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Dave Says December 17 2019

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Great start, but follow the steps

Dear Dave,

I’ve recently begun living on a budget, and I’ve got $1,000 saved. At the moment, I have $150 left over each month after everything is account for in my budget. I also have three debts totaling about $12,000. Should I use this extra cash to pay off debt, or would it be a better idea to start investing the money?

Leland

Dear Leland,

Let’s put off investing for the time being. You’ve done a great job so far by getting on a budget and saving $1,000. Making mature decisions and telling your money where to go, instead of wondering where it went, is the key to gaining control of your finances.

Now, let’s take a closer look at my plan and where you stand. You’ve already set aside $1,000 for a beginner emergency fund. That’s Baby Step 1. Don’t touch that money except in the event of an actual emergency. You’re ready now for Baby Step 2, which is to pay off all debt except for your mortgage using the debt snowball system.

To do this, make a list of your debts from smallest to largest. Make minimum payments on all but the smallest debt, and attack it with a vengeance. As soon as you get that one paid off, move on to the next one and then the next one.

Once you finish the debt snowball, and you’re debt-free except for your house, you go back to your emergency fund and stash more money away until you have a fully-funded emergency fund of three to six months of expenses. This is Baby Step 3. Now you can begin concentrating on investing for retirement, which is Baby Step 4. Start with your employer’s 401(k) plan. Then, you can invest the rest into Roth IRAs—one for you, and one for your spouse—if you’re married.

Saving and investing are both very important. But it’s also important to become debt-free. That’s what makes them easy!

—Dave

Who will be liable for the debt?

Dear Dave,

My parents are getting up there in years, and they aren’t really prepared for when they pass away. They can’t afford life insurance at this point, and they also have a lot of debt. When they die, who will be liable for their debt?

Tammi

Dear Tammi,

Any outstanding debt your parents have upon passing will likely go against their estate. If they have a positive net worth—meaning they owned more than they owed—there will be money left over after the debts are paid, and this could go toward an inheritance. If they have a negative net worth, which means they owed more than they owned, everything could be sold off to cover as much of the debt as possible. Regardless, you would only be held liable for any of their debt if you were a co-signer on the loans.

I’d also suggest getting their permission to buy burial policies on them. If they won’t agree to this, you might have to save up money for their final expenses yourself. In most areas, $10,000 to $15,000 is enough to cover basic burial costs for two people.

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money MakeoverThe Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Ramsey Says October 29 2019

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Mini emergency fund?

Dear Dave,

I’m 26 and single, and I have about $35,000 in credit card and student loan debt. I’m only making $20,000 a year right now, but I expect to be making almost $30,000 soon. Under the circumstances, can I get by with $500 in my emergency fund, or do I need to have $1,000 set aside like you recommend in Baby Step 1? I’m worried about keeping up with bills while saving money for my starter emergency fund.

Thomas

Dear Thomas,

I know it will be tough, but a $1,000 emergency fund should be your first big goal. Also, if you’re not already doing a monthly budget—and spending every dollar on paper before the next month begins—start doing it now! Living on a budget will help you control your money instead of allowing a lack of money to control youThat’s how you can keep up with the bills while you save that first $1,000.

Let’s say you know you’ll be getting two $750 paychecks each month. You go ahead and plan out how to spend that money before you ever get it. Take care of necessities first. I’m talking about food, clothing, shelter, transportation and utilities. After that, make sure you’re current on your debts. Once those things are out of the way, pump every spare dollar you can into your emergency fund. And remember, limit your spending to necessities only!

Start working on that now, Thomas. It’s very important. Remember the old saying about Murphy’s Law, and how anything that can go wrong will go wrong? If you keep living without a plan and no emergency fund, Murphy will hunt you down!

—Dave

They’re just trying to help, but…

Dear Dave,

My husband and I are in our twenties, and we work for the same company. We’ve been thinking about going back to school and finishing our degrees, because our employer is willing to pay for up to 10 credit hours, plus books, per semester with no strings attached. My parents think we should get student loans instead, so we can finish faster. We both have less than two years to go to complete our degrees, so what do you think?

Janet

Dear Janet,

Wow, this is a fantastic opportunity! How many times does someone offer to pay for a college degree with no financial strings attached?

I’m sure your folks want what’s best for you, but the truth is you probably couldn’t take more than nine or 10 hours per semester, work full-time jobs, and keep your relationship and your marriage healthy. If you’ve both got less than two years of school left, it’s not going to take that long, anyway. You’re still young and have plenty of time to make this happen.

