Do you think you’re ready to buy a house? Personal finance expert Dave Ramsey has a simple home-buying formula that determines if you’re ready to undertake this major purchase. Rachel Cruze, money expert and Ramsey’s daughter, even shared with CNBC Make It that she used this formula before she bought her first home.
The 2-Step Home-Buying Formula
Before buying a home, you need to follow both steps in this formula.
- Get free of any debt.
- Build up three to six months’ worth of emergency savings.
How can you achieve both of these goals? Let’s dig deeper and find out.
Getting Free of Debt
There are several ways you can get out of debt. A blog post on Ramsey Solutions shares 28 approaches to getting started including basic tips like creating a budget and working a side hustle, and how to spend less money and shop smart.
Those who decide they are done with debt and ready to own a home follow Dave Ramsey’s 7 Baby Steps. According to Ramsey Solutions, these steps not only get you out of debt for good but allow you to build wealth and take control of your money. And the first step mentioned in the two-step formula for buying a house is the second in the 7 Baby Steps. Here are the rest of the steps.
- Save $1,000 for your starter emergency fund.
- Pay off all debt (except the house) using the debt snowball.
- Save three to six months of expenses in a fully funded emergency fund.
- Invest 15% of your household income in retirement.
- Save for your children’s college fund.
- Pay off your home early.
- Build wealth and give.
Build Up Three to Six Months’ Worth of Emergency Savings
Step two of the home-buying formula is to build up three to six months’ worth of emergency savings.
Per the 7 Baby Steps, you might already have $1,000 saved in a starter emergency fund. This fund is different from the one that contains three to six months’ worth of expenses. The starter fund, according to Ramsey Solutions, is a temporary buffer for paying off debt. After the debt is gone, you need to build up three to six months’ worth of savings in a fully funded emergency fund.
Both steps in this formula are practical and necessary to undertake before buying a home. Paying off your debt helps decrease your debt-to-income ratio, increases your credit score and ensures you’re less likely to be denied a mortgage. Having a fully funded emergency fund gives you cash reserves that can cover unforeseen expenses and keep you from falling behind on mortgage payments or racking up any debt.
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