Welcome back to my continuing break down of Dave Ramsey’s Baby Steps. These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.
I personally find these steps simple and easy to follow but also elegant and effective.
In previous installments I covered:
Baby Step 1 – $1000 Emergency Fund
Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball
Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses
Baby Step 4 – 15% Earnings Invested for Retirement
Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)
Today, we’ll examine Baby Step Six.
Baby Step 6 – Pay-Off the House
I find there is an elegant symmetry in Ramsey’s Baby Steps. In step 2 you use a snowball principle to eradicate your debt. You deploy minimum payments in multiple directions while focusing your heavy firepower against a single target.
The second half of the Baby Step set works in much the same way. You see, Steps 4 and 5 and 6 are meant to be exercised concurrently. A portion of your income is directed against your retirement – consider it a 15% minimum payment. Similarly your college savings are incremental deposits against a future need – the age of your children and the amount already saved will help inform that ‘minimum’ payment.
That should leave you with a hearty sum that you begin to focus against what is often considered an unthinkable goal – paying off your home mortgage.
Granted, paying off your mortgage will not happen overnight. That is why you need to engage the retirement and education savings at the same time. But it is an attainable goal.
Consider some popular strategies for attacking a home mortgage:
- Make half payments every 2 weeks rather than a full payment monthly. The trick here is that a 52 week year has 26 two week intervals which equates to 13 payments. One payment more per year than the 12 month calendar. On average, this approach will shave 6-7 years from a traditional 30 year mortgage.
- Many folks are electing for a 15 year mortgage rather than the traditional 30 year term. Given how mortgages are amortized, cutting your term in half does not equate to a doubling of your monthly payment. Often it is only a couple hundred dollars. An easy increase to handle if you’ve eliminated your consumer debt.
- Extra payments are valid if you have an irregular income stream or are unable to refinance into a shorter term. Pay raises, gifts, bonus payouts, etc are easy ways to ply additional dollars against your mortgage.
- Tag Team… imagine paying half payments every 2 weeks against a 15 year term loan and tossing a healthy chunk of your annual bonus into the mix as well. Suddenly 30 years looks like 15 which looks a lot like 9, which can begin to look even smaller.
In reality, if you’ve eliminated your consumer debt, it may not be unrealistic to shave your mortgage payoff down to a 7 or 8 year term. When I consider that we’ve already been in our current home for nearly 5 years, I wish I had applied some of this thinking back in the day.
But the beauty is that rather than lamenting previous decisions, I have the freedom to embrace a new decision today. And I’m certain that once I finish step 2 this spring and then step 3 over the summer, I’ll be excited to start pushing my snowball to where I want to take it rather than to where I have to take it.
Paying off the house… now that’s just cool!
Stay tuned for the final installment in this series:
Baby Step 7 – Save, Invest, and Get Rich
Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well. While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.
Read, Enjoy, Comment, Subscribe!
Bible Money Matters – step 6
Dave Ramsey – step 6
Photo By: chrisinplymouth