I don’t think your parents mean any harm, but they’re wrong on this one. I’ve got a feeling they’re like most people in America today. They’ve spent most of their lives swimming in debt, and they’ve reached a point where they’ve just accepted it and think there’s no other way. To me, that’s sad.

If you and your husband really want to finish your degrees, I’d say the two of you need to march into work tomorrow morning, and take advantage of that wonderful offer. Stay away from debt! 

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money MakeoverThe Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Says August 1, 2019

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Adjust our emergency fund?

Dear Dave,

My husband and I have been married five years, and we’ve decided we want to have children. We’ve both been working full time since our wedding, and we were wondering if we should adjust our emergency fund and retirement investing to accommodate all the upcoming life changes that go along with having a bigger family.

Rachel

Dear Rachel,

When it comes to an emergency fund, I’d stick with what I recommend in the Baby Steps. A good emergency fund of three to six months of expenses should be fine. If you feel safer leaning toward the six-month side, that’s fine. As far as investing is concerned, that’s Baby Step 4. This means 15 percent of your household income going toward retirement. None of that really changes.

Now, with another person in the house, your day-to-day expenses are going to increase. That’ll make it even more important to make sure you’re living on a written monthly budget. What you don’t want to do, is quit your job to come home and be a full-time mom, then find yourselves dipping into the emergency fund. Being a stay-at-home mom is fine. It’s a wonderful thing if you can afford it. But if that’s the plan you need to budget accordingly, and practice living on just your husband’s income before you quit your job.

God bless you two, Rachel!

—Dave

Micro investing apps?

Dear Dave,

What is your opinion on micro investing apps like Acorns and Betterment? Are these good vehicles for building wealth in the long term, and are there any major drawbacks to these types of services?  

Alex

Dear Alex,

I’m not saying there’s anything really wrong with Acorns or Betterment, but they do different things. Acorns is more of an invest pennies, round-up kind of program, where Betterment is kind of a robo-investing deal.

Here’s the thing. Micro investing is going to create micro wealth. And the big downside is you’re going to feel like you did something important. The way you end up with money is by investing money. The way you end up with more money is by investing more money. You can argue all you want that using things like these create extra money. Yeah, but not really. The returns are still micro. An app doesn’t make two dollars turn into twenty dollars.

It’s okay to use apps like that. I’m not mad at them, and I don’t think they’re a rip-off. What worries me about these kinds of things, in an investing sense, is they give the illusion that you’ve done something significant with your money.

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money MakeoverThe Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

How to Budget for Christmas in July

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Can you believe Christmas is right around the corner? It seems like we were just celebrating the Fourth of July, and now it’s time for another Christmas season.

Okay, don’t get mad and protest that I’m bringing up Christmas too early. Even though the actualholiday is still five months away, it’s not too early to budget for it.

One of the most frequent stressors I hear about during the holiday season is overspending. So many people have the best intentions—and they want to give to as many people as possible—but those good intentions often come with a lot of bills in January.

If you’re worried about overspending this Christmas, the fix is to do a Christmas budget. Here’s how you make a very simple zero-based Christmas budget:

Step 1: Decide how much you can spend on Christmas gifts

I’m not talking about throwing Christmas parties or decorating your house. This is just about gifts.

Last year, 33% of Americans planned to spend $1,000 on Christmas gifts. Now, depending on your family and money situation, that might be a lot or not nearly enough. But chances are you don’t have that kind of cash just lying around in your bank account, which is why you’ll want to start putting a little bit aside each month starting now.

For example, let’s take that number and reduce it a little. Let’s say you budget $600 for Christmas gifts. That’s the total amount of money you plan on spending on your family and friends this holiday season. If you start saving for that this month, you’ll need to set aside $120 per month. That’s if you do all your shopping in December.

Step 2: List the people you want to buy for, and how much you plan to spend on each

Your Christmas budget might look like this:

Kid One: $135
Kid Two: $135
Spouse: $50
Mom: $50
Dad: $50
In-Laws: $100
Sister: $30
Friend: $30
Office Secret Santa: $20

Step 3: Subtract all those numbers from the total amount you’ve budgeted for gifts 

If you end up with zero, then you’ve perfected a zero-based Christmas budget!

Every dollar you’ll spend is attached to someone’s name, just like categories in a normal budget. It’s that simple, and all you really need is a sheet of paper. If you prefer a digital budget, check out EveryDollar. It’s the budgeting app I use.

Don’t get too caught up in the specifics of this example. Your situation might be totally different. The main thing is being intentional, proactive, and precise with your spending. And when December comes around, your Christmas shopping experience will be much more merry and bright. You’ll be checking everyone off your budget list, instead of spending first and worrying about the consequences later.

