Dave Says

Getting ready for the Baby Steps
Dear Dave,
I like your plan, and I’m ready to get control of my finances. Should I catch up on past due bills before saving $1,000 for the beginner emergency fund you recommend in Baby Step 1?
Samantha
Dear Samantha,
This is a great question, because it gives me a chance to walk you all the way through the Baby Steps plan.
Make sure your necessities are taken care of first. I’m talking about food, clothing, shelter, transportation, and utilities. Then, get current on anything you owe or make payment arrangements for your past due bills. Once you have these things taken care of, it’s time to take your first Baby Step.
You’ve already mentioned getting $1,000 in the bank for a starter emergency fund. That’s Baby Step 1. After that, begin your debt snowball. That’s Baby Step 2, and here you’ll pay off all your debts from smallest to largest, except for your home. Attack the first balance on your list by paying as much as you can each month, while making minimum payments on your other debts. When you’ve paid off the first one, add what you were paying on it to the payment on your next debt and start attacking it. In Baby Step 3, you’ll save up and increase your emergency fund from $1,000 to a full three to six months of expenses. Trust me, you’ll be surprised how quickly you can save money when you’ve got all that debt out of the way.
Once you reach this point, it’s time to really start looking at the future. In Baby Step 4 you start investing 15 percent of your income for retirement. College funding for any little ones is next in Baby Step 5, and Baby Step 6 is a big one—pay off your house early.
But Baby Step 7 is the real deal. When you’re able to build wealth and give with extreme generosity, you’ve reached the pinnacle of smart money management. Good luck, Samantha.
—Dave

Home warranties?
Dear Dave,
Are home warranties a waste of money if someone has been following your plan and already has six months of expenses set aside in an emergency fund, plus home insurance?
Andrea
Dear Andrea,
Home warranties are a waste of money even if you don’t have quite that
much set aside in an emergency fund. I recommend an emergency fund of three to six months of expenses to cover the unexpected things that life will throw at you. This amount of cash, sitting in a good money market account with check writing privileges, will give you easy access in the event of a financial emergency.
I don’t recommend extended warranties of any kind. They’re just not a good deal. You’re better off to self-insure against things breaking down, and putting what would have been profit and marketing dollars for the extended warranty company in your own pocket.
—Dave
 
Put retirement on hold temporarily
Dear Dave,
Should I stop making contributions to my 401(k) account for a year in order to save up an emergency fund? Thanks to you, I’m 33 and debt-free.
Blake
Dear Blake,
Congratulations on being debt-free at such a young age. I appreciate the credit, but the truth is I just pointed you in the right direction. You made the sacrifices and did all the hard work. I’m really proud of you.
Yes, my advice is to temporarily stop making contributions to your 401(k) until you save up an emergency fund of three to six months of expenses. It shouldn’t take a year, though, to set aside an emergency fund if you’re debt-free and making decent money at your job. Just make it part of your monthly budget plan, and get that emergency fund set up in a few months.
Here’s the way I look at it. If you don’t have an emergency fund, but you’re contributing to a 401(k), there’s a good chance you’ll end up cashing out your 401(k) if something happens that leaves you with a large, unexpected bill. When you cash out a 401(k) early, you get hit with a penalty plus your tax rate. That’s not a good plan.
And that’s just one of the reasons I tell people to have an emergency fund in place before they start investing.
—Dave
* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 14 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

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204 N. Mill Street
Lake Mills, IA 50450

Office Number: (641) 592-4222
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