Archives for August 2018

Dave Ramsey’s 7 Baby Steps: Step 3 – 3 To 6 Months Of Expenses In Savings

Last time we looked at Baby Step 2, paying off all your debt using the debt snowball. You take your bills, put them in order from smallest amount to largest amount, and proceed to pay them off one by one, snowballing the amounts until the debts are gone!

Baby Step 3 – 3 To 6 Months Of Expenses In Savings

In baby step 1 we built up a $1000 emergency fund in order to protect us from life's little emergencies. In baby step 3 we are going to take our emergency fund to the next level, and continue building it until you have at least 3-6 months of expenses saved up. Dave Ramsey calls it the “fully funded emergency fund of 3-6 months of living expenses“.

Why do you need to build up your balance in your emergency account? This larger balance will allow you to build up an umbrella to keep you protected from the storms of life. Because life events WILL happen. When you have a fully funded emergency fund, you're less likely to ever have to go into debt again.

When you have a fully funded emergency fund of 3-6 months, there aren't many things that can happen that would cause you to be in immediate danger. Lose a job? You'll be able to cut back and cover your mortgage long enough to find another job. Have your appendix rupture? You'll be able to cover your large health insurance deductible.

Having that large emergency fund will help mitigate the risk of unplanned negative events – of which we will all have encounters with many times in our lifetimes.

Why Are Emergency Funds So Important?

I've heard a lot of people say that they think this emergency fund of 3-6 moths is too large (we thought it was too small and have saved closed to 8-10 months of expenses), and they can't imagine ever having to use that much money to fix a problem. Why not instead invest the money or use it for a vacation?

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

Here are just a few of the reasons why we've saved up our emergency fund.

Negative events DO Happen: As the quote on this page says, 78% of us will have a major negative event happen in any given 10 year period. Those are pretty good odds.
Less Stress: When you have an emergency fund to fall back on, there is a lot less stress worrying about how you're going to pay the bills.
Risk Is Managed: An emergency fund (along with other things like health insurance, disability insurance and life insurance) will give you a situation where you have substantially less risk of having a bad situation turn into a horrible one. A hospitalization won’t turn into bankruptcy, and a job loss won’t turn into a foreclosure. Plan for problems, before they happen. Don't allow problems you could have planned for turn into life changing events.

How Much Is Enough?

When talking about a fully funded emergency fund, you'll need to talk with your family about how much you want to save. Ramsey suggests that you save 3-6 months of expenses, but that can obviously change based upon your situation. Factors to take into account include number of children, job stability and other factors. For example, if you're expecting to be laid off, you'll probably want to save up as much cash as fast as you can. In a stable job with no kids? A smaller amount might work. The very baseline amount that Dave Ramsey speaks of is 3-6 months of expenses.

How much should you save? An example: If your family has a minimum of $2500 in expenses every month after cutting out all the un-necessary bills, your 3-6 months of expenses would come out to anywhere from $7500-$15,000.

At our house we like the peace of mind that comes with the emergency fund, plus we have a child – so we have saved up 10 months in our emergency fund currently. Figure out the correct amount for your family and situation.

Can I Invest My 3-6 Months Of Savings?

One question that often comes up is this – “Should I invest my emergency fund in a CD, or a mutual fund?”. Usually the answer to that would be no – you want to keep the emergency fund pretty liquid, and accessible. That's the reason for the emergency fund – for unplanned and unexpected emergencies!

Personally I prefer to save the bulk of my money is a good high-yield savings account, like the ones offered by Ally Bank. I then keep $1000 in my local bricks and mortar bank as well just in case I need it in a hurry.

Don’t put your emergency fund in things where you can't get at it fast – like real estate, mutual funds or by investing in a cousin's business. Keep your emergency fund liquid!

Do you think saving up 3-6 months of expenses is enough? How much do you have saved in your large emergency fund? Do you prefer to use credit cards as your emergency fund? Tell us your thoughts in the comments.

Dave Ramsey’s 7 Baby Steps: Step 2 – Pay Off All Debt Using The Debt Snowball

By Mr. Money 5 Comments

In my last post in the 7 Baby Steps series, we looked at Baby Step 1, saving up an emergency fund of $1000.