Merry Christmas in July, and happy budgeting!

About Rachel Cruze:

As a #1 New York Times best-selling author, host of The Rachel Cruze Show, and The Rachel Cruze Show podcast, Rachel helps people learn the proper ways to handle money and stay out of debt. She’s authored three best-selling books, including Love Your Life, Not Theirs and Smart Money Smart Kids, which she co-wrote with her father, Dave Ramsey. You can follow Cruze on Twitter and Instagram at @RachelCruze and online at rachelcruze.comyoutube.com/rachelcruze or facebook.com/rachelramseycruze.

Dave Ramsey Says July 25, 2019

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Time for fun money?

Dear Dave,

I had about $12,000 in debt when my husband and I got married three years ago. Since that time, we’ve been given cash gifts from my parents from time to time, and we keep having discussions on how to use this kind of money when it is given to us. I’d like to put it toward paying off debt, but he would rather treat it as fun money. What are your thoughts on this, please?

Sara

Dear Sara,

If there’s something you need, and you agree on it together and choose to buy it as a couple, that’s cool. I’ve got no problem with that. But you guys are still just starting out, and you’ve got debts to pay. I’m sure your husband has a good heart, but I think it’s time for him to grow up a little and realize the importance of getting your financial house in order.

Did your parents have specific and reasonable thoughts on how they’d like you to use the money? If so, you should honor their intent. If not, then how it gets used is pretty much up to you guys. But in your situation, life’s not a birthday party when this kind of thing happens. You should be making mature, responsible decisions together regarding any money that comes into your household. It’s really no different than a paycheck. You take care of obligations and other important things first.

Adults waste money on play things and fun stuff just because it was handed to them by mom and dad. That’s how a 10-year-old behaves. Sit down with your husband, and explain how important it is that you guys start making better decisions with your money. If you two start working together, you could knock out this debt in a hurry!

—Dave

First, catch up!

Dear Dave,

I’ve had enough of living paycheck-to-paycheck. I’m going to start following your plan, but I have a question. Should I catch up on my past due bills before beginning Baby Step 1?

Simon

Dear Simon,

Go for it! You’re sick and tired of being sick and tired, and you’re going to get control of your money. I love it!

First, make sure you’re up to date with necessities—food, clothing, shelter, transportation, and utilities. Next, get current or make payment arrangements for any other types of debt you have, including credit cards.

You mentioned Baby Step 1, which is getting $1,000 in the bank for a beginner emergency fund. Baby Step 2, the debt snowball, comes next. Start paying off all debts, except for your home, from smallest to largest. Then, in Baby Step 3 you’ll save more and increase your emergency fund to a full three to six months of expenses.

Now, you can really start looking at the future. In Baby Step 4, you’ll start investing 15 percent of your household income for retirement. College funding for the kids, if there are any, is Baby Step 5, and Baby Step 6 is a milestone—pay off your house early!

But the real deal is Baby Step 7. This is when all your hard work, sacrifice, and smart financial decisions put you in a place where you can build wealth and give with outrageous generosity. At this point, you’re securing your family’s future and helping others in a big way!

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Says May 2 2019

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When to start the process?

Dear Dave,

My husband and I are debt-free, and we have an emergency fund of six months of expenses saved. We’d like to buy a home in the $250,000 to $275,000 price range in the near future, and we plan on saving $60,000 for a down payment. It should take a little less than two years to save that much money. When should we begin the search for a good real estate agent and start the underwriting process?

Sarah

Dear Sarah,

I’m really proud of you two. You’re being very intentional and goal-oriented about getting control of your finances and the home buying process.

I’d advise starting a conversation with a quality mortgage company when you’re about five or six months away from your savings goal date. There’s “pre-approval,” but there’s also something called “certified.” That’s a step beyond pre-approved, and it basically puts you in a position to make an offer when you’re ready for the purchase. So, getting certified as a buyer is very helpful. After that, sit down and talk with a few agents. Interview them, and decide on someone you like and trust. Find an experienced agent you’re comfortable with to guide you through the real estateworld, and then start outlining your search and buying strategy.

What I would not do is jump from agent to agent. There’s a tremendous benefit in finding someone you trust and feel good about. I’m talking about a buyer’s agent who’s going to fight foryou. This means someone who will show you several different properties, keep your wants and needs foremost in their mind, and help you get the best possible buy on your new home!

—Dave

A home shouldn’t leave you house poor

Dear Dave,

My husband and I were listening to your radio show the other day. In it, you were speaking to a lady about buying a home. When you talk about mortgage payments being 25 percent or less of your take-home pay, does this figure include taxes and insurance or just principal and interest?

