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Financial baby steps: pay off your house and give like crazy

The past few weeks we explored the basics of Dave Ramsey‘s baby steps — save up $1,000 and pay off debt, then save up a fully-funded Emergency Fund and start investing for the future.

Today, we’re exploring the last two steps — paying off your house, building wealth, and giving like crazy.  And I can’t wait to actually be at these steps.

As a reminder, here are all seven baby steps:

1.  Quickly save $1,000 as your beginning Emergency Fund.
2.  Pay off all your non-mortgage debt using the Debt Snowball method.
3.  Save 3 to 6 months of expenses, completing the Emergency Fund from step 1.
4.  Invest 15% of your regular household income for retirement.
5.  Create a college fund for your children.
6.  Pay off your house.
7.  Build wealth and give like crazy.

And like I reminded you the past few weeks, Dave’s plan isn’t the only plan, but it’s a great one that makes a lot of sense, and has worked beautifully for my family.
And also, even though “give like crazy” isn’t until step 7, he still advocates charitable giving all throughout the plan. The last step implies having enough wealth that you can give tons of it away and still live comfortably.

Baby Step 6

After you start investing for retirement and your children’s future education, you put all your efforts towards paying off your house.  This step is controversial because popular advice tells you to keep your mortgage forever and ever for the tax write-off.
This popular argument is rather silly, really.  To save giving money to the government (taxes), you’re going to continue giving money to the bank (interest).  Over time, you’ll pay more in interest than you would save in tax write-offs.

A simple solution is that once you have no mortgage, take the same amount you’d pay in a mortgage interest, and give it to charity instead.  You’ll get the same write-off.  And you get to put that money towards something you care about, instead of to the government.

Photo by Marya

Benefits of a Paid-For House

There are a plethora of benefits to having a home you truly, 100 percent own.
Here are just a few:

1.  You’ve got less risk.

Once your securely in a paid-off home, you can rest assuredly that nothing can happen to your home, no matter the economy, your job situation, or life stage.  It’s nothing but equity.

2.  You’ll have less stress and more peace.

Don’t underestimate the emotions behind personal finance. Having a paid-for house means not worrying about a mortgage payment, and it means enjoying the four walls you truly own.  As Dave says, the grass in your yard feels different when you own it.

3.  More money for other things.

The money you were paying towards a mortgage?  Now you can really fund that retirement account, easily save up for a vacation, or add an addition or remodel that paid-for house in 100 percent cash.

“Negatives” to Paying off Your House Early

I’m not too subtle in how I feel about this, eh?  But there are some arguments people make for not paying your home off early.  Here are a few:

1.  Your investments aren’t as diverse.

When you funnel your money towards paying off your house, you’re not investing extra towards retirement or college education.  It’s in one major thing — your home.

But I argue that your investments are diverse here, because baby steps 4 and 5 are to save up for retirement and kids’ education.  So you’re not doing nothing there — in fact, by adding a paid-for house to your portfolio, I’d say you’re more diverse!  And once you have no mortgage payment, you’ll have plenty of money to invest elsewhere.

2.  Your funds aren’t as liquid.

Some argue that in a paid-for house, you can’t easily access extra money when you need it; that if more is in mutual funds, you’d be able to grab it in a hurry.  But I argue that this is exactly why baby step 3 is to save six month’s worth of expenses — for emergencies.  You can easily grab that money out of a savings account.

3.  You’re working against inflation.

One argument against paying off your home early is that you’re working against inflation — as it rises three to four percent annually, you’re essentially paying “less” each year for your home.  In other words, your $1,000 monthly mortgage payment is worth less each year.

But seriously — if you paid off your home early, you can transfer that steady mortgage payment into a monthly investment.  And if your retirement and education accounts are in something steady like mutual funds, they can often offer a seven to twelve percent return.  That definitely makes your $1,000 a month more powerful.

To sum up, baby step 6  is to put your efforts towards paying off your mortgage as fast as you can.  And if you can’t tell, I’m all for it.

There really is a method to these baby steps here — and there’s a reason paying off the house is one of the last steps.  It’s so all these other things are set in place, like an emergency fund and other investments for the future.  This makes it a blessing to truly own your home without worry.

For even more inspiration, follow Crystal’s story on Money Saving Mom about how her family recently saved up 100 percent for their first home.

Baby Step 7

Photo by Kris

The last baby step is to build wealth and give like crazy. Now that your home is paid off, you are truly free to do what you want with the money you earn.  For one thing, you don’t need to earn as much, so if you want to downgrade to a less stressful job, you can.  Or, you can take your money and let it work for you.

As you invest your money, you build wealth.  There’s even a tipping point, where eventually, your invested money makes more than you do — and that’s when wealth-building goes into overdrive.  You can quickly save up for a nice vacation, because you’ve got enough “extra” money.  You can get that thing you’ve always wanted.  Your money officially works for you.

