The Total Money Makeover plan does indeed work as the many examples and testimonials in Ramsey’s book and his syndicated daily radio show can verify. Let’s start with Step One of Ramsey’s “Baby Steps” and see how stowing away $1,000 in an emergency fund is the most important first step in climbing out of debt.
Why You Must Save for Emergency. You may think that it is not absolutely essential that you put your money away toward this type of savings goal after you meet your basic living expenses. However, research indicates that people who do not establish an emergency savings account are more likely to fall victim to debt than individuals who make it a priority to save. Even if you think you cannot afford to save in this way, you will be in far worse shape financially if you do not deposit at least the $1,000 that Ramsey suggests for future emergencies. It is the building block for all other baby steps.
Setting Up The Account – Make It Accessible But Not Too Accessible. When you open such a savings account, make sure you do so in an account that offers okay rates and is not tied to your regular savings or checking account. Make it accessible but do not make the funds too easy to obtain, especially if you are someone who is prone to withdraw money when it really is not needed. The point is not to earn interest on this money but to have it accessible when Murphy moves in or it start raining (it’s a rainy day fund).
Why $1,000? Almost every immediate emergency can be covered by $1,000, and that is where the number comes from. If your car needs a lot of repairs or you have an unexpected trip to the emergency room, you will be hard pressed to have those fees cost you more than $1,000. Anything over those costs, like a huge medical bill, can be put on a payment plan….saving you your emergency fund. $1,000 is the beginning, and all money after that will go into your debt snowball which we will see in tomorrow’s blog post.
Cut Out Unnecessary Spending. In addition to establishing an emergency savings account, make certain that you are reducing your debts and not overspending. Now is the time to build your budget. You should have a written monthly budget where every single dollar has a job description. The emergency fund is the basic foundation for continuing the arduous but rewarding journey toward becoming debt free and building wealth. As Ramsey says in his book, “If you will live like no one else, later you can live like no one else!”
It Is No Cakewalk But You Will See Results. Ramsey provides needed insight for people who struggle to save. The “baby steps” he provides in his book are a practical and simple guide that encourages anyone in debt to transition from poor spending and saving habits toward a way of life that will set them free to actually realize their dreams. However, you have to stay focused on those “baby steps” and work hard. There is no magic formula to the plan. But, the plan requires you to be dedicated and stay on track with its seven step approach. By following the steps, and completing them in succession, you will be able to see the benefits of all the hard work and the required sacrifices.
In an upcoming post, we’ll examine the second step of Ramsey’s “baby steps” in his book, The Total Money Makeover, which covers one of his most important concepts, the debt snowball method to eliminate ALL of your debt.
A Review of the Basic Steps for Saving, Eliminating Debt, and Building Wealth
Ramsey’s program and book, “The Total Money Makeover“, include the following baby steps to financial freedom…
- Step One: Save $1,000 for an emergency fund
- Step Two: Use the debt snowball method to pay off your debt
- Step Three: Complete the emergency fund
- Step Four: Invest 15% for retirement
- Step Five: Save for your children’s college
- Step Six: Pay off your mortgage
- Step Seven: Start building wealth
For the next seven days, I will be detailing each one of these baby steps in more details. So, please check back or sign up to get all of the posts in this series in your favorite RSS Reader or by E-Mail.