Have you tried more than once to get out of debt, but find yourself in the same position? You might even be afraid to look at your finances, or dread opening the bills each month.
How can you get beyond this roadblock and finally get rid of your debt once and for all?
One option that many consumers have had luck with is the Dave Ramsey Baby Steps program.
The Dave Ramsey plan is designed to help you get your finances back on track by taking small steps to change the way you manage money and ultimately get rid of debt.
Dave Ramsey Baby Steps Breakdown
Create a solid base
One of the best aspects of the Dave Ramsey Baby Steps plan is the focus on starting with a $1,000 emergency fund.
Rather than tackling debt immediately, the idea is to get some money in an emergency fund. That way, you can handle unexpected costs without resorting to debt.
Basically, if you put everything toward debt reduction, you have nothing to use for emergencies. So if you need to fix your car or buy a new washing machine, you’re essentially out of luck. Or, you could end up turning to your just-reduced credit cards and get stuck again.
Reduce the chance that you will end up back in debt due to an unexpected expense by starting a $1,000 emergency fund.
It’s probably not a large enough fund to sustain you in the event that you lose your job or experience a major illness. But, it’s big enough to help you handle some of the everyday things that come up and can throw off your debt reduction efforts.
Debt snowball vs. debt avalanche methods
The second step in the Dave Ramsey plan is to use the debt snowball method to get rid of all your debts but your mortgage.
With this method, you order your debts from lowest balance to highest balance. Then you put as much as you can (on top of the minimum payment) towards the first on the list while maintaining minimum payments on the rest of your debts.
Once the first debt is paid off, you move to the next one. Essentially, you’re taking the full amount you’ve been paying (minimum payment plus extra payment) and applying it on top of the next debt’s minimum payment.
Dave Ramsey’s philosophy is that starting with your smallest debt helps you get a fast psychological win that motivates you to keep going, rather than getting bogged down.
However, starting with the smallest debt isn’t always the best financial approach. If you want to pay less in interest over time, the debt avalanche method might be the way to go.
The debt avalanche follows the same basic principle. But, instead, you order your debts so you tackle the highest-interest debts first then work your way down the list.
In the end, no matter which method you use. The important thing is that you make progress paying your debts in a way that works for you.
Start a savings habit
Once your debt is paid off, the next of Dave Ramsey’s steps is to start building a long-term emergency fund.
Other steps include putting 15 percent of your income towards retirement, funding your children’s college educations, paying off your home early, building wealth while giving generously, and preparing to leave a legacy.
The idea behind these steps is to gradually create a money situation that allows you to prepare for your future and become financially independent.
Once you’ve paid off your debt and are no longer paying interest, it’s time to start earning it. Ramsey states that investing is a way to earn more interest over time. It’s also one of the best ways to earn long-term wealth.
However, it’s important to be realistic as you begin investing. Ramsey claims that a couple hundred dollars a month are enough to make you a multi-millionaire. But, that assumes returns that aren’t practical — especially if you use an indexing strategy.
When determining how much you are likely to earn over time, it’s better to assume annualized returns of six to eight percent, rather than assuming you will receive 12 percent annualized returns over time.
The idea of investing for the future is a good one. And, setting aside 15 percent of your income is a good rule of thumb to start.
But, it’s important to look for ways to ensure that you are setting aside enough money for the future. The Employee Benefit Research Institute reported in 2015 that less than half of workers have determined their retirement needs.
Keep in mind, you can always adjust how much you save based on an assessment of your actual retirement needs.
Should you really pay off your mortgage early?
Some gurus take issue with Ramsey’s insistence that you pay off your mortgage early.
Since your mortgage is typically a low-rate debt, and tax-deductible in some cases, the contention is that there are other ways to use that money to earn more interest over time.
Another consideration is that Ramsey takes the view that all debt is bad. He’s right to be skeptical of credit, especially since consumer credit often encourages mindless spending and creates debt problems over time.
However, some business owners and others use credit and debt to their advantage. And credit card rewards can allow you to get cash back, free travel, and enjoy other perks. The best way to take advantage of these is by paying off your credit cards in full each month.
In the end, you should always be careful about how you use debt and how much you borrow. And, stay away from spending habits that got you in debt in the first place.
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|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|7.39% - 29.99%||$1,000 - $50,000||Visit Upstart|
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