Fours and Sevens; Rules and Baby Steps
In learning to handle money, it is important to have ground rules, and SUPER IMPORTANT to set goals and shoot toward them. In that vein, after reading and surfing for several years, I like and will be discussing Dave Ramsey’s Baby Steps and the budget program YNAB in depth.
YNAB’s Four Rules:
YNAB is short for their website name: http://www.youneedabudget.com/
Their Four Rules help you stop living paycheck to paycheck, get out of debt, and save more money. Excellent product support and a nice blog to boot.
Rule One: Give Every Dollar A Job: YNAB uses what is called zero-based budgeting, you assign every dollar coming in a job to do down to the last penny.
Rule Two: Save For A Rainy Day: In giving every dollar a job, YNAB wants to make sure that some of your assigned money is going to long-term spending (gifts, car repairs, vacations etc) and of course your Emergency Fund. You find money to fill these buckets in your Step One, and Step Two helps you clearly see the opportunity cost of spending money outside the plan. In no way do these Steps preclude you from having fun with some of your hard-earned dollars, just to budget your fun so you don’t go overboard.
Rule Three: Roll With The Punches: This is what I call the Human Rule. When you plan your money down to the last penny, everything is not going to flow exactly with your plan (Especially when you are first starting out on this “I am going to control my money” journey). Roll With The Punches simply says, “Hey, you ARE going to go over budget from time to time in a category or two”. That is not a failure of your plan at all. Simply shift some money dedicated to another goal to the overage, or let the overage carry over into next month, deducting the overage(s) from your available income before you give any other jobs to your funds. Repeated punches though, point to a need to either change spending habits or adjust your cash flow plan to better fit your reality.
Rule Four: Live on Last Month’s Income: This is the rule that makes you go “Hmm”. It is not one you see too often, but if you are able to follow it, you will have comfort in your financial life. How you do it? Well, to achieve this you would add one more line to your budget. YNAB calls this a BUFFER. Every pay, toss some money into this BUFFER until it grows to an amount equal to your monthly budget. Then, every month you use buffer money to fund your budget, while all your income refills the buffer. How would you like to be able to pay ALL your monthly bills in one day at one session? Think of the PEACE you’ll have, not having to time and plan which bill gets paid when. This is a really nice goal to shoot for, but a whole month’s savings might take a while to achieve. On second thought, tax season is fast approaching. If you get a refund, consider tossing it into your buffer and get a leg up on Living on Last Months Income.
That’s the four Rules of YNAB. The program currently costs $60 to download, and the company gives you a 34 day free trial, and ongoing free webinars.
Now, onto the Dave Ramsey Babysteps!
For the record, Dave Ramsey is a Financial Guru who lives and works near Nashville Tennessee.
He has a national radio show, and several books to his name. His live shows are something to see, I’m told. Mr. Ramsey approaches money from a Christian perspective, but don’t let that turn you off if that is not your flavor. The things he talks about work from just about any direction you come from.
His seven Baby Steps are well-known to many people across the world. They are:
Baby Step 1. $1000 Emergency Fund to Start: See my prior posts about this step; we recommend $2,000 and give you ways to get there.
Baby Step 2. Pay off all your debt (expect a home mortgage) using a debt snowball. (ooh, I feel our next post coming on)!
Baby Step 3. Build your Emergency Fund up to three to six months of expenses. Shoot for AT LEAST six months here, maybe longer depending on your job circumstances. After your debts are gone, shovel the money you were throwing at debt toward this goal. Into a money market account, you are NOT looking to make interest off of this. This money is Murphy’s Law insurance. As Dave says, it also kicks out his cousins Broke, Dumb and Stupid.
Baby Step 4. Invest 15% of your household income into Roth IRAs and pre-tax retirement accounts. If you work for a company that provides a match to your 401K , 403B, or any other pre-tax retirement accounts, invest at least enough to get all the match. Do not leave free money on the table. Roth IRA contributions are after tax money, but if you hold the money there long enough, both the contributions AND the growth can be withdrawn TAX FREE! Oh, and Dave’s 15% may not be high enough. Anyone for 20%, 25% or even 30%???
Baby Step 5. Fund college for your children. Dave Ramsey puts this step after your own retirement investments for good reason. Would you really want to starve in retirement or work until you are 75 so your children could go to a certain school? It is a college degree that matters, in most circumstances, it is much less important where you matriculate. Take care of your own house first.
Baby Step 6. Pay off your home mortgage early. This is the last debt you should have, and to kill it with the same zeal you killed your other debts in Baby Step 2, this is your time. You might be saying: “But if I pay off my mortgage, I will lose the tax deduction!” Let’s look at the math. You get a tax deduction (NOT A TAX CREDIT) on interest you pay on your home mortgage (presuming you itemize). So in a year, if your paid interest is $8,000 and you are in a 25% tax bracket, you will save about $2000 on your taxes. After you paid the mortgage company $8000 in interest. If you want to spend $8000 and get $2000 back, please let me know, I’d be glad to make that deal with you.
Baby Step Seven. Build Wealth and Give. Look at you. Completely out of debt, not even a mortgage, retirement savings on overdrive, fully funded Emergency Fund. It’s time to take that extra money and invest it, and also be generous in giving your income away. Make some waitresses’ or waiter’s week by leaving a $200 tip. Give a lot to your favorite charity groups and houses of worship. Find contentment and peace, your money mistakes far behind.
And that’s Dave Ramsey’s Baby Steps! Next post, we will look at Debt Snowballs in detail.
See everyone soon!
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