What are the Baby Steps?

Learn about the seven proven steps to Financial Peace.
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What is an emergency fund?

An emergency fund is a rainy day fund, an umbrella. It is for those unexpected events in life: a job loss, an unexpected pregnancy, a car transmission going out, and so on. This is not an investment or a Bahamas fund! Before attacking Baby Step 2—the debt snowball—save $1,000 as a baby emergency fund. A fully funded emergency fund is 3–6 months of your personal expenses set aside in a savings or money market account. Build this up in Baby Step 3.
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How does Dave feel about using a debit card?

A debit card is used just like a credit card; however, the funds come directly out of your checking account. So you are not spending money you don't have. Debit cards can still get you into trouble, though. Research tells us that you spend more when using plastic; you register no emotional pain when you spend with plastic. Dave says to keep the use of your debit card to a minimum—hotel reservations, car rentals, air travel, online purchases, etc.
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Why should I pay off my smallest debt first?

Getting out of debt is like losing weight. It is an emotional decision. You get out of debt when you get mad and passionate! If it takes six months to lose a pound, will you stick to that diet? No way. Paying off the smallest debt first allows you to get some immediate, positive feedback—and encourages you to keep going. Once the debts start getting paid off, you’ll become addicted and stick with the program.
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How do I start managing my money?

Get on a written game plan. John Maxwell says, “A budget is telling your money where to go instead of wondering where it went.” You don’t have to start with a perfect month. Just start where you are. Write down what you have today—income and expenses—and spend your income on paper before the month begins. Get free, downloadable budgeting forms.

Also try using Dave’s envelope system to help you spend cash where you’ve budgeted it to be spent. Take some envelopes, write the budget categories on the envelopes, and use only the allotted money to purchase specific things. When an envelope is empty, don’t buy anything else in that budget category.

Do it on paper, on purpose, before the month begins—and include your spouse! Then you’ll have a game plan, and you’ll start to understand what Dave means when he talks about having Financial Peace.

Learn more about budgeting your money.

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What is the debt snowball?

The debt snowball is the process Dave suggests you use to pay off debt. Here’s how it works: list your debts in descending order with the smallest payoff or balance first. Do not worry about interest rates or terms unless two debts have similar payoffs. In this case, list the higher interest rate debt first.

Pay the minimum payments on all of your debts except the smallest. Put any and all money left over—after you’ve covered necessities—onto the smallest debt. Attack the smallest debt, and pay it off as quickly as possible. Once the smallest debt is clear, start making extra payments on the next smallest debt. You now have more dispensable income because you have one less debt. Just like a snowball gains momentum as it rolls downhill, you’re going to gain tons of momentum and motivation as you move further along in your debt snowball. Learn more.

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What are some tips for sticking to a budget?

1. Make sure you write it down. Give every dollar a name on paper. Spend your income on paper before you actually spend it. Use our free, downloadable budgeting forms.
2. Stay away from places that tempt you to spend. If you are overspending, you need to buckle down and get serious. It’s a sign of maturity when you delay pleasure today so that you can ensure a better tomorrow.
3. Use Dave’s envelope system to help you spend cash in line with your budget. Take some envelopes, write the budget categories on the envelopes, and use only the allotted money to purchase specific things. When an envelope is empty, don’t buy anything else in that budget category.
4. Stay motivated! Don’t give up! A budget gives you hope that your money situation can and will get better. Dwelling on the failures of the past, or fearing that you will never get to the end, will steal your hope. To avoid this, break your plan down into smaller goals. You can change your financial picture. You can change your life.

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What’s the difference between saving and investing?

Saving
Saving stabilizes your money. Save money you plan to use for something within the next five years. Money you plan to use in the near future doesn’t need to be subjected to risk; it needs to be safe. That way, it’s still there when you want it, regardless of how the stock markets are performing that day.

For instance, if you are saving for a car, use a money market account with a mutual fund company. Don't put money into a mutual fund unless you're going to leave it alone for at least five years. Your savings is not an investment.

Investing
Dave’s first investing principle is not to mess with investing until you’ve completed your first three Baby Steps. Then you are ready to invest 15% of your income. The second major principle is to never invest in anything you don’t understand. Don’t invest in something because your brother-in-law says, “You gotta do this!” Talk to your advisor, do your research and know the facts.

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Why should I wait to start investing?

We are emotional beings. If we don’t see quick results, we feel like quitting and decide to move on to something else. The Baby Steps and the debt snowball help build momentum and maintain focus. By taking small steps, you will see quicker results. This helps you stay focused and motivated to stay on track. By paying off the smaller debts first, you will see quick results and have more income available to fight debt.

