Dave Ramsey’s Baby Steps are a famous method of achieving debt payoff, investment for retirement, and financial freedom. Dave Ramsey is an expert on personal money management, a best-selling author, and he even hosts his own radio show. Dave managed to build a $4 million real estate portfolio by the time he was 26 years old. Unfortunately, he lost everything by the time he reached his 30s. Get a copy and read The Total Money Makeover.
Ramsey’s story didn’t end there, as he managed to get out of bankruptcy and pay off all his debt. Once he was out of his financial misery he started teaching people how to do the same, in order for them to reach their financial freedom. His live events attract millions of people, and he also created the Financial Peace University (FPU), where he helps others get out of debt and learn more about how to handle their finances. We’re going to take a look at Dave Ramsey’s 7 baby steps and how they can help you with your debt payoff and wealth building.
Dave Ramsey’s Baby Steps for debt payoff and financial freedom
According to Ramsey, if you want to take control of your finances and thrive, you can achieve that by following these 7 baby steps. They’re in chronological order and you need to follow them accordingly for best results.
- Save $1,000 for your starter emergency fund
- Paying all debt (without including the house) by making use of the debt snowball
- Save 3-6 month of expenses in a fully-funded emergency fund
- 15% of your household income should be invested in retirement
- Save for your children’s college fund
- Pay off your home early
- Build wealth and give
How Can Dave Ramsey’s Baby Steps Help You
Now that we presented you with the 7 baby steps, let’s take a deeper look at what each of them means and how they can help you. You can read Ramsey’s Total Money Makeover and get your copy here.
1. Baby step one: Save $1,000 for your starter emergency fund.
Consider this your first goal, to save $1,000 as soon as you can. Put the money in an emergency fund. This will help you survive unexpected life events without falling into more debt. You need to have an emergency fund that you can rely on. Remember your ultimate goal is debt payoff and wealth building, so going into more debt would be counterintuitive.
2. Baby step two: complete debt payoff (except the house) using the debt snowball.
In the next step, you will need to start the debt payoff process. This includes all the money you owe, car leasing, credit cards, and student loans. Do your budget planning and note down all your debts in order from the smallest sum to the largest, not taking into consideration the interest rate. One by one start paying each of your debts, using this debt snowball method. It will help you have a perspective over what you owe and start taking action towards debt payoff.
3. Baby step three: Save 3-6 months of expenses in a fully-funded emergency fund.
Once you’ve paid off all your debt it is time you use the extra money in a smart way. The sum you used to pay off the debt can be put in an emergency fund that can support your expenses for 3 to 6 months. This step will help you when life throws challenges your way. You will have a safety net, instead of forming new debt.
4. Baby step four: Invest 15% of your household income in retirement.
Investment in your retirement should be a priority no matter how old you are, as it’s always best to plan for your financial future. 15% of your household income should now go into your retirement fund, to make sure you can relax once you get there.
5. Baby step five: Save for your children’s college fund.
After paying your debt and putting 15% of your household income into your retirement, it’s time to think about your children’s future. Open up a savings account for college expenses so your children can get the education they need.
6. Baby step six: Pay off your home early for total debt payoff.
Remember how we talked about debt payoff but told you not to include your mortgage? That’s because you will take care of it during this step, the most important of them all since it’s the last one before achieving your financial freedom. Any extra money you make and you can put aside should be dropped in your mortgage account, as it will help you pay it early and save you a lot of money in interest.
7. Baby step seven: Build wealth and also give.
Now you’re freshly out of debt, congratulations! The fun part begins: you can enjoy your life without worrying about debt, and continue to build wealth. And while you’re at it, be generous with those less fortunate and help as much as you can. Help your family and secure the financial future of your children and grandchildren, while enjoying the sweet taste of no debt.
The path towards financial freedom is worth it, though not always easy, if you follow your financial goals and plan your steps you can achieve them. To help you along the way, here is a financial wellness guide for a holistic approach towards your financial freedom.