You save up that baby emergency fund in order to insure yourself against the risk of life's little emergencies that have a way of popping up at the least opportune time. If you don't save up that money as an insurance policy, you can be assured that your plan to get out of debt will be set back many times over by many little “emergencies”.

If you have an emergency fund saved, no new debt is created, and you just take the time to re-stock that emergency fund in case of further expenses.

Today we will look at Baby Step 2, paying off all debt using the debt snowball.

Pay Off Your Debt Using The Debt Snowball

Now that you’ve got your $1000 emergency fund saved, it's time to get intense about paying off all your debt. Dave Ramsey likes to call this getting “gazelle intense”, in reference to the bursts of speed and intensity a gazelle will use in order to get away from a cheetah (or in our case, debt).

For many people this step is the longest in your 7 baby steps.

If you’ve built up a lot of debt over the years in the form of student loans, auto loans, credit card debt and other things, it probably took you a long time to get so far in the hole, and it will take quite a while to dig your way back out. But you CAN get back out!

If you're not so far in the hole, getting out of debt can happen a lot quicker, and you can get on to the next steps of building up a larger emergency fund, paying off your home early, building wealth and giving more.

If you've gotten this far and you haven't done a budget yet, now would be the time to get started.

Figure out where you are in regards to your income, expenses and your debt obligations. Do a zero based budget and make sure that every dollar is accounted for – because every extra dollar is now going to be going to debt reduction.

Once you’ve got all of your income, expenses and debt listed, follow these steps to get rid of your non-mortgage debt. (Mortgage debt is paid off separately in another baby step, so exclude it for now)

The Debt Snowball

Here is a rundown of the debt snowball plan.

Put all your debts in order from the smallest balance to the largest balance.
After you have paid for food, clothing, transportation and a roof over your head (the necessities), pay the minimum payments on all of your debts.
Put any extra money left over towards paying off the smallest debt first.
Pay off your smallest debt, and then “snowball” the money you were paying on that debt over to the next largest debt.
Continue paying off the next largest debt, and when that one is complete, roll it all over to the next largest debt until you are completed.

That's not too hard, right? Just pay off your debts from smallest to largest until they are all paid off!

Buying A Home: When Is The Right Time?

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Humanity has come a long way since the time we lived in caves.

Back then, we simply had to find a cave that didn't have a bear inside of it, and we owned a home.

Now, it's a bit different.

There's a whole process and lots of different people involved in the home purchase event. There are also a lot of questions that will need to be answered, such as what are my homeowner's insurance costs going to be, how much do solar panels cost or where should I go to get my loan.

In this article, we will discuss what it takes to purchase a home.

Buying A Home

How do you know when it's the right time to settle down and purchase a home? Is it when your bank account has the zeroes needed to put a hefty down payment, or when your kids have begun to drive you crazy inside of your two-bedroom apartment?

This answer varies depending on the individual or family's situation, but there are some guidelines to follow before even thinking about purchasing a home. Below is a list of these guidelines, and what they entail:

Credit: In order to get a good mortgage (unless you're buying in cash) you must have good credit. There is no way to even be considered for a home loan without having good credit. Lenders want to know that they will be repaid, and a history of late payments, collections, and other events that appear negative, can have a huge impact on your loan and you may even get denied for a home loan. A rule of thumb is to have a credit score above 700 which is considered “good” credit. Anything above 750 will put you in a very good spot in the lender's eyes.
Job Security: Another thing that mortgage companies want to make sure is stability in your job. They don't want to know that you've had six jobs in the last six months. This shows irresponsibility, and a lack of commitment. If you're going to keep paying a mortgage for fifteen to thirty years, they want to know you're a stable person and can keep a job for more than two years.
Down Payment: Before applying for a mortgage, you need to make sure that you can put down at least 25% of the price of the home. This will ensure you get a better rate, and that your monthly payment is as low as it can be. The less you put down, the higher your monthly mortgage payment will be, and the higher your interest rate will be.
Savings: Remember we were talking about job security. If you've had a few jobs in the past two or three years, you can give some security to the lender by letting them know that you have a large savings account. If you don't, you may have to wait a few more years to accumulate it.
Proper Knowledge: Buying a home is much more than just “buying a home.” It may be a month's income for the realtor, it may meet a mortgage broker's quota for the year, and it can be a great investment as well. For these reasons, you need to have the proper knowledge about escrow companies, title companies, realtors, contracts, negotiation, and the fine print of your mortgage contract. The aforementioned professionals can all help you with this, but it is always smart to triangulate with other professionals to make the best decision possible.
Market Trends: In the previous passage we mentioned how a home can be an investment for some. Market trends can cause this investment to increase and create a good return if you were ever to sell, or it can put people underwater just like it did in 2008. You must project your home's value into the future because you do not want to be stuck with a mortgage that is more than what the home is going to be worth in five to ten years.