Here’s a recent quote Dave had with a caller to his radio show:

When you don’t have a house payment and you make $90,000, if you go blow $2,000 or $3,000 on something in a given month, it doesn’t matter. If you blow $5,000 on an Aspen trip and it took you four months to save up for that, whoopee! You can do that then, because it doesn’t affect your net worth and it doesn’t put you in debt. It doesn’t cripple your family’s future. That’s when you know you can live like no one else.

A friend of mine felt guilty the other day because he bought a new Lexus. He has $20 million. My response to him was, “Dude, would you please shut up? You buying that Lexus is like most people buying a Happy Meal.” It doesn’t matter. He can do that and still hand someone a $100,000 check for Haiti.

And this is what I truly love about Dave — he really emphasizes giving.  I can’t say this from experience, but Dave has said that after awhile, lobster tastes like soap.  He means that you can think of all these things you’d like once you’re in wealth-building mode, but once you’ve tried it, it’s no big deal.  The real blessings — and the real fun — are when you can give like crazy.

Yes, you should be giving a portion of your income to charity throughout all the steps.  But in step 7, you can do really wild things.

• You can drop a $100 tip on a waitress that does a great job and you can tell could really use it.

• You can anonymously leave cash for a single mother, who has no money for groceries.

• You can fund a major project headed by a relief or missions organization.

• You could help support several missionary families, or pay for girls’ education in a difficult country, or provide aid to orphans.

• You could drop a ton of money on relief efforts, such as those happening in Haiti.

These are the things that get me really jazzed up. And this is what my family is working towards.  Now that we’re on baby steps 3b/c/d, 4, and 5 all at the same time, we have a specific plan.  We’re saving up to eventually build our own home — a small one on a pretty plot of land.  As we invest in retirement and our kids’ education, we’ll channel all our money and energy on paying off that house as quickly as we can.  And then we can start building wealth.

What are your family’s big dreams?

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  1. Laura@movetoportugal

    Steps 6 and 7, the best steps!

    We’re at stage six and we can’t wait to pay off our mortgage.
    The tax situation is a little different here in the UK and there are arguments for and against paying off your mortgage, just like in the US, but as you say it’s difficult to take the emotion out of personal finance and I figure having no mortgage must be the best feeling.

  2. Micha

    I like your ideas! It would be great to do with our money, whatever we want… perhaps a long trip to Canada or the United States…found a good room for “my own cafe”…oh I can think of so many things.
    .-= Micha´s last blog ..Stoffvorräte / fabric stash =-.

  3. steadymom

    We’ll have our house paid for one of these days, and that will be amazing!

    We try to increase our giving by 1% (minimum) each year, as that is our passion and we want to do as much of it as we possibly can.

    .-= steadymom´s last blog ..STEADY DAYS – Let’s Chat =-.

  4. Angela

    We’re on baby step #4 & #5. We’re also trying to stay GAZELLE-INTENSE and add a little extra to our house each year so we can quickly get to baby step #6 as well. We can do this because our kids are young, we’re relatively young, and we are still living like no one else (not keeping up with the Jones’s). One of the things we’ve enjoyed during these steps is the ability to give back more. Even though we’re not giving like crazy, we’ve still substantially increased what we’re giving back. It’s not a $100 tip, but we try to give a random $20 (on a small bill) when we have really good service. We’ve become St. Jude’s Partners in Hope (because we pray we will never need them). We’ve also been fortunate enough to give to other various charities we would have had to pass over before. It’s give us a glimpse in to the future and WE CAN’T WAIT!!!!
    .-= Angela´s last blog ..Just a mom! =-.

  5. Aimee

    great post! it’s a bit sad that most of us as americans have never even considered the prospect that you could own your house free and clear. to the point that i’ve rarely even heard it as a goal for people unless they’re talking about their 60s and 70s.

    this has nothing to do with the dave ramsey plan but somehow i’ve never figured out where it is that you all live (maybe you don’t want us to!) or if living outside of the states is a permanent situation. i’m just being nosey but am curious if the house being built on a pretty plot of land is in the states or elsewhere. 🙂
    .-= Aimee´s last blog ..2010 goals =-.

  6. Melissa Gorzelanczyk

    The thought of not having a mortgage sounds like true freedom. Happy Monday!

  7. Jennie

    Dave Ramsey’s Financial Peace University changed our lives when we got in and really worked his system! When we pay off our house we want to spend a month in Germany every year as a family. We also want to be able to support small businesses in underprivileged countries via organizations like Kiva.

  8. paige

    We’re on step 2. We started working on the steps starting around December 25th (about 4 weeks ago) and we’ve already saved $1,000.00 and I’m sending the last payment on my first credit card on Wednesday!

    So I wanted to say thanks for your posts because they gave me the ideas and encouragement to start on this. Thank you!