Ann

Dear Ann,

That figure includes taxes and insurance, too. The whole idea is to make sure your house payment is manageable. You don’t want to have so much money going toward your mortgage every month, what I call being “house poor,” that you can’t take care of your other financial responsibilities or enjoy life.

It’s simple. You have more money when you don’t have debt. If you want to build wealth, you have to get out of the payment business. When one-third to one-half of everything you bring home is going to creditors, you have less money for other stuff—other important stuff.

Trust me, I get it. A home is a huge expense that very few people, especially those just starting out, can afford to pay for in cash. That’s why I don’t beat people up for getting a 15-year, fixed-rate mortgage. But that’s the only kind of mortgage I recommend. 

And yes, make sure the monthly payments are just 25 percent, or less, of your take-home pay!

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, includingThe Total Money MakeoverThe Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Says April 25 2019

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Before or after?

Dear Dave,

I’ve started following your plan, and I’ve got a beginner emergency fund of $1,000 saved. Now that I’m ready to start paying off debt in Baby Step 2, do you recommend paying off credit card balances before or after closing the accounts?

Maeve

Dear Maeve,

I’m really proud of you. Congratulations on starting the journey toward getting out of debt and gaining control of your money!

Honestly, either way is fine. The point is to get rid of them, and stop using the stupid things. I like the idea, and the finality, of going ahead and closing the accounts and cutting up the cards. Personal finance is 80 percent behavior. Getting credit cards—and credit card debt—out of your life is a great first step in really learning to behave with your money.

Remember, you don’t build wealth or save money by using credit cards. And you’re naïve if you think you’re going to play around with a multi-billion-dollar industry and beat them at their own game. The only way to win against credit card companies is by refusing to play around with them!

—Dave

Paying extra

Dear Dave,

I’d like to start paying a little extra each month on my car loan, so I can get out of debt faster. Would it be a good idea to write a separate check for this extra amount?

Steve

Dear Steve,

I think that’s a great idea! You can include the extra check in a separate envelope with the regular payment. In addition, write “principal only” in big, bold letters on the extra envelope and on the extra check. Make sure to also include the account number in the notation line at the bottom. Follow these guidelines, and you’ll be much less likely to run into problems as result of someone at the bank not paying attention.

Some companies use payment booklets that have a box specifically for entering any amount you want applied directly to the principal. See if this is available to you, as well. Regardless, make sure you keep an accurate, written record of the monthly and overall amounts you’re designating as “principal only.”

Great question, Steve!

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money MakeoverThe Dave Ramsey Show is heard by more than 15 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Ramsey Says February 14 2019

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Zero percent interest?

Dear Dave,

I know you’re against financing purchases. However, is it okay to finance things like furniture at zero percent interest?

Detrick

Dear Detrick,

We just finished an extensive study of more than 10,000 millionaires. Not a single one of these folks said they became rich by borrowing money to buy things at zero percent interest. Since none of those millionaires gave credit for their wealth to zero percent interest financing, and since we know banks charge interest on loans, how is it you think these people are loaning money at “zero percent interest?”

Is it possible the pricing of the item has the interest rate built into it? I think the chances of that are pretty high. If not that, companies offering this kind of financing have very accurate and highly researched data that tells them the vast majority of people who take out zero-percent loans don’t pay off the loans in the specified period of time. Do you know what happens if you don’t live up to the terms of those contracts? It becomes a regular loan, and they back charge you for the interest.

So, on average you’re paying for it all. I don’t know why you’d want to play with snakes, Detrick. Snakes bite, and some of them can kill you. Avoid debt like the plague. It destroys your most powerful wealth-building tool—your income.

—Dave     

Explaining the envelopes

Dear Dave,

I’ve listened to you for a little while, but I was wondering about the envelope system you recommend. How does it work?

Danielle

Dear Danielle,

Don’t let the word “system” intimidate you. It’s just grandma’s old-fashioned, common sense way of budgeting money.

Back in the day, many people were paid in cash at their jobs. Then, they would take the money home and divide it up into different envelopes. The envelopes held cash for different categories in their budgets—food, clothes, rent, and other bills and such. When a particular envelope was empty they stopped buying that item, because the money budgeted for that category was gone. If you wanted a dress, but the clothing envelope was empty, you didn’t buy a dress that month.

It’s just a simple cash system that, combined with doing a written monthly budget, will help keep you from overspending!

