Money Goals
1. $1000 to start an Emergency Fund
An emergency fund is for those unexpected events in life that you can’t plan for: the loss of a job, an unexpected pregnancy, a faulty car transmission, and the list goes on and on. It’s not a matter of if these events will happen; it’s simply a matter of when they will happen.
This beginning emergency fund will keep life’s little Murphys from turning into new debt while you work off the old debt. If a real emergency happens, you can handle it with your emergency fund. No more borrowing. It’s time to break the cycle of debt!
2. Pay off all debt using the Debt Snowball
List your debts, excluding the house, in order, smallest to largest. The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first.
The point of the Debt Snowball is simply this: You need some quick wins in order to stay pumped up about getting out of debt! Paying off debt is not always about math. It’s about motivation. Personal finance is 20% head knowledge and 80% behavior. When you start knocking off the smaller debts, you will see results and you will stay motivated to dump your debt.
3. 3 to 6 months of expenses in savings
Once you complete the first two Baby Steps, you will have built serious momentum. But don’t start throwing all your “extra” money into investments quite yet. It’s time to build your full emergency fund. Ask yourself, “What would it take for me to live for three to six months if I lost my income?” Your answer to that question is how much you should save.
Use this money for emergencies only: incidents that would have a major impact on you and your family. Keep it in a money market account. Remember, this stash of money is not an investment; it is insurance you’re paying to yourself, a buffer between you and life.
4. Invest 15% for retirement
When you reach this step, you’ll have no payments—except the house—and a fully funded emergency fund. Now it’s time to get serious about building wealth.
Dave suggests investing 15% of your household income into Roth IRAs and pre-tax retirement plans. Don’t invest more than that because the extra money will help you complete the next two steps: college savings and paying off your home early.
Why shouldn’t you invest less than 15%? Some people choose to invest a small amount, if anything, because they want to get a child through school or pay off the home in a hurry. But the kids’ degrees won’t feed you at retirement, and if you throw all your money into your mortgage at this point, you’ll end up having to sell the house and buy the book 72 Ways to Prepare Alpo and Love It. Bad plan.
5. College funding
By this point, you should have already started Baby Step 4—investing 15% of your income—before saving for college. Whether you are saving for you or your child to go to college, you need to start now.
In order to have enough money saved for college, you need to have a goal. Determine how much per month you should be saving at 12% interest in order to have enough for college. If you save at 12% and inflation is at 4%, then you are moving ahead of inflation at a net of 8% per year!
6. Pay off home early
Now it’s time to begin chunking all of your extra money toward the mortgage. You are getting closer to realizing the dream of a life with no house payments.
As you attack this last debt, you will gain momentum much like you did back in the second step of the debt snowball. Remember, having absolutely no payments is totally within your reach!
7. Build wealth and GIVE!
It’s time to build wealth and give like never before. Leave an inheritance for future generations, and bless others now with your excess. It's really the only way to live!
Golda Meir says, “You can’t shake hands with a clenched fist.” Vow to never hold your money so tightly that you never give any away. Hoarding money is not the way to wealth. Save for yourself, save for your family’s future, and be gracious enough to bless others. You can do all three at the same time.
Budget guidelines
1. Charity
Church
Dave recommends 10-15% of your income go toward giving
This includes places such as your church, non-profit organizations and education foundations. It does not include gifts for birthdays, Christmas, or other similar occasions.
2. Saving
Emergency fund/ retirement fund
Dave recommends 10-15% of your income go toward savings
This includes items like your retirement, mutual funds, college savings and even your emergency fund.
3. Housing
Mortgage, Rent, Repairs/Maintenance
Dave recommends 25-35% of your income go toward housing
Depending on whether you rent or own your home, this category consists of items such as rent/mortgage, repairs, property taxes, homeowner's insurance and even furniture.
4. Utilities
Cable/ Electricity/Gas/Phone/Trash/Water
Dave recommends 5-10% of your income go toward utilities
You'll want to keep services like your phone, electricity, water, Internet, gas, and trash pick-up running smoothly each month.
Utilities
5. Food
Grocery/restaurants
Dave recommends 5-15% of your income go toward food
Whether it's just you or a house full of teenage boys, everybody has to eat. Make sure you include grocery stores, restaurants, and even that cup of coffee you bought this morning.
6. Transportation
Car insurance/ gas and oil/ repair and tires
Dave recommends 10-15% of your income go toward transportation
If you have good public transportation, or you walk or ride a bike to work, then you're in good shape. Otherwise, you need to account for auto insurance, repairs, license, registration, taxes, gas and oil. If you are making car payments – include that in the DEBTS category.
7. Clothing
Adult, child
Dave recommends 2-7% of your income go toward clothing
Even though you might think this is more of a personal item, it really is a necessity; especially if you have small kids. Make sure they don't wake up one morning with clothes that no longer fit!
8. Medical/ Health
Disability insurance/ health insurance
Dave recommends 5-10% of your income go toward medical and health expenses
This is a tough and frustrating category for most people, but it includes things like health insurance, disability insurance, doctor bills and medicines.
9. Personal
Child care/ life insurance / miscellaneous
Dave recommends 5-10% of your income go toward personal expenses
This category contains a lot of variety. Examples include hair care, school supplies, life insurance, alimony, child care, subscriptions, pet supplies, toiletries, gifts and other miscellaneous items.
10. Recreation
Entertainment
Dave recommends 5-10% of your income go toward recreation
Don't let life go by without having some fun. Live a little, but make a plan first. Set aside some money for entertainment and vacation. Doing your budget shouldn't count as entertainment!
11. Debts
Car payment/ credit card/ student loans
We hope you don't have to put any of your money to this category
Dave wants you to be debt free more than anybody, but while you work on that he recommends that 5-10% of your income go toward consumer debt. Most Americans don't like to look at this category, so get it paid off quickly. Add up things like car payments, credit cards and student loans. Include everything you owe money on EXCEPT the house you live in.