  9. Denise

    just last week I was thinking about the freedom of being debt free especially when it comes to giving. Great post.
    .-= Denise´s last blog .. =-.

  10. Laryssa @ Heaven In The Home

    We’re on step three too. I’m like you, I can’t wait until the last step! We are keeping our eyes on the goal.
    .-= Laryssa @ Heaven In The Home´s last blog ..Hope For Haiti =-.

  11. caroline starr rose

    A few years ago, my husband and I decided to budget for something we call our benevolence fund. This is a bit of extra money above and beyond our tithe and missionary support. Though it’s not much, it’s lovely to have this set aside to share when needs arise.
    .-= caroline starr rose´s last blog ..Permission to Fail =-.

  12. Amy @ Finer Things

    When we took out our 15 year mortgage 3 1/2 years ago, we set a goal to have it paid off in 6 years. Looks like we’ll be DONE in April 2012, 6 months ahead of schedule! All the sacrificing (old vehicles, no cable, pre-paid $8.34/month cell phone) is so worth it. 🙂
    .-= Amy @ Finer Things´s last blog ..Menu Plan: Pantry Challenge Week 3 =-.

  13. Mrs. Money

    I recently discussed how I can’t bring myself to make additional payments on the mortgage because then the money is “gone” to me. I do have a car loan that I’m working on getting rid of first though, but after that, it’s all mortgage!
    .-= Mrs. Money´s last blog ..I Went on a Cash Diet =-.

  14. Melinda M

    We are also on the program with Dave (went through FPU). We are still in the early steps, but we will be at step 3 by the end of the year! As good as it will feel to have no more non-mortgage debt, it will be extra delicious to no longer have a mortgage!!! My husband and I would love to travel with our sons and expose them to other cultures in a way that only travel can do. That’s our big dream.
    .-= Melinda M´s last blog ..An A+ Day with My Son =-.

  15. Danielle @

    This post is so inspiring!! It’s nice to think about money management in terms of my own family and our freedom to not worry about our finances. However, to think about giving, and giving in massive ways, is awesome!

    My dream would be to fund adoptions for willing families who don’t have the finances. We don’t feel the pull to adopt, but I would love to support those who do.

    I would also love to read about a worthy cause that only needs $7000 to reach their goal and be able to fully fund that without even thinking about it.

    Lastly, though World Vision, I would love to “adopt” an entire village. Can you even do that? I don’t know, but can you imagine making that phone call to find out?
    .-= Danielle @´s last blog ..Funniest Blogs on the Internet-Post #2 =-.

  16. AboutOne Rick

    Love Love Love the Baby Steps tips. Thanks so much for posting this. I am putting the plan into place right now!
    .-= AboutOne Rick´s last blog ..How can I sign up for AboutOne? =-.

  17. Frugillionaire

    Fabulous post! DH and I paid off our mortgage in four years, and it was a wonderful feeling. People told us we were crazy to give up the tax deduction, but we couldn’t see paying a dollar (to the bank) to get back a quarter (from Uncle Sam).
    .-= Frugillionaire´s last blog ..Frugal Transportation: Save on Gas with Good Habits =-.

  18. Becky

    I think it’s important to remember that even paid off, a house is still an expense–taxes, insurance, repairs, etc. The bigger the house, the bigger the ongoing expenses, generally. So having “enough” house is a basic need, but “extra” house is a want. Like Dave’s friend with the Lexus, if you can afford it, great, but it’s something to keep in mind with the long-term financial picture. Our goal is to have a big enough house for our family, on a big enough plot for a large garden and plenty of fruit trees. All paid off, of course.

  19. Amy Reads Good Books

    Great post! Just today, I was working on our long-term financial plan. I’m hoping that we get to the no-mortgage phase eventually!
    .-= Amy Reads Good Books´s last blog ..Uncommon Arrangements =-.

  20. Betsy M

    Good advice. I need to learn more about this. I would LOVE to someday be doing lots more to help those in need.

  21. Wendy

    I am not the biggest Dave Ramsey fan…but he is good for some people. (He just irritates me!) I have just seen many people go on it and then go crazy buying again…I even know someone who took out a large debt then went on the program, but that is people too, not him!

    However we are debt free except our house. Did not need a program for it because I was thankfully taught to not buy things unless I had the cash…

    We will have our home paid for before we are 40! We also bought a home for less than what the mortgage companies said we could afford!!! We bought on one income rather than two! Our home is not extravagant therefore there is not tax benefit for us…I can only claim the minimum standard deduction each year, so I am in more of a hurry to pay it off becuase it does not benefit us!

  22. Jill

    We are amazed at how many Americans are in serious debt. We are on Baby Step #2, and will be here for just a bit more time. It’s quite a joyous occasion when we pay off a card, rather than just consolidating once again – actually paying it off forever! Paying off the student loans and then the house means tremendous freedom to us!
    .-= Jill´s last blog ..Learning About Trust =-.

