Do “The Baby Steps” or “The Wealth Cycle” really work for everyone?
Every major personal finance counselor has a financial plan that they suggest everyone follows. Dave Ramsey teaches his listeners to follow “The Baby Steps.” Loral Langemeier offers what she likes to call “The Wealth Cycle.” Everyone has their own plan that they think you should follow, even some personal finance bloggers have jumped on the band wagon and suggested their own financial plans that you should consider following. Are these plans worth following? If so, which are worth following and which should be ignored?
All of these plans focus on getting your financial life in order. Usually it involves saving up money for emergencies, reducing your debt, investing for retirement, and paying off your house. All of these are great things to do for their own reasons.
Let’s look at Dave Ramsey’s financial plan. First he suggests that you put $1000 in the bank for a beginner emergency fund. Secondly, he suggest that you pay off all of your consumer debts from smallest to largest. Following such, you are to put three to six months of expenses in an emergency fund. Then you are to start putting 15% of your income into retirement, start savings for the kids college, and then pay off your home and build wealth.
Ramsey’s plan is certainly one of the better constructed plans, however it’s not without its shortcomings. It doesn’t work for everyone. If you’re more prone to emergencies, you’ll want a lot more than $1000 to start off for an emergency fund. If you got stuck with some very bad pay day loans, you’ll want to clean those up before putting money away for emergencies. If you have some extremely low interest debt, there’s no reason to pay it off in a hurry, but Ramsey suggests that you do so anyway. His plan also assumes that you have children and are a home-owner. There are a lot of assumptions made about you in this plan.
This is not to say that Dave Ramsey’s plan is any worse than anyone else’s, in fact it’s a very good plan, but the problem is that these cookie cutter financial plans just don’t work for everyone. There’s no way they can take into account your specific situation, and often times they just don’t work for everyone. Each and everyone of our financial situations is different, but these cookie cutter financial plans don’t take this into account. Often times radio hosts of these shows have to tell callers to do something slightly different than their financial plan because of their unique situation.
Fortunately, there’s an alternative which will work for everyone. You need to do your own financial plan which takes into consideration all of the financial concerns in your life. You can create one of these by doing research, prioritizing and working with a good financial counselor or a friend who’s smart with money. Your financial plan might not be the world’s greatest plan, but it will better match your situation more than one by someone who’s never met you. As long as you have focused intensity and are working toward your goals, you will do well.
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The initial baby emergency fund is to keep you from going back into debt or going back to the pay day loan place. It’s meant to break the cycle. If you paid pay day loans before having the $1000 and your car breaks down, you’ll just be right back at the Payday loan place doing more of the same.
No assumptions. If you don’t have a house or kids, you skip those steps.
FJH
Baby Steps – http://www.daveramseyguru.com/the-dave-ramsey-baby-steps-will-change-your-life-if-you-just-apply-them-your-only-other-option-is-to-stay-in-debt-and-keep-doing-what-you-have-been-doing-financial-guru-dave-ramsey-is-mentor-to-th/
Logic and commonsense tells us that living on less than you make is a good plan. Keep it simple.
FJH
daveramseyguru.com
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