A better version of Dave Ramsey's Baby Steps
All over the financial world you'll find fans, and anti-fans, of Dave Ramsey. I'd put myself in the second category. First, because I've read his books and they're REALLY heavy on not-spending, like "man I get it, move on to the meat of budgeting". But he keeps judging people for shopping at the mall for another 200 pages. I'm already not shopping at the mall. Then his website is ALL about buying more stuff. More books, programs, seminars, conferences. He's definitely making himself wealthy.
I'd dramatically change his baby steps. I don't get why people are such big fans of this method. In fact when I talk to people, they all seem to be fans of the first step, and that's it! So why give the whole philosophy so much credit?
To re-cap, here are the baby steps:
- Save $1000 emergency fund
- Pay off all debt (except the mortgage), smallest debts first
- Save 3-6 months of expenses in a fully funded emergency fund
- Invest 15% in retirement
- Save for your kids college
- Pay off your home early
- Build wealth and give
And here are my issues with them.
1) Save up $1000
This is actually a decent first step. Of course I've written before about my REAL first step, which is sit down with your statements and stare at how much money you actually have going out. That will help you reduce spending and start to save. But $1000 is a good goal that will help you out with a lot of vet bills, car repairs, travel for a family emergency, that puts people's financial well-being at risk.
2) Pay off all debt, smallest debts first
I'd strongly recommend that you consider paying the highest interest first, but if you find his snowball method motivating, knock yourself out.
3) Save 3-6 months of expenses in a fully funded emergency fund
This is the one I hate the most. First, there's a HUGE difference between 3 and 6 months, which is it? If it's 6 months, and it took you a while to save up $1000, it could take you YEARS to save up that much! In America the average household income is $75,000. If most Americans spend what they make (sorry to say it but it's true), this step is like telling people to save up over $30,000 before they start a retirement fund. This is a terrible idea.
What I'd actually do: Transition to the 50/30/20 budget. 50% for your needs, minimum food and contractual obligations. 20% savings - break it down to 15% retirement, 5% emergency savings if you want. 30% discretionary.
4) Invest 15% in retirement
This is fine if it's step 3, not 4. Do not wait on this step.
5) Save for your kids college
This might be nice. Look into the tax advantages in your state and take advantage of those.
6) Pay off your home early
I'm conflicted on this one. Full disclosure: I did it. I paid extra on my principle every month and paid my house off in 10 years. I live in a low cost-of-living area, chose an affordable house, and budgeted carefully. But THEN I looked at what would have happened if I'd invested that extra money in whole market index funds and I really regretted my decision. I'd be ahead by some $60K if I'd invested! But hindsight is 20/20, peace of mind is worth something, so I won't beat myself up or criticize anyone who makes either choice.
7) Build Wealth and Give
If you have 30% of your income labeled as discretionary, you can "give" at step 3. It's very important to me to support the causes that make our world a better place. I have several charities, from local to international, that I support monthly through automatic giving. I have one credit card for them so it's all in one place. Don't wait until your house is paid off and your kids colleges are funded. The world needs your help now.
The better steps
1) Save $1000 in an emergency fund
3) Start retirement savings. 401K up to employer match, or if that's not an option, start a small monthly deposit into an IRA.
4) Pay off all high interest debt, whatever order you want
5) Budget 20% of your income for savings and debt repayment. Once the debts are paid off, 15%/5% is a good split for retirement investments vs. short term (HYSA) savings.
6) Reduce "needs" to 50% of your income (housing, insurance, utilities, minimum food)
7) The last 30% is for emergencies, discretionary spending (clothes, gym, vacations), donations, anything else you've identified that sparks joy.
it's sometimes hard for me as a midwesterner to be in these communities and talk about finance because there are people who need, like, $2M for a starter home, and I'm like WHY DO YOU LIVE THERE! Sometimes it's just where they're at. Other times they say they need to be within 45 minutes of a beach for their personal happiness and I'm like well, I can't fix that... good luck. but it's going to be so impractical to save much in a place like that, I can't relate!
ReplyDeleteIf you live somewhere cheaper, you can afford to take vacation to the beach!
ReplyDeleteEveryone brings their own list of "requirements" to their world, and I get that - some people just need to be near family, or their job requires them to live in a certain place - my uncle was a cattle auctioneer - when the cattleyards in Regina, SK closed down, he had no choice but to move to Winnipeg, MB - that was the only other place he could do his job. My aunt was NOT happy about it - her family (and his) were all in Regina - but they moved and they made a good life in Winnipeg!
But I think sometimes people don't even consider the option of living somewhere else as a possibility - they just struggle forever and wonder why they can't get ahead!