Dave basically operates on the premise that one's income is his biggest asset. And that most of us have a significant portion of that income tied up in paying revolving debt. Basically, if you can get out of debt, you can free up that cash to then use for other, far wiser, pursuits. Dave suggests getting on a tight budget (he calls it "beans and rice") until debt is retired, and working gradually up the following ladder of "baby steps" until financial peace is achieved:
- Save (ASAP) $1000 in a liquid emergency fund. Otherwise, every time you have a problem, you'll have to go back in debt.
- Pay off all non-home debt using the "snowball" method. (more on this later). Never borrow again.
- Take the money you used to spend on debt and save 3-6 months expenses in a liquid investment as a "full" emergency fund. This will cover anything up to a job loss or disability.
- Once debt-free, invest 15% of gross income in a mixture of mutual funds, preferably tax-advantaged, for retirement.
- Only after retirement is covered, save for kids' college funds.
- Pay off mortgage (which should only have been a 15-year note at a fixed rate with a payment of 25% or less of your monthly take-home pay).
- Once that is all done, you have zero payments... take all that money and invest for wealth-building... as soon as your investments can throw off enough return to pay your expenses (which are low since you're debt-free), you have reached the point of total financial independence.
The slogan is, "if you'll live like no one else (frugal, below your means, debt-free), later you can live like no one else (wealthy)."
In later posts I'll tell what my family does and doesn't do according to this plan.