Step 1: Create a budget
Ramsey’s first step to becoming a millionaire is to create a budget. Outline your income and expenses, and then note the difference. Once you’ve done this, create a monthly budget that you can live by. According to Ramsey, to be successful, every dollar should be tracked and accounted for before the month even begins.
“Where I see a lot of people screw up is that they don’t live on less than they make,” he said.
He points out that wealthy people don’t “blow all their money on stupid stuff.” Instead, they shop with coupons, don’t carry a balance on their credit cards and spend $200 or less a month eating out.
Step 2: Get rid of debt
In order to build wealth, you need to get rid of any debt. There are several ways to do this, but Ramsey suggests the “snowball” method. This starts with paying off the smallest debts first, then slowly moving up until you finish with the biggest debt, regardless of interest rates.
Ramsey prefers this method over others because he believes it’s better for morale and, therefore, you’re more likely to succeed.
Step 3: Build an emergency fund
With a budget in place and your debt paid off, you now have some extra funds to set aside. Ramsey says your priority should be an emergency fund, which is a savings account that you can rely on should you run into financial troubles. This could be anything from a job loss to a medical emergency, or even a broken furnace or car repairs.
The amount set aside in an emergency fund will differ from person to person, based on living expenses. Many experts agree it should be enough to cover you for three to six months.
According to Ramsey, an emergency fund should be prioritized over investing because otherwise, should you need those emergency finances, you’ll just end up taking them from your investments anyway.
Step 4: Invest
Finally, with an emergency fund in place, you can start to invest. Ideally, you should be investing 15% of your gross income into retirement accounts, Ramsey says. Investing is where you can make money, but Ramsey warns not to get distracted by market swings and steady stocks.
The key is being consistent and investing over a long period of time.
More: 10 best investment apps of 2024
Is this realistic?
While these four steps seem pretty straightforward in theory, that’s not necessarily the case in reality. As Ramsey points out in the article, the key to building wealth is investing early and, for many Americans — especially those with student debt — it’s just not possible to start at a young age.
