Many of you that know me personally are aware that I have my degree in Finance and therefore understand all of the benefits of using other people’s money (OPM). If you’re able to earn 10% on your money each year, rather than tie up your own capital (which is typically quite limited) into the operation, you could use the bank’s money at 5% interest and still earn 5% for yourself — all on money that wasn’t even yours in the first place!
The principle of using OPM sounds all well and good when you’re earning that 10%, however, what if your business goes south and you’re suddenly only earning 2%? Now the bank has a hold on you and has you backpedalling. And, when you can’t pay the bank, they have every right to take away your assets that you signed as surety for the loan. You’ll be left with nothing, all because you thought borrowing money was smart. Is it really worth the risk? I say no.
Before listening to his recordings, I thought that Dave Ramsey was an uneducated quack (to put it nicely). Why in the world would I live a debt free life when interest rates were so low? It just didn’t make sense….until I thought about the risk vs. the reward. Sure, I could use the bank’s money and potentially earn $20+ million in my lifetime (with high risk), or I could play it safe and reduce my risk down to practically zero and earn $10+ million. I don’t know about you, but $10 million is plenty for me. Plus, I don’t have to worry each day about losing my shirt at a swing in the economy.
Dave’s plan just flat out makes sense, and it’s super simple! Let’s check out the 7 steps:
- Save Up $1,000 for your Emergency Fund – Anyone can start paying down their debts, but if you don’t have an emergency fund set up, you’ll most likely dive right back into debt when an unexpected expense comes up.
- Pay Off All Debt Using the Debt Snowball – Start paying off those car loans, the credit card debt, and anything else that you owe besides your home loan.
- 3 to 6 Months of Expenses in Savings – It’s wise to have some money saved up and stocked away in the event of a job loss or injury. With this large savings, your credit cards should never carry the burden of an emergency again.
- Invest 15% of Household Income into Roth IRAs and Pre-Tax Retirement – This is where the wealth begins to happen. If you can start this investment early in life, you’ll most likely earn millions before retirement.
- College Funding For Children – With the rising costs of education these days, it’s wise to invest some of your money into college funds for your children.
- Pay Off Your Home Early – With your large savings and your debts gone, paying off the house could happen within 5 years rather than 30.
- Build Wealth and Give – Can you imagine a life with absolutely no payments? You don’t even have house payments anymore! This frees up a bunch of cash to get ultra-wealthy and will also allow you to give like never before!
Since my wife and I started this “Dave Ramsey Plan” in 2010, we’ve been blessed with good jobs and semi-lucrative side-gigs. We were able to ditch our college debts in 2011 and were 100% debt free. It was then time for us to build up a solid savings account and buy a house. We did both, and now we’re investing heavily in our future as well as paying off our house in record time. By the time I’m 30 (in about 3 years), the house should be paid off and it will be time to gain some serious wealth. Also, we’re excited about the freedom this move will give us. Perhaps one of us will want to pursue a different career or start our own business full-time? Without any payments whatsoever, we’ll have plenty of options available to us. I can’t wait!
Are you following this plan? If so, what step are you on and what are your goals for the future?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.