Tuesday, August 10, 2010

Do you Dave Ramsey? I do it differently.

You may or may not have heard of Dave Ramsey. He’s a financial guru person. He’s written a few books, gives lots of advice etc... He is most famous for his “Baby Steps”. In case you haven’t heard of them, here they are.

1.) $1,000 to start and emergency fund
2.) Pay off debt using the debt snowball
3.) 3 – 6 months of expenses in savings
4.) Invest 15% of household income into Roth IRA’s and pre-tax retirement (superannuation)
5.) College funding for children
6.) Pay off your home early
7.) Build wealth and give

I think these are great steps, but I would change them a bit. He has said that everyone’s situation is different and this is just a general guide, so I am not saying these steps are wrong. I think they are a great way for people to have a think about what they should do and give some guidance to their lives.

Why do baby steps? It is easier to tackle one financial change at a time. Trying to do everything at once will lead to failure. Doing baby steps helps to teach you good financial habits and will not leave you feeling overwhelmed.

How would I change these steps?
1.) Start a $1000 emergency fund. Every single time something has happened where I instantly needed a sum of cash (e.g. roof leak, car blew up etc...) it has cost me close to $3,000 to fix. As such my starting emergency fund is $3,000. I think $1,000 for most people is an achievable goal and doesn’t seem so big, whereas $3,000 many people would look at and go, “It’s too much!” For me my starting fund is $3,000, but if you have nothing, aim for $1,000 first.

2.) Pay off debt using the debt snowball. What is a debt snowball? It is a big ball of snow you throw at your debt to make it disappear. I wish! A debt snowball is where you focus on one debt, whilst still maintaining the minimum payments on others. Once that debt is paid off, you focus on the next using the payments you were making from the first debt PLUS the payments you were making on this debt to pay the 2nd debt off. Once that debt is paid of you use the payments from the first and second debts plus the current payments to pay this debt of and so forth until you are debt free. Instead of “freeing up” your money once you have paid the first debt, you continue on as if you didn’t have that money in the first place and you will be debt free much sooner.

3.) Have 3 – 6 months of expenses in savings. There is lots of talk about whether this is excessive in Australia. The welfare system here pretty good (in some people’s eyes, I am not judging either way), leaving many to think they don’t really need this amount of savings. Also the job situation here is not as dire as the USA, meaning it is easier to get other work in many parts of Australia to be able to support yourself. I know for a fact if I needed to, IO could walk out of my house today, find a job and start tomorrow. It won’t be a job I love, but being a hairdresser, it is that easy for me to get a job.

It might not be a job loss that causes financial hardship. It may be injury, death, tenants not paying rent etc... There are lots of things that can happen and change your situation. Are you prepared for that? Also, even with welfare, it can take up to 3 months to get that worked out and you will need money before then. I am aiming to have 3 months worth of expenses. I have it already, sitting in my mortgage, which I can redraw at any time. Only problem with this is at any time, the bank can choose to keep this money as part of my mortgage and I will have no access to it. I will have a lower mortgage, but no cash.

4.) Invest in pre-tax super. I do not believe in super, it’s long post as to why, so I will write that for you later. I believe in sorting out my own finances so I am able to support myself through my investments. Not everyone does this, and if you are not interested in investing, you should put extra into super.

5.) College fund for children. Here, we have HECS. You get an interest free loan to pay for you tuition, and until you earn over a certain amount you need not pay it off completely. You do have to make payments, but it is a flexible thing. Personally, I would be paying off my mortgage first. I also think kids should pay for college. You can assist them, or maybe have money saved to clear the debt when they complete it, but do not tell them you will. Why? I know quite a few people who have gone to uni/college. Those whose parents paid for it stuffed around. They did not take it as seriously and many spent a few extra years their trying to work out what they want to do/find themselves costing tens of thousands extra.

Those who paid for themselves did much better. They achieved higher scores, completed on time and appreciated their degree. They are also doing much better in the work force than those whose parents paid for it. By the time they go to uni/college they are adults and quite capable of taking care of themselves.

6.) Pay off your mortgage early. This is a huge one. Once it is gone, you won’t be paying interest and you will have freed up so much money to invest in other things.

