7 Dave Ramsey’s Baby Steps 2023 [Start Saving & Become Debt Free]
If you've ever felt like taking control of your financial situation is daunting, stick around because we're about to journey through Dave Ramsey's Baby Steps together.
Known for demystifying the world of personal finance, Dave's method is practical, clear, and powerful if applied with determination and consistency. Today, we will break it down so you can see just how achievable financial freedom can be.
Desperate to pay off that credit card bill? Eager to have a stash away for emergencies? Or maybe you regret not starting that retirement fund ten years ago. No stress will help change your current circumstances, but taking action does.
With Dave Ramsey's Baby Steps, you could pave the path towards greater financial security and freedom. But most importantly, you can stop letting money matters keep you up at night! It's never too late to take control; let's find out how these steps could be your guide on this journey.
What Are Dave Ramsey’s Baby Steps?
Dave Ramsey's Baby Steps is a series of seven steps designed to help individuals create a plan for their finances. These steps, taken sequentially, provide a strategic pathway designed to help you manage your money, tackle debt, and build financial security. These steps include:
Baby Step 1: Save $1,000 for Your Starter Emergency Fund
In the first step, your aim should be to save $1,000 as a beginner's emergency fund. The goal here is not to overwhelm you but to create a safety net for unexpected expenses like a car repair or medical bill.
You might think $1,000 isn't enough to cover most emergencies - and you're right. But remember, we are just starting.
Consider cutting back on non-essential expenses by selling unused items, perhaps? Every little bit will help build this starter fund.
Baby Step 2: Pay Off All Debt Using the Debt Snowball
Moving on to step two, it's time to tackle your debt. Here's where we use what Ramsey calls the 'Debt snowball' method.
Here's how it works - List all your debts (excluding the house) from smallest to largest regardless of interest rate.
Pay minimum payments on everything but the little one, then attack that small debt with a vengeance until it’s gone.
This method is designed for you to gain momentum as each debt gets paid off and gives one a sense of accomplishment, thus encouraging further payoff.
Baby Step 3: Save 3–6 Months of Expenses in a Fully Funded Emergency Fund
Now that you've kicked your debt to the curb, ramping up your emergency fund is time. The aim is to accumulate funds equivalent to three to six months' worth of your living expenses.
Why? Because life is unpredictable, and sometimes it tosses curveballs at us - think about a major car breakdown or an unexpected job loss. You'd appreciate a safety net to break the fall in those moments.
Invest time in making a basic budget for your monthly living expenses, giving you the exact figure to target. Maintain discipline for regular saving; remember every dollar counts; consistency is key.
Now, where should you keep this money? Find a high-yield savings account where your money can grow but stay liquid when needed.
Baby Step 4: Invest 15% of Your Household Income in Retirement
It's now time to focus on long-term goals - retirement! Ramsey suggests putting 15% of your gross household income into retirement funds. Take advantage of the match in your company’s 401(k), then invest the rest into Roth IRAs—one for you and one for your spouse if you’re married.
Remember, this isn't about amassing wealth just for being rich, but rather providing comfort for yourself and possibly leaving a legacy behind. Now, if investing looks like rocket science to you, don't break a sweat.
There are easy ways to get started: consult a financial advisor or do independent research online on beginner-friendly investment options.
And yes, while dedicating 15% might seem daunting now, over time, as income grows, it becomes manageable and proves extremely beneficial when that retirement horizon approaches. You'll be patting your back then, guaranteed.
Baby Step 5: Save for Your Children’s College Fund
Now that you're investing for your future, it's time to think about your children. In step five, you must start putting some money away for your college education. Here's where things can seem tricky, but hang in there!
Consider options like the 529 college saving plans or Education Savings Accounts (ESAs). These plans let your money grow tax-free as long as they're used for qualified education expenses – a huge plus.
Try setting a monthly amount to put away based on what you can afford. Remember, every bit counts, and time can be your friend, allowing the fund to grow.
However, remember this vital advice - don't sacrifice your retirement for your child’s college education. They have options such as scholarships, grants, and work-study programs that can help fund their degrees.
Baby Step 6: Pay Off Your Home Early
You've arrived at step six – the time has come to pay off that mortgage early. You're probably thinking it sounds crazy; after all, who pays off their house early? But guess what? By freeing yourself from monthly mortgage payments before schedule, you'll have more to invest and save.
Double down on the monthly principal payments, or make an extra house payment when you can. It'll help pay off the loan sooner and save thousands of dollars in interest over time.