  23. Amanda

    We didn’t follow Dave’s steps exactly- we bought a house before we had our debt payed off. However, we did “live like no one else” by living in our best friends’ (finished) basement for a year so we could pay off a bunch of school debt AND save up for a down payment on our first home. I NEVER dreamed we would be able to afford to have our own home, but we do!! After a few months of sprucing up our new place, we are back on working on our debt snowball even though I am just working as a graduate assistant. My hope and prayers are that we can have ALL our debt (student loans) before we start our family. I’m not sure how we will do it, but we just keep praying and making small sacrifices each day 🙂
    .-= Amanda´s last blog ..Give me your tired, your poor, Your huddled masses yearning to breathe free =-.

  24. Micha B

    i really enjoyed this segment. the line especially about lobster tasting like soap. i have a friend who is very entrepreneurial and he told me once that he felt the best things that could happen to everyone would be to make their fortune (or fulfill financial dreams) and then lose it all so that people could realize that neither were as big of a deal as you expect them to be.

    i’m not sure i agree 100% with that, but then i haven’t experienced it as he has and the comment has sure made me think over the years. everything does tend to become commonplace eventually unless we consciously work to prevent that.

  25. Maureen

    With interest rates being what they are, why pay 5% interest on a loan and get little, no, or negative returns on your 401K – pay the house off first!

  26. Holden

    Really enjoyed your thoughts on Ramsey’s “Baby Steps”. I’ve been a financial disaster every since I got out of college and am really new to the whole taking charge of my personal finances concept. But, I actually started a blog ( track my personal progress and have made my way through Dave’s Total Money Makeover and Financial Peace. Anyways, I’m looking for other people that have worked the program successfully to try and learn from them. Do you think his Baby Step 2 makes sense … paying off lowest debts first regardless of interest rate? The way Dave talks about credit and interest … this recommendation seems to be in conflict his overall thoughts. I understand the short term wins pyschology but wondered what you thought?
    .-= Holden´s last blog ..My Debt Snowball =-.

  27. Heather

    We are on baby step 5. I can’t wait till we can GIVE! That is our goal. Good post.

  28. Emily

    We are on baby step 2, and some days I feel like we’re gonna be there forever! I know that with persistence and diligence we WILL get there. I understand that Dave isn’t for everyone…he can be a bit abrasive. HA! But I especially enjoy listening to him on the radio. It gives me the boost I need to keep going. That may sound silly, but that’s how I feel. One day, the house will be paid off, and I cannot wait to be able to give like crazy. How wonderful it will be to be able to bless people with giving.
    .-= Emily´s last blog ..Coupons… =-.

  29. rachel

    We just started Dave’s Financial Peace University, and are loving it. Honestly, right now, our big dream is paying off our gargantuan student loans before our oldest kid hits her teens. Even though I wish that weren’t our situation, it is exciting to think that we could actually do it in 3-4 years instead of 30.

    I get excited about giving along the way. We have always tithed and felt good about that being our giving, but even to tithe + contribute small amounts for micro-loans and that kind of thing is exciting to me. Recently my kids and I found some things to sell at a children’s consignment sale, with the plan of using some or all of the profits to donate to Haiti relief funds. In the past, I don’t think we would even have considered this a possibility because I felt like we were barely making it. If anything, we have less money to spend now that we are more in control of it, but the control makes it easier to be able to give, somehow. I feel blessed to have learned about Dave Ramsey’s plan because it has really helped us in this way.

  30. Cara

    MAN sometimes I wish we were rich. I’m trying so hard to keep our family afloat and not be insanely jealous of people like my parents and my in-laws, who are in their fifties and have their finances together like this article encourages. It’s really a work I need the Lord to do on my heart.

    This article sounds just so, so great to me. We’ve solidly reached step 1 and are not too far from finishing step 2 (though I don’t know what the Debt Snowball method is, it seems self-explanatory). Hurray!

    But as I was listening to my mother talk about her car payment, which is more than my husband and I make per month combined, I couldn’t help but cringe. It sounds profound to say that buying a Lexus is like buying a happy meal to some people, but I just can’t comprehend how that shift in perspective is justified.

    To some people, money isn’t relative. To some people, money is worth a certain defined, absolute amount. Once a person is making enough to have their basic needs, and secondary needs, and even their comfort wants provided for, money plays a different role in life. It just makes me sick to my stomach thinking about how much money some people waste and waste and they don’t feel the waste. It doesn’t matter to them.

    Well, I feel it. And when we’re on our feet solidly, I am not wasting our extra money. We’re giving it away! Away, away, away!

  31. April

    We are on babystep 6. The question I have is…. If you are military and know that you will be retiring in 4 years… and not living in the same state when you retire. Still try to pay off house?

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