7.) Build wealth and give.

That’s my opinion on his steps. Everyone’s situation is different, but in a nutshell here, are my steps.
1.) Have a $1,000 emergency fund
2.) Pay off debt
3.) Get a 3 month emergency fund of living expenses
4.) Pay off your mortgage early
5.) Invest in shares, property, whatever.
6.) Save for children’s college/university if you want to do this.

I think Dave’s steps are good if you yourself have no other plan or idea, but I will be doing things slightly differently.

Do you Dave Ramsey? How have his steps helped you? Or is this the first time you’ve heard of him?

15 comments :

  1. I'm interested to hear about the Australian tax system for investments. The reason Dave suggests investing in employer-based retirement plans is to take advantage of any matching contributions offered by the employer. After that, the best route is the Roth IRA in which you pay taxes only on contributions and not on gains or distributions in retirement. Obviously, if the tax incentives are different, his advice is going to be different.

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  2. yes, love dave, and we have been trying to follow some of his steps and like you we changed ours around a little, pretty much the same as your ideas :) thanks for the reminder! naomi.

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  3. The systems are VERY different. I'll do a post on it soo. Employers don't match contributions, they have to make them, at least 9% of what yoru pay is worth. Not from you pay, on top of what they pay you.

    Our tax system is very generous for investments, so most advisors here recommend paying off yoru mortgage first before putting money into super/retirement fund, only if you are disciplined and have a plan to be financially free.


    HTH a bit. :)

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  4. I'm doing the debt snowball and I'm working on the emergency fund even though you're suppose to have that first.

    I want to get to the point where I have 9mos savings. The job market here in the US can be bad especially in the state I live in.

    I don't have to worry about 5 and 6 since I have neither.

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  5. I am following you from Tuesday Follow! This is a great site! We are making changes little by little. Come visit Mama's Little Chick!

    Mama Hen
    www.mamaslittlechick.com

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  6. Hi..I’m Barb….I am from TTA. I am your newest follower. I hope you will get a chance to visit my blog @ santasgiftshoppe.blogspot.com & get inspired by something for your family/home. I hope you will follow me as well. I also would love for you to be a new Fan of my Facebook page too & click “LIKE” in the upper right hand corner of my blog & you’ve done it..Thanks so much! I am just starting at Facebook. Nice to meet ya new friend!!!

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  7. I know I should be doing all of those things but really all we do is pay our mortgage, save a bit for the kids, pay off our credit cards each month (no interest), pay a bit extra into our super each week and have a small managed fund. We are stuffed when there's an emergency!

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  8. Hi, Love this blog!
    New follower from Tuesday Tag Along.
    www.andrialake.blogspot.com

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  9. Hi there! Stopping by for FMBT, and following! Those are some great tips. Hope you'll stop by and visit me soon! :)

    Tree (aka Mother of Pearl)
    Mother of Pearl It Is

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  10. Thanks for coming by, now following. =)

    These are great tips. I have never heard of him though.
    You are right taht evryone's situation is different. I'm taking baby steps myself to save up for my kiddo. =)

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  11. Argh. I have been working on Step 1 for like 15 years.

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  12. Great blog! Came across your blog from one of the blog hops, and looking forward to reading more of your stuff. I am now following... feel free to follow back if you like!!!!
    All the best,
    Kim

    http://amoroccan-acat-and-my-bigass.blogspot.com/

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  13. I have the emergency fund, etc, completely agree with doing my own superannuation savings, like the control, think I can do better with my own money anyway ;o)

    How are the book sales going? I miss the more personal postings like you had at the start of your blog!

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  14. Stopping by from Tuesday Tag Along.

    I was already following you but just wanted to give you a friendly reminder to feel free to stop by and join in my new blog hop: Wobble Over Wednesday.

    It's a great way to meet new friends, and get more followers :)

    Hope to see you there!

    -Amanda T
    http://mylifewithratsandmore.blogspot.com

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  15. Thanks for stopping by & following - following back. I just received your comment today due to this new spam filter they have?

    Interesting info. I will take more time to read it as soon as I can.

    Hope you have a great day

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