Investing is further down the Baby Steps. That’s because until you free your income from being spent on payments, you cannot fully use the power of investing. Your income is the most powerful wealth-building tool you will ever have.

It’s still important to start investing as soon as possible. The average time it takes people to get through Baby Step 2 is 18 months to two years. But you’ve got to get “gazelle intense” first and truly focus your efforts on becoming debt-free. Use your desire to start investing for your future as motivation to get debt-free!

Remember, don't get caught up in the numbers games. Focus on one task at a time. This process yields the quickest and best results, and Dave has used these principles for over 15 years.

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While paying off debt, should I stop investing?

Dave recommends stopping your contribution to retirement plans and investments for as long as it takes to get rid of your debt (excluding mortgage payment). Do not withdraw from your retirement plans; just let them sit while you conquer your debt. Then, after everything is paid off, start contributing toward your retirement plans again.
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How does Dave feel about "90-days-same-as-cash" deals?

When you have saved up enough to pay cash for an item, then buy it. Period. Finance plans like "90-days-same-as-cash" or "one year, no interest" are designed to get you to buy more than you would normally buy if you were paying right then. Eighty-eight percent of the 90-days-same-as-cash contracts convert to payments that are usually at 24% APR with the Rule of 78s prepayment penalty.

You don't need or deserve it unless you have saved cash to pay for it. Remember, you can also negotiate with cash and get a far better deal. When this happens, 90 days is not the same as cash, now is it?

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Should I call the credit card company when I cut up my cards?

Yes. Call them and do the following:

1. Close the account to further charges.
2. Ask them to send you written verification that the account is closed to further charges.

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Why doesn’t debt consolidation work?

Debt consolidation doesn’t work because you end up paying about the same amount. The truth is that you cannot borrow your way out of debt.

The way to get out of debt is to change your habits. You need to commit to get on a written game plan—a budget—and stick to it. Get an extra job and start paying off the debt. Live on less than you make. Becoming debt-free is not rocket science; it’s common sense and self-discipline.

You may be tempted by the companies that claim to be able to clean up your credit. Don’t go there. There are two basic problems with these companies. First, for purposes of getting a mortgage, going through companies that take your money and pay your bills will reflect on your credit as if you filed a Chapter 13 Bankruptcy. Secondly, only transactions older than seven years, or a mistake, may be taken off your credit report. A company that says otherwise is either lying or operating illegally.

Here are two suggestions. First, sit down with a counselor and work out a plan to get out of debt. Find counselors in your area who have been trained by Dave. Second, attend Financial Peace University—Dave’s 13-week program that will teach you how to make the right money decisions to achieve your financial goals. Find a class in your area.

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Are consumer finance companies good?

The most expensive money comes from consumer finance companies. They specialize in higher-risk loans and charge high interest rates. Your best option is to save for the item or service you are seeking. Just set aside money and budget. Of course, buying stuff is fun; just don’t go into debt because you want something now. Remember, delaying pleasure is a sign of maturity.
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How do I handle my creditors?

Collectors know that logical people will pay the house payment first. Creditors have discovered that the only way people will pay an unsecured creditor first is if they are being illogical. That’s why collectors are taught to evoke strong emotions. When you become emotional, you tend to pay a collector before you pay the utilities or house payment, so they try to bring out emotions like anger, fear, hate and even friendship. They will store the approach that gets the best results in their computer and use it again and again.

Collectors will bluff you and try to play on your ignorance—if you aren’t aware of the laws. You have to remain logical and make sure you leave your emotions out of these conversations. If you start to feel emotional, politely end the discussion and ask them to call you back later when they can speak to you like a normal human being. Speak with them once every two weeks. Inform the creditors of this rule and tell them not to call too often inside the two-week window. If they do, then simply thank them for their call, hang up, and await their next call in the next two-week window.

The Federal Fair Debt Collection Practices Act is a federal act that outlines consumer rights, as well as the restrictions of creditor calls. Here are a few regulations addressed in that particular act:

1. No harassing calls can be made.
2. Calls must be between 8 a.m. and 9 p.m.
3. Repeated calling and name-calling are prohibited.
4. If a collector is harassing you, put him on notice that you are taping the calls to ensure that he follows the act’s stipulations.
5. You can stop unwanted collector calls at your workplace by sending a certified letter (return receipt requested) to the collector in question. Just ask them to stop.
6. You are even allowed to send a cease-and-desist letter requesting that they no longer contact you in any way except to inform you of legal proceedings. Use this only in extreme circumstances.
7. No collector may garnish wages or attach bank accounts without first suing and winning. (The only exception is student loans that are in default.)

You do have to make some kind of monthly payment to them. To find out how to get on a budget and eventually get these creditors off your back, get Financial Peace Revisited or The Total Money Makeover.

