Dave Ramsey + YNAB = Super powers (well, it feels that way to us)
We were doing well with YNAB. We had curbed our overspending and Mr Mint (the power spender in our family) was happily spending his allocated fun money on gadgets/motorbikes without feeling guilt or acquiring new debt. However, we really didn’t know what direction to take next with planning our financial future.
On the YNAB Facebook fan page, I saw many users mention the Dave Ramsey baby steps. It was a EUREKA moment, which led to us only having a mortgage debt and a nice emergency fund. Dave Ramsey has a radio show, which is available on YouTube. You can also borrow his book at the library (it’s free and most libraries have phone apps for digital copies, if you can’t physically get to the library). He’s been in serious debt in the past and shares his experiences and proven method (baby steps) to get control of your financial life.
It’s really easy to follow and here’s the list:
- Save $1000 as an emergency fundAn unexpected bill/school trip/vehicle breakdown will hit you while getting through. Don’t let it derail the budget or force you to borrow.
- This is an American show, so you could convert this if it made you feel more secure e.g. NZ$1500, £775, €890 (at time of writing this).
- Pay off non-mortgage debts, starting with the smallest (not the interest payment), using the snowball method.It might not be the best mathematically, but it’s the best emotionally. Watching that small debt disappear early on gives you perseverance to see this through.
- If you’ve done consolidation loans as a 2nd mortgage and they’re less than 50% of your annual take home pay, they belong in this step. Otherwise, count it as part of step 6.
- If you’ve taken out huge car loans, this may mean selling the expensive car and running around in a dirt cheap car (only for a few months), until you can trade up later (using cash, not borrowing).
- Sell everything that will help you get out of the debt or take on extra work. This is only temporary.
- Save 3 – 6 months of expenses (use step 1 as the starter)Imagine being able to leave a job you hated (possibly making you ill), without having to worry about paying the bills for a while. Feels good, doesn’t it?
- Contractors and single income should aim for 6 months, for extra security.
- Invest 15% of your income into pensionsThere’s a high chance you’re going to live well beyond 65, so don’t live those years in poverty or feel pressured to work when you’re too tired.
- This is more important than children’s education as they will be able to earn money after you’ve retired or work part time while they study. Same goes for the mortgage, because you’ll probably downgrade to a smaller (cheaper) home in later years.
- Save money for children’s educationLet’s try to get out of the vicious cycle of student debt being normal. Encourage your kids to pay into this too, so they understand the value early in life.
- No kids or they’ve already left home? Skip to step 6.
- Pay off your mortgage earlyDave recommends a maximum of a 15 year mortgage. Don’t be fooled by taking a 30 year mortgage and promising yourself you’ll overpay; we certainly didn’t and we bitterly regret it.
- He also states that the mortgage/rent payments need to be 25% or less of your family’s take home pay, so you’re not “house poor”. If you are above this, but below 45% don’t panic too much as long as you know you can get your income up over the next few years. Otherwise, you need to consider moving to a cheaper home. Living in an expensive city doesn’t excuse you from this rule.
- Overpayments are made AFTER the pension savings and children’s education (if applicable). You don’t want to end up at retirement age with a fully paid off house and no pension, because you can always downgrade your house later.
- Build wealth and give generously to people in needStart putting all that spare income into building wealth.
- You have permission to enjoy your hard work without any payments robbing your future income. Just make sure you pay cash for whatever you want to do!!!
- Now you’ll be able to help others in need in BIG ways, not just with $1 donations at the supermarket checkout; be a force for good with that money and enjoy it.
We’ve not made it to step 7 yet and sometimes an emergency does come up, that pushes us back to step 3. That’s OK, because this plan will take a few years. The most important thing is that retirement is looking brighter.
Since starting with Dave Ramsey, they’ve released a free budgeting software called Every Dollar. Unfortunately, it’s only available in Canada & USA. We’d definitely be willing to give it a go when it’s available internationally.