Wednesday, March 16, 2011

Forbes 400 Best Way to Build Wealth

Dave Ramsey in the audio program The Total Money Makeover: A Proven Plan for Financial Fitness says, "The Forbes 400 is a list of the richest 400 people in America as rated by Forbes magazine. When surveyed, 75% of the Forbes 400 (rich people, not your broke brother-in-law with an opinion) said the best way to build wealth is to become and stay debt-free."

Dave Ramsey continues with his audio program by explaining the best and quickest way to get out of debt in small, incremental baby steps. Here is the first two on his list:

 1. Put away $1,000 in savings for emergencies only

Have you ever heard of Murphy's Law? Murphy's Law states that if anything can go wrong, it will. Dave Ramsey explained that when working with financially broke individuals he would first teach them to begin paying off debt. This may work for a while until Murphy decides to pay a visit and cause the car to break down. Leaving no money for repairs, the credit card that had just been paid off is maxed out again.

Having $1,000 in savings not only prevents disasters from happening when Murphy shows up, it also appears that Murphy tends to show up less often.

Ramsey also explains that if you use any money from your emergency fund, that you replenish it at once before you go on to pay more than your unpaid bill's minimum amounts.

Do not continue to step 2 without first completing step 1.

2. Pay off all debts using the debt snowball effect

List all your debt from the smallest amount owed to the largest amount owed. Include everything from car loans to student loans. Pay the minimum amount on all your loans/debts except for the loans with the smallest amount owed. On these you will pay all that you can to eliminate those bills entirely. If it's a car loan you just paid off, don't go buy a new car because you need one or because you deserve it. Likewise, if it's a credit card you just paid off, immediately cancel the credit card.

You can learn what the remaining five steps are to wealth by purchasing Dave Ramsey's audio program by clicking here.

We start with the smallest amounts owed first to generate momentum in our journey to financial freedom. Each loan that is paid off makes the next month's bills a little easier to handle. The more debts you pay off, the more money you can put towards paying off the next loan on your list, getting you out of debt faster and faster after each loan is paid off.

Do not neglect the second half of the richest people's advice to being wealthy, and that is to stay debt-free. Over a lifetime, the average American will spend over $600,000 in interest. Imagine if you could keep that interest you paid to bill collectors in your pocket instead? And it would all be because you chose to stay debt-free.
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