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money MakeoverThe Dave Ramsey Show is heard by more than 15 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Ramsey Says January 3 2019

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Worried about mom

Dear Dave,

My mom is 75, and I’m the executor of her estate. She has $500,000 in retirement accounts, and the only debt she has is around $70,000 on her mortgage. Most of her money is in the stock market, with only $20,000 in a money market account, and this worries me. She lives well within her means, so am I wrong to be concerned? Also, do you think she should go ahead and pay off her mortgage? 

Keith

Dear Keith,

Yes, I would recommend she go ahead a pay off the mortgage. If she can do that at age 75, and still have $430,000 left, that’s the way to go.

Now, being in the stock market at her age sounds like a shock to you. I don’t think it’s a bad thing at all. It’s not what the typical financial planner tells you to do. For the most part, they’ll tell you to get super conservative with your money as you get older. But from what you’ve said, she’s not going to use this money. She’s going to use the income from this money. So, the money’s going to be left alone. If she’s in good mutual funds, and not single stocks, I’m not worried about her.

Let’s pay off the mortgage, and then she can start taking her income off the remainder. With the house payment out of the way, she won’t need as much in terms of income, because she won’t be sending money to the bank to pay the note on the house anymore. I’m comfortable with that. I’m 58, and I’m 100 percent into stocks through mutual funds. I don’t have anything else, and I really don’t ever plan on changing that!

—Dave

Changing jobs and retirement savings

Dear Dave,

What happens to my Roth 401(k) when I change jobs and go to a company that doesn’t offer this type of investment savings account? How should you proceed in this situation?

Jamie

Dear Jamie,

Anytime you leave one company for another, you should always roll your 401(k) from your former employer into an IRA (Individual Retirement Account). If it’s a traditional IRA, you roll it to a traditional IRA. If it’s a Roth IRA, you roll it to a Roth IRA. You would choose your own mutual funds, and you would manage your own accounts, with the help of a financial advisor of your choosing.

When it comes to choosing a financial advisor, my advice is to find someone with the heart of a teacher. A good financial advisor will help you make informed decisions about your money, and they will explain all aspects of your investments until you fully understand everything. In short, a quality advisor will never encourage you to invest in something you don’t understand.

Also, look for someone with the ability to assess your overall retirement picture. You need someone who will help you map out a complete retirement plan, and your advisor should be able to explain the big picture and provide a comprehensive, easy-to-understand strategy for achieving your retirement goals.

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 14 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Ramsey Says November 29 2018

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Do what’s best for you

Dear Dave,

I’ll be graduating from college with no debt in a couple of weeks, and I have a good job waiting for me in January. During the last few years, I’ve managed to save almost $25,000 from my part-time jobs while in school. My car is pretty beaten up and old, so I’ve been shopping at a couple of car dealerships recently. Every time I talk to a salesperson, they tell me I should finance something new instead of paying cash for a used car. What should I do?

Ethan

Dear Ethan,

I hope you’ll keep one very important thing in mind. This is your purchase, not theirs. The only reason they want you to finance something is so they’ll make a lot more money off the deal. Forget what they want. You need to do what’s best for you.

You’ve been a hard-working, smart guy over the last few years. The fact that you’ve been able to save nearly $25,000 is proof of that. I don’t think you want to throw a big chunk of your savings—or your new income—into something that’s going to go down in value like a rock. New cars lose about 60 percent of their value during the first four years of ownership. That means a $28,000 car would be worth around $11,000 after that period. That’s not a smart investment.

If I were you, I’d shop around and pay cash for a nice, slightly used $10,000 car. You can get a great automobile for that kind of money, plus you’ll still have the majority of your savings.

Congratulations, young man. You’ve done a great job!

—Dave

Retirement contributions

Dear Dave,

As part of your Baby Steps plan, you always advise people to put 15 percent of their income toward retirement. Would you explain the details of this, please?

Mallory

Dear Mallory,

For starters, Baby Step 4 of my plan involves saving 15 percent of your gross annual pay for retirement. You don’t have to be a complete nerd about this figure. I mean, you probably won’t end up in the poor house if you set aside 12 to 14 percent. The bottom line is you should be able to save $7,500 a year if you make $50,000 annually. That’s just a little over $600 a month.

However, the only way you can do this is by giving up stupid things like credit cards and car payments. When you get out of debt, it’s easy to set aside an emergency fund of three to six months of expenses—which is Baby Step 3—and start throwing 15 percent at retirement during Baby Step 4.

Did you know you can retire a millionaire if you save 15 percent of a $50,000 a year income, and invest it in good growth stock mutual funds starting at age 30? Sounds worth it to me!

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 14 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.