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The Total Money Makeover: A Proven Plan for Financial Fitness, is the book I used to design my financial plan. I like it because it is so simple and straight forward.
So you are ready to take control of your money, you are in the right place. Do you think that your finances are completely out of control and there is no hope of getting out of debt or building wealth for that matter. Rest assured I will help you walk through the process of getting organized. Everything won’t magically fall into place, but you will begin to feel like you are in control as soon as you get started. I am so honored to be on the journey to financial peace with you.
My Total Money Makeover
I remember the summer I realized I needed to get my financial life together. I had just finished grad school, bought a brand spanking new car, moved to Tulsa, OK for work, bought furniture and started by big girl job. Before the dust could settle I owed $104,616 in debt (credit cards, student loans & car loan), no emergency saving, no retirement savings and no solid plan to build any kind of financial foundation.
One weekend I read the Total Money Makeover. Once I got over feeling bad about my mistakes I was ready to put the 7 baby steps to work. I mean, it’s all the direction I had for making a plan to give, spend and save my money. I was so eager to see how different my life could be. Unfortunately, I was so overwhelmed by all the new information and the fact that my financial information was all over the place in my apartment and the internet.
While the information in the book with great, I needed a clear vision or path that was more personal than the 7 baby steps in the book if I wanted to make progress. So I started out by customizing the steps to fit my unique situation and I encourage you to do the same.
The 7 Baby Steps
For those of you who have not read the book, the 7 Baby Steps are the steps that Dave Ramsey recommends his readers follow if they want to win with money.
- Baby Step 1 – $1,000 to start an Emergency Fund
- Baby Step 2 – Pay off all debt using the Debt Snowball
- Baby Step 3 – 3 to 6 months of expenses in savings
- Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
- Baby Step 5 –College funding for children
- Baby Step 6 – Pay off home early
- Baby Step 7 – Build wealth and give!
Since each and every one of us has a unique situation we should each have our very own road map to guide us on the journey to financial peace. The 7 steps are easily customized for any household. This is an equal opportunity road map to wealth, it works for singles, couples and families at all stages of life. Let’s get started!
Creating Your Customized Financial Plan
Before you get started you must know and believe that this is a living document. It can & will change whenever you need it to, it is not written in stone.
To begin download the road map worksheet & copy of my road map. The worksheet is split into 7 sections to match the 7 baby steps. We are going to list all accounts and balances on our road map so be prepared with debt statements and your budget.
Baby Step 1 – $1,000 to start an Emergency Fund
Everyone has the same goal for step one so you don’t need to add anything on the worksheet.
Baby Step 2 – Pay off all debt using the Debt Snowball
List all your debts in order of the one with the smallest balance to the one with the largest balance. Fill in the name of the account and the balance due on the worksheet. Add more lines as needed. To the right of the account names be sure to include the balance according to the statement you are using and total the debts at the bottom
Baby Step 3 – 3 to 6 months of expenses in savings
Unlike the previous step, this is the step requires you to make some decisions on your own. You must decided if you want a 3, 4, 5 or 6 month emergency fund. I opted for 6 months because I think more is better when it comes to emergencies.
The emergency fund is based off the number of months you selected multiplied by how much it cost you to cover your necessary expenses in an emergency. Review your budget to determine the monthly expense amount. After calculating the monthly amount add it to the work sheet for month #1. Keep adding one months expense to create a rolling total next to each month.
Example: My monthly expenses equal $1851.85, so my 6 month emergency fund goal is $11,111.10. To keep it simple, my goal is save $12,000 in my emergency fund.
Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
Multiply your household gross income (combine both spouses) by 15% to determine the total amount to be allocated to retirement accounts. For this post I assume employers do that do not match the employee contribution. If one or both of you have a match, check out How to Calculate Retirement Contributions
If your total is less than $5500 for singles or $11,000 for couples you will allocate all to Roth IRAs. Since we are assuming no employer match, you will not contribute 401K accounts at this time.
If your total is greater than $5500 for singles or $11,000 for couples you will allocate $5500 or $11,000 to Roth IRAs and the rest to 401K accounts.
Example: I am single and when I started my total money makeover my income was $71,500. With this in mind, 15% of my income was $10,725. Therefore, $5,500 went to my Roth IRA and $5,225 went to my 401K.
Baby Step 5 – College funding for children
Unfortunately, this step has the least amount of structure.
Skip this step if there are no kids or you do not plan to pay for your kid’s college and you do not have plans to pursue higher education.
You (and spouse) will determine how much you will save for college based on estimates for colleges you are willing to pay for and how much time you have to save for college.
Once you determine the amount to be save list it next to the child or adult that will receive the money for their education.
Baby Step 6 – Pay off home early
If you own a home you will list the payoff amount for the home.
If you don’t own a home you will list the amount you would like to save for a down payment.
Leave it blank if you are not a home owner and aren’t thinking about home ownership at this time.
Baby Step 7 – Build wealth and give!
The 7 Baby Steps have not let me down once in the past 10 years. Who knows what type of financial condition my life would have been in had I not read the Total Money Makeover. What if I didn’t put what I learn into practice? Luckily I can only share what happened because I put it into practice and I hope you will have a similar story to tell one day.