There are many important items to think about before purchasing a home. These include knowing as much as possible about the home buying process to prevent problems, projecting future values and trends inside of your market, having a stable income, and good to great credit.

When everything is in place, you can begin to build the home of your dreams.

Financial Planning Is Planning For A Happy Future

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There are some areas of life one simply doesn't take chances on.

These are the areas of life where preparation is necessary. And of these, anything related to your finances should rise to the top of the list.

That said, it's often difficult to know what to expect on visiting a financial services professional.

The entire concept often feels rather intimidating. In large part, this has to do with the seriousness and importance of financial topics. The professionals involved often take it just as seriously as one would hope, and this tends to lend a certain gravitas to the environment. That can make it feel a little intimidating at first.

However, one should remember that taking it seriously isn't a negative. One's financial future is serious business. And the fact that said business is taking it seriously is a good sign. Instead of being intimidated it's important to look at it as a reminder. It's a way of telling someone that it's time to really focus on the seriousness of the situation and what can be gained from it.

You're A Part Of The Process

And when focusing on the situation, there's something you should remember. The financial institution is essentially working for you. You're paying them for a service. That means that you're the one who should be in control of the process. Again, the atmosphere can feel somewhat intimidating at first. But it's important to remember that you're essentially the one guiding the process. If you're there about financial planning then that should be among the first things on the table.

That said, people at a financial institution aren't mind readers. They're there to help in any way possible, and they should have considerable expertise to provide to clients. But they need to know about their clients concerns and goals in order to properly meet expectations. As such, you should make sure that you plainly explain exactly what it is you're hoping to get out of the discussion.

The First Steps

Working with financial service professionals usually begins with a general concern. Probably the most common motivator involves retirement. There's a certain point in life where people start to really consider their golden years.

When retirement is an abstract concept, it's usually reassuring. It's a time to just relax and enjoy the world. But as it becomes a more concrete reality the concerns of any life-changing experience takes hold. People usually begin to wonder if they're going to be able to retire as soon as they would wish. Some might wonder if they'll be able to retire at all. And this is when they decide to look for advice. Retirement concerns are common to the point where it becomes a useful example.

Different people will obviously have different needs. But the general process of seeking financial planning tends to go along similar lines. As such, one can easily extrapolate from an example of someone planning for retirement.

Meeting And Planning For Different Strategies

Going with the retirement example, one would go in with well-defined retirement goals. It's important to have these goals well defined so that the professionals can plan for them. After discussing what one is hoping to accomplish the real process will begin.

There will typically be some discussions on strategies for saving money. For example, using a zero-based budget. But one should expect this to go into fairly extensive detail.

Scope Of Discussion

The discussion will usually go into almost every aspect of one's life that involves money. As such, the more documentation one has at hand the better. In the age of electronics, this can be a fairly simple process. If one tends to file taxes electronically, for example, it's often easily available online.

It's a good idea to see if one can access those files so that they're ready if needed. There's seldom need to print them out in advance unless specifically asked to do so. But it's still a good idea to have them available electronically. If they're needed, then it can save an additional visit later on.

From there, a real plan can begin to take form. And this is one of the most important things to keep in mind. Most aspects of financial planning involve long-term decisions. In fact, most professionals recommend planning for retirement as early as possible. And the same goes for any other large financial event in the future.

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