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Dave Ramsey's 7 Baby Steps for Getting out of Debt

Pay off Debt and Build Wealth with Dave Ramsey's Baby Steps

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Trying to shovel your way out of a mountain of debt? Popular financial expert Dave Ramsey, the host of the nationally-syndicated radio program The Dave Ramsey Show, suggests that you follow these seven "baby steps" as you pay off debt and build wealth.

Baby Step 1: Contribute $1,000 to an Emergency Fund

An emergency fund, also known as a "rainy day fund," is money that you set aside in case of a dire emergency. It's NOT an account that you tap to go on vacation or buy a new vacuum cleaner.

Even if you have massive credit card debt, Ramsey says, you should first put aside $1,000 in an emergency fund. Then only start tackling your debt.

Read more: What's an Emergency Fund?

Baby Step 2: Pay Off Your Debt

Step two is a big step, one that might take years -- pay off all debt except for your mortgage. Ramsey advocates a tactic called the "debt snowball," through which you pay debts in the order of the smallest balance to the largest balance, regardless of interest rate.

This is a controversial tactic. Most finance experts advocate "debt stacking," the payoff of debts in the order of interest rate. Read more about debt snowball vs. debt stacking.

Baby Step 3: Build a 3-6 Month Emergency Fund

Once all your debt is paid off, build an emergency fund that covers 3-6 months of your living expenses. This will save you from going into debt again in the event that you face a major crisis, like a job loss or massive medical bills.

Baby Step 4: Save 15 Percent of Your Income for Retirement

Put aside 15 percent of your total household income into retirement accounts such as a Roth IRA, traditional 401k or others. Don't worry if your employer doesn't offer a retirement plan -- you can set up your own individual retirement account, or IRA.

Baby Step 5: Save for College

Next, start saving for either your own college education or your children's college education (or both!) He recommends using 529 College Savings Plans and Educational Savings Accounts (ESA's) as your savings vehicles.

Baby Step 6: Pay Off the Mortgage!

Now it's time to throw every dime into paying off your mortgage early. Why wait for 30 years to finish making house payments? You can aggressively pay down the principal and become completely debt-free, including your home!

Baby Step 7: Build Wealth and Give

Now that you're saving 15 percent towards retirement, you're debt-free (including the mortgage), and you're prepared to send your kids to college, it's time to focus on building wealth (by investing, creating businesses, etc.) and giving to charity.

Source: Dave Ramsey's 7 Baby Steps

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