Dave Ramsey is a very well-known radio talk show host and best-selling author. He has helped thousands of people through his Financial Peace University seminar. The Financial Peace University seminar outlines 7 Baby steps toward financial peace. I thought it would be fitting to discuss those baby steps here, in light of the YNAB Personal Budget System. Do the two jive?
More than you think. They thrive on each other.
Financial Peace University Baby Steps
- Make only minimum payments. Squeeze your budget until you have $1000 cash. This is the start of your emergency fund.
- Snowball your debts, smallest to largest.
- Save a full emergency fund of 3-6 months’ expenses. (I recommend Betterment for this account.)
- Fully fund 15% of your gross pay into pre-tax retirement plans and a Roth IRA (if you’re eligible).
- Fund your kids’ college.
- Pay your home off early.
- Build wealth, and give it away!
Baby Step 1
Baby step 1 goes right along with the first rule of cash flow management (see this page). While Dave Ramsey puts out a blanket $1000, I simply advise you to save one month’s expenses. That way, you’re on your way to your emergency fund. However, I don’t suggest you put that money into your emergency fund account. It’s to be left in your checking account. Having that one month buffer allows you to budget and spend money earned in January, in February.
This one month lag creates an optimal situation for budgeting. Financial peace comes when you aren’t caught by surprises. When you’re lagging one month behind your paycheck (instead of your bills!) you will experience financial peace. You then only budget what you know you make – because you already made it.
Baby Step 2
Baby step 2 makes perfect sense also. The fewer payments you have to make to someone else, the more financial peace you will experience. When your money belongs to you, that is a very, very nice feeling. With a purchase of the YNAB system, I give away a bonus debt snowball tool that makes this snowballing of debts a piece of cake.
Baby Step 3
Baby step 3 brings you further on up the road to current financial peace. You don’t need to graduate from any university to realize just how great it would feel to have 3-6 months’ expenses sitting in a liquid fund that were there only for emergencies. I can tell you from experience – it’s nice.
Baby Step 4
Baby step 4 deals with your future financial peace and should not – cannot be ignored until later in life. Seeing your nest egg grow over time will give you more financial peace than just about anything. Keep in mind that you will want to diversify your retirement savings. Don’t put it all in stocks, don’t put it all in bonds, don’t put it all in real estate. Diversity brings even more financial peace. Dave Ramsey hammers this home day in and day out on the radio – you must diversify.
Baby Steps 5-7
Baby steps 5-7 are all pretty self-explanatory.
I want to emphasize one point here. Dave Ramsey does mention budgeting throughout his books – even though it’s not a baby step. These baby steps are really only possible if you have a solid grasp of your money. You must know where your money came from and where it’s headed. Don’t be deceived into thinking this will be an easy task – reaching baby step 7 where you are building enough wealth that you can give away a ton of it and still live the way you want to live. Reaching that type of lifestyle takes hard, focused work.
Financial peace university is an excellent, excellent education that Dave Ramsey is providing to America. I hope I can also do my part by sharing one aspect of a proven financial peace plan with you. As I like to say, when you take care of cash flow, the baby steps balances take care of themselves.
Your Next Step
Budgeting is not restrictive. You won’t be spending less, you’ll be spending right. So what do you have to lose? Except all that debt and stress?