Bestselling author and radio personality Dave Ramsey spends a lot of time encouraging people to take control of their finances.
He suggests that people interested in seriously managing their money use a method that he has identified and that he calls baby steps.
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Ramsey believes small steps (there are seven) can show people how to save for emergencies, pay off debt, and build wealth. He says it’s not a fairy tale and it always works.
Ramsey often explain these steps in great detail, but here is a brief summary of them:
1. Save $1,000 for your initial emergency fund.
2. Pay off all debts (except the house) using the debt snowball.
3. Save 3-6 months of expenses in a fully funded emergency fund.
4. Invest 15% of your household income in retirement.
5. Save for your children’s college fund.
6. Pay for your house early.
7. Generate wealth and donate.
The street
An approach to approaching life insurance
A person who identified himself as Clay, who had been following Ramsey’s financial advice, recently asked him about a major financial issue he had been dealing with.
“My wife and I are 36 years old and have two children,” he wrote, according to KTAR News in Phoenix. “Our son is six and our daughter will be four next month. We’ve been taking the first steps and should have our house paid for sometime next summer.”
“The other day we realized that the only thing missing from our financial picture is life insurance,” he continued. “We both work outside the home. She makes $60,000 a year, while I make $80,000 a year. At our age, and in our current situation, do you think we should get 20 or 30 year term life insurance policies? “
The personal finance personality began his response by praising his efforts and then asking a key question.
“Dear Clay,” Ramsey wrote. “You guys are doing a great job of getting your finances under control and planning for the future.”
“Speaking of the future, do you plan to have more children?” she asked. “If you do, you might want to go with 30-year policies. If you’ve decided that two is enough, then based on your current situation, I think 20-year policies would work well.”
Ramsey expands on the mathematics involved
Ramsey then explained the approach he uses to calculate how much life insurance people need.
“I recommend that people have 10 to 12 times their annual income in life insurance coverage,” he wrote. “That means you would need between $800,000 and $960,000 in coverage, while your wife needs a policy in the range of $600,000 to $720,000.”
Ramsey suggested digging a little deeper into the details involved in this scenario.
“Their kids will be in their twenties in 20 years,” he wrote. “Ideally, you would both have finished college by then or at least be working and living on your own.”
“If you continue to follow my plan, you and your wife will have paid off your house in a few months and will be completely debt-free,” Ramsey continued. “And you will have been saving 15% of your income for retirement over those 20 years. On average, that alone should give you more than half a million dollars for retirement.”
Ramsey seemed to confess to Clay that he was presenting these facts this way with a different purpose in mind.
“Do you see where I’m going with this, Clay?” she asked. “Over time, you two will secure yourselves by getting out of debt, staying debt-free, and accumulating cash.”
“So if you have $500,000 or more in a retirement fund, you have no debt, and your children are older and out of the house, even if you or your wife died unexpectedly at that time, the other one would still be taken care of.” and in very good financial shape,” Ramsey wrote.
“Keep up the good work!”
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