Once you finish Baby Step 1, the next step according to Dave Ramsey is to make a list of all your debts, excluding only the house. This debt list should be ordered from smallest to largest and the smallest debt balance becomes the number one priority. According to Dave, you shouldn't worry about interest rates and focus only on the debt amount. If two debts happen to be the same amount, then you should list the debt with the higher interest rate first.
Dave calls paying off the debts this way a "debt snowball" and he likes this order because it allows you to have pay off some of your debts quickly which should give you motivation about getting out of debt. Dave understands that paying the higher interest rate debts will save more money, but feels that paying off debt is not always about math. A lot of it is emotional and about motivation. He believes that personal finance is 20% knowledge you know in your head while the other 80% behavior. With this in mind, he believes that once you are able to get rid of the lower debts, you will see the results you are producing and stay motivated to get rid of all your other debt as well.
Friday, September 30, 2011
Tuesday, September 27, 2011
When it comes to finances and baby steps, many people often think about Dave Ramsey's 7 baby steps. Over the next few weeks I will be going over each of them and you can decide whether they are a good approach for you. The first Baby Step in Dave Ramsey's program is to save up a $1000 emergency fund.
Everyone really should have an emergency fund for the unexpected events that happen in life to all of us. The amount of the emergency fund probably varies from person to person depending on their situation and lifestyle. $1000 is definitely much better than having nothing at all and creating an emergency fund is a good place to begin financial baby steps.