, shelter, and transportation. You decide what you need to survive and how many months of reserves you want to have on hand.
The amount of money you keep in your Emergency Fund is a personal decision which you need to be comfortable with, and is one you can always increase the balance in the future. The recommended range is just a recommended range which you can visit and revisit as your needs change.
Baby Step 3 (b): Save up a down payment for a house!
If you do not own a home, now is the time to start saving up for a down payment. Dave would love to see you purchase your home with cash, but he also recognizes the magnitude of the purchase.
Start saving up now so when you are ready to buy, you will be able to purchase a home with no more than a 15-year note.
Baby Step 4: Invest 15 Percent of Your Income
A Total Money Makeover retirement plan means investing with the goal of security. – Dave Ramsey, Total Money Makeover
Once you have completed Baby Steps 1-3, the time has come to dump 15 percent of your income into your retirement. On December 1, 2016, Money Magazine published a study that showed “Some 41% of retirees have an annual income less than $25,000, and of those, only 21% receive income from a pension or retirement plan.”
The numbers are startling!
So in this step, you already have all of your debt paid off except for your home, and you have nice nest egg stashed in your Emergency Fund. Now is the time to take the money you were blowing every month on debt payments and squirrel it away for your future.
In this step you will invest 15 percent of your income in a retirement account of your choice; With a 15 percent investment rate, you will still have enough money to save up for your kids’ college and pay off your home early. This 15 percent is your contribution – – – not your employer’s contribution or the payroll deduction for social security!
I don’t count on an inept government for my dignity at retirement, and you shouldn’t either. – Dave Ramsey, Total Money Makeover
Now is the time where the real wealth-building begins!
Baby Step 5: Save for Your Kids College
So when we started the Dave Ramsey Plan, our kids were already on their way. Our son earned a full-ride scholarship in high school, and our daughter was on year five of serving her country.
For us, college savings is not part of our plan.
If you still have kiddos at home and you want to help them with their college expenses, now is the time to start saving. By saving money and paying cash, think of all the stress and expenses your child will avoid if student loans are not part of their future.
Just remember, it is not a requirement as there are so many options available to assist your kids with the cost of going to college.
Baby Step 6: Pay off Your Home Early
You have trained, conditioned, and eaten right to run this marathon, so don’t quit on the eighteenth mile! Every dollar in your budget that you can find above living, retirement, and college should be used to make extra payments on your home. Attack that home mortgage with gazelle intensity. – Dave Ramsey, Total Money Makeover
Baby Step 6 is why I stayed away from the Dave Ramsey Plan for years! For us, paying off our home early and locking away such large amounts of money in our home seemed fruitless.
It wasn’t until we started working the plan that we saw the emotional benefit of paying off our mortgage fast. The opportunity to be beholden to no one. To be able to have 100 percent of your monthly income to use as you wish.
Once we worked the program, we could see all of the reasons Dave includes this in his plan. The idea of being mortgage-free is exciting!
For us, we have other financial goals we need to see come to pass before we take this step. We are also restless, empty nesters who dream of trading homeownership for location independence. At this point in the plan, we know we have forever changed our relationship with money.
Baby Step 7: Build Wealth and Give
The final step in the plan is to build wealth and give because at this point you have accomplished what few people are able to do in a lifetime. You are living 100 percent debt free, have a healthy nest egg, and are building a retirement which will provide you with all of your future needs.
This is the part of the plan where you can let your hair down, breathe and start checking off all of you items on your bucket list. You are free!
Giving is possibly the most fun you will ever have with money. – Dave Ramsey, Total Money Makeover
Learn to Live Debt-Free so that You Can “Live Like No One Else”
“Live Like No One Else” is the title of the final chapter in The Total Money Makeover. It is a powerful chapter which addresses the guilt which is often associated with money.
It is a short but important chapter that is designed to help us all improve the way we view money and our bad relationship with money.
If you are ready to get over your hang up with money and learn to live a debt-free life that encourages wealth building, we highly recommend you give the Dave Ramsey Plan a shot! The Total Money Makeover changed our lives and I am sure that it can change your life too!
By reaching the last step of your Total Money Makeover, you have entered the top 2 percent of Americans. You are totally debt-free – no house payment, no car payment. You are not Mastered by a Card, you have not Discovered bondage, American Excess has left your life, you have no student loans (your old pet), and you are free. – Dave Ramsey, Total Money Makeover