Dave Ramsey’s 5 Baby Steps to Financial Freedom
Financial Freedom, for many, is like a mirage. No matter how close one seems to get to it, one is just still far away! Little wonder that most people only end up dreaming of a life of opulence, where they can spend to their heart’s content. But in reality, the struggles just never seem to cease.
Internationally, renowned financial guru, Dave Ramsey has defined 5 baby steps- small but powerful steps that guarantee to end the common man’s financial woes.
Step #1: Creating an Emergency Fund
The worst thing about emergencies is that they hit us hard when it is the least expected.
It makes great sense for us to have an emergency fund of approximately $1000 in value. This fund should usually be saved in a separate bank account from the one we use regularly. Thus, in the case of emergencies, this becomes our go to pile instead of a credit card which becomes a bigger emergency in the longer run.
Step #2: Paying off Debt
Debt carries interest. And interest hurts our monthly income a lot.
The quickest way to pay off debt is to list down all the amounts we owe and the interest rates that come with them. We then begin to pay off the smallest but costliest debt, since not only can that be wiped off quickly, but it also gives us the motivation to attack the next amount on the list. The secret here is to add what was being paid on the previous debt to the next one. In no time, since cash flow increases, the bigger amounts disappear too.
Step #3: Saving for Living Expenses
The next step is to save for at least 3 months of living expenses.
This is achieved by listing down all the expenses that you make in a month and multiplying that by 3. Though 6 months should be an ideal target, 3 is a good number to start with for motivation. This fund should be invested in an avenue that earns a risk-free return so that you know exactly how much you have at the end of a period. Doing this virtually ensures that you never have to go into debt again.
Step #4: Retirement
The next avenue to take care of is retirement. Ramsey, as a thumb rule, recommends 15% of the current household income to be invested towards enjoying a sound retirement life. If you feel that you aren’t very good at investing, go ahead and put your money into 3 or 4 well-performing mutual funds with different risk
Step #5: Paying off the Home Loan
The last ‘baby’ step is to pay off your home loan. This is the last step for two big reasons. Home loans are generally the lowest interest rate loans available in the market. And they are usually the biggest debts on a personal balance sheet. If you follow all the above steps, surely all the other debts will be taken care off. Moreover, with sound savings happening in the background, paying this big loan off is just a matter of time. The average tenure to pay off home loans is 7 to 15 years. Focus on beating that.
It’s surprising how little needs to be done to achieve financial freedom. If you doubt the above steps – don’t. Every single person who made it big in human history had just about done the same thing.
Happy financial freedom to you.
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