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Should my spouse and I have separate checking accounts?

No. When you get married, you become one. Money is a key area that helps bring unity. When you handle your money together, you are agreeing on your hopes, dreams and goals.

After counseling thousands of families, Dave and his team assure you that more marriages are saved over this one issue than any other. Agree on how you spend your money, and you will begin to feel a powerful sense of unity in your marriage.

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What are some tips on getting my spouse to create a budget with me?

What do they object to about living on a plan? Do they feel controlled? Do they feel like they will lose their freedom? Talk about those issues. You may be surprised by what you hear. After listening to their concerns, tell them your concerns. Why do you want to budget together? How will it make you feel to plan together? Security? Unity? Strength? By telling your spouse how you feel—and not how they should feel—you will often get on the right track together.
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My spouse and I argue about our money. Is it wrong for me to tell my spouse what "Dave Ramsey says" about every single thing?

Absolutely. Your spouse does not care what Dave thinks. He or she only cares about what you think and why you feel a plan is needed. Take the advice you hear on the show, read Dave's books, and apply it to your life—but take it as your own.
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How do I consolidate my student loans?

If you do choose to consolidate your student loans, do it once and do it right. Get a locked-in, fixed rate and don't extend the terms. Nothing else.
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How can I avoid student loans?

Start with grants and scholarships. You’ll have a much better chance if your GPA is much higher than average. Good grades are an investment. Students in the top 10 percent of their classes have many more options.

Work part-time if you need the money. You could also try attending an affordable local college to complete your first few years of required classes. Then, if you can pay cash, transfer to the school of your dreams.

Other alternatives:

• Internships with commitment to hire after graduation
• Church gifts and scholarships
• Private scholarships and grants
• Working prior to college admittance
• Working on campus or while in college

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How do I find scholarships and grants?

Dave suggests getting one or all of these books to help find financial support for college:

• The Scholarship Book by Daniel Cassidy
• Free Money from Colleges and Universities by Laurie Blum
• Winning Scholarships for College by Marianne Ragins

You might also approach your church. If you're a student that has been active within the church, you may be eligible for some assistance. Also, depending on your field of study, you may be able to find a business to sponsor an internship. Dave says, "I worked two campus jobs and a work-study program to pay my way through college. I also worked with 'gazelle intensity' during the summers." Try some of these unique ideas to increase those gifts and grants.
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What is a reverse mortgage?

Reverse mortgages are a bad plan normally offered to the elderly. It’s an awful concept for senior citizens to work hard their entire lives only to finish up being in debt with their home on the line. Not only will they go into debt with this kind of mortgage, but their home will decrease in value. How much sense does this make? This concept goes against all principles of wealth building and wise asset management.
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What is a home equity loan?

A home equity loan is where you borrow money against your home. If you get a home equity loan, you are risking the roof over your family. This is your home, your shelter! It is stupid to borrow more than your home is worth! You’re just asking for Murphy to move in!

You cannot borrow your way out of debt! You get out of debt by changing your habits. Commit to a written game plan and stick to it. Maybe you need to get an extra job to start paying off your debt. Live on less than you make. It’s not rocket science; it’s just basic common sense mixed with disciplined behavior. Get started now!

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How much life insurance should someone have?

As a general rule of thumb, you should have 8–10 times your income in guaranteed renewable term life insurance. Life insurance is designed to replace you, financially speaking, if something happens to you. Let's say that you earn $50,000/year, and you have $500,000 in term life. If you pass away, your spouse should take the money and invest it in a solid mutual fund. If your spouse simply pulled 10% interest out each year, he or she would receive $50,000, without ever touching the principle. Your income would be replaced.
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How can I find a Financial Peace University (FPU) class in my area?

Type in your ZIP code here. You will then be taken to a page with a list of all the classes in your area. You can even view a streaming video preview of FPU.
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What do I do when I’m “upside-down” on my vehicle?

If you are “upside-down” on your vehicle and can't pay it off within 18 months, then sell it yourself. List it at your loan amount. If there are no bites, then knock off a couple hundred. Continue to pay it down as you sell it. Do not go any lower than the Kelly Blue Book value.

In order to turn over the title, you will have to get intense and pay out of pocket for the difference. Or, you will need to get a small loan to make up the difference between the loan amount and the blue book value. In this case, you should try to borrow enough from your credit union to pay your vehicle off and get an extra one or two thousand dollars. That extra money goes toward the purchase of a used, yet reliable, vehicle until you clean up some of your debt. Because you are reducing the amount of debt by a drastic amount in just a short period of time, this is one of the only times Dave would recommend borrowing money to get out of debt.

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