Sometimes it's necessary that we take only a few simple steps to come to a point where we can change our lives for the better. This shows itself time and time again in the area of personal finance, where changes to our fundamental habits soon lead to positive results. One of the world's leading experts in the field of personal finance, Dave Ramsey, says that every journey begins with a few steps. “When you decide to take the first step, the path can take you wherever you want,” he says. He has developed 7 steps which can help you on your path to having your personal finances in order, possibly also financial tranquility. All you need to do is to decide.
Step 1: Save 1,000 euros and begin to build an emergency fund
“The goal in the first stage is to save €1,000, however fast you can. We call this an emergency fund and its purpose is for all unexpected events in life, which we rarely think of, or that we are in constant fear of,” says Ramsey. Without an emergency fund, people often find themselves in debt so as to cover expected expenses such as a broken-down washing machine, a car, or something similar “An emergency fund helps get rid of such debt. It is important that the emergency fund is held somewhere separately from your regular funds, as in this way you will avoid any unexpected spending of it.” Of course, quickly creating your emergency fund in the amount of €1,000 euros is not so easy, unless you create for yourself a budget.
Step 2: Use “snowballs” to pay off your debts
“When you no longer want to be in debt, it’s time to get rid of your existing ones. Begin by writing down a list of all of them,” says Ramsey, which he calls a “snowball”, as in this way you get rid of one after the other. Put your debts in order from the smallest to the biggest. If you have two loans with similar payment terms, then the one with the highest interest rate is the one which takes precedence.” Tackle the paying off of debts in such a way that you “attack” the first on the list with the highest possible monthly payment, while the others you pay off with the minimal amount. When you pay off the first, you attack the second and so on in the same way, until you have paid all of them off.” Positive results lead the way and are expressed in every payment, and before you know it, you will have rid yourself of your debts!” added Dave Ramsey.
Step 3: Create an emergency fund in the amount of …
The third step is key to building your emergency fund, which will, in the case of a loss of income, ensure the payment of your monthly expenses for three to six months. Because you will have already gotten used to putting money aside with the repayment of your loans, you will be able to realize this step with relative ease. “In the same way you saved your first €1,000, you will continue to build your emergency fund. When you have created your emergency fund to the required level, you will be prepared for most unexpected and unpleasant surprises, which have until now pushed you into debt,” says the expert. But be careful that you have your emergency fund on a separate account so that everyday temptations do not get the better of you. And don’t forget – the easiest way to build your emergency fund is to regularly manage your personal finances – having a budget.
Step 4: Dedicate 15 % of your income towards your pension
In this step, you will prepare for your pension, irrespective of your current age. “Your goal has to be to invest 15 % of your income for your pension. Spread your money out in a number of different ways, from conservative to dynamic,” says the expert. In doing so we can add that the smartest thing to do is to engage an independent personal financial advisor, who will create for you the most efficient portfolio, and above all take care of that which you yourself do not have the suitable knowledge or time for. And as Ramsey says, even with a few hundred euros per month today, you can one day become a millionaire. With the right management of your investments, even that can happen.
Step 5: Save for your children
When you come to the fifth step, you will have paid off all your loans (except perhaps your apartment loan) and you will have regularly been taking care of payments for your pension. “Now it is time, that you take care of your children’s future. If you begin to save money for your children when they are still small, time will be on your side and you will have an important advantage, as opposed to when your children are already preparing for their own independence,” says Ramsey. Different methods exist in terms of how to save for children’s long-term goals, how to perhaps save money for school fees, a first car, apartment or something else. And that for which they would have to pay heavily by taking out a loan, can with a few tens of euros per month, in this time absolutely make all the difference.
Step 6: It is time to pay off your home loan earlier
Right now, do you think that’s impossible? It’s not! “It’s not a big step, but here there is truly only one loan that stands in your way to financial tranquility – your home loan. Can you imagine a life without a loan? Take this part of your path to financial tranquility as a marathon which you have to attack,” says the world-renowned best-selling author from the field of personal finance. Every additional euro which you can spare and direct towards the early payment of your home loan can bring savings of many thousands of euros in the form of interest, which would be necessary to pay. And especially these days, it pays to check if it would be better to change your interest rate from variable into fixed and to change the repayment period of your loan.
Step 7: Build your wealth and help others
“Can you imagine what other people without loans and financial obligations are able to do? Whatever they like! The seventh step is the last and definitely the one that is the most fun on the path the financial tranquility. When you are finally at that point, you can really live and give like no other. Build your wealth and become generous, leave a legacy to other generations – all that with the help of discipline, which you have maintained perhaps only a few years,” encourages Ramsey and adds, that it is now your legacy, to which you have come via perseverance and good habits.
Therefore, begin today – monitor your budget every month, have goals and follow them. It’s not easy, but with a strong will, discipline and clearly set goals you will succeed.