Baby Step 7: Build Wealth and Give
The idea here is quite simple. You now have the means to create wealth by continuing with your investments, allowing them to grow over time.
A wise man once said wealth is not about having a lot of money; it's about having a lot of options. And when you amplify your wealth, more doors open for you.
Living like no one else allows you to make decisions according to your deepest values rather than your deepest fears or pressing desires- be it philanthropy or supporting causes you're passionate about. After all, generosity is an integral part of wealth-building.
Don't forget that this stage isn't just about making money. It's about nurturing an attitude of gratitude and sharing life abundantly while securing your future. By embracing Baby Step 7, you invite a fulfilling journey where financial stability meets magnanimity.
Who is Dave Ramsey?
Dave Ramsey is a revered American financial guru with over 25 years of financial consulting experience. A successful entrepreneur and best-selling author, he's most recognized for his simple yet effective money management concepts.
With a mission to help people gain control of their finances, he developed the renowned ‘Baby Steps’ approach, which has transformed the lives of millions.
Dave hosts "The Ramsey Show," a popular radio program offering folks just like you real-life advice about money management.
His teachings primarily focus on eliminating debt to create wealth, highlighting that financial peace isn't an impossible dream but an attainable goal.
5 Alternatives To Dave Ramsey’s Baby Steps
Though the Baby Steps are a solid plan, they aren't for everyone. Let's talk about five effective alternatives to Dave Ramsey’s Baby Steps.
FIRE Movement (Financial Independence, Retire Early)
Have you ever dreamt of clocking out way before hitting your 60s? The FIRE Movement (Financial Independence, Retire Early) suggests you can do just that. But it's not about winning the lottery or receiving an enormous inheritance.
It's about living frugally and saving aggressively. You aim to save and invest enough money so that the returns can cover all your living expenses.
Key elements of the FIRE strategy include significantly downsizing consumption to maximize savings, which can reach rates of 50% to 75% of income. Most people following this method aspire to retire by their 40s or earlier.
The Bogleheads’ Guide to Investing/Three-Fund Portfolio
If you want a straightforward and efficient investment strategy, look into The Boglehead’s Guide to the Investing/Three-Fund-Portfolio approach.
Named after John Bogle, founder of Vanguard Group (and creator of index funds), this investing style promotes broad diversification through owning three basic investment categories: a domestic total stock market index fund, an international total stock market index fund, and a bond market fund.
These types of portfolios are lauded for their simplicity and effectiveness. They reduce the need for constant management and keep costs low — which means more money in your pocket over time.
The 50/30/20 Budgeting Rule
Shedding more light on how you manage your hard-earned cash is The 50/30/20 Budgeting Rule. Coined by Elizabeth Warren, U.S. Senator from Massachusetts — it's deceptively simple but provides a macro view of where your money should go.
It proposes you divide after-tax income spending into three categories:
- 50% towards needs — like rent, utilities, and groceries.
- 30% towards wants — those non-essentials like eating out or your Netflix subscription.
- 20% towards savings and debt repayments.
The Snowball vs. Avalanche Debt Repayment Methods:
If you aim to get out of debt, you may have encountered two popular approaches: the Snowball and Avalanche methods.
The Snowball method, which Dave Ramsey advocates, involves paying off debts from smallest to largest, regardless of interest rates. You focus on paying off the smallest debt first while making minimum payments on other loans.
As each debt clears, the extra money you’ve freed goes onto the next smallest debt, creating a ‘snowball effect’. This method provides quick wins, which can be psychologically motivating.
On the other hand, the Avalanche method suggests paying off debts with the highest interest rate first while making minimum payments on your other debts.
This can save time because you're tackling the most expensive debts sooner. However, it may take longer before you see progress.
Both methods can work; it depends on what motivates YOU to keep chipping away at your debt.
The Zero-Based Budgeting System:
Beyond tackling existing financial obligations, it’s essential to understand how to prevent debt pile-up in the first place. That’s where zero-based budgeting comes in handy.
In a zero-based budgeting system, you must give every dollar a job. That means your income minus expenses should equal zero at the end of every month.
This doesn't mean you've spent all your income irresponsibly; instead, it ensures that every dollar is accounted for - for bills, food expenses, or savings goals.
By visualizing exactly where your money goes each month, you're likelier to stay on top of your financial goals and less likely to overspend or accumulate unnecessary debt.
FAQs About 7 Dave Ramsey’s Baby Steps
What is the first of the 7 Dave Ramsey’s Baby Steps?
The first step is to save $1,000 fast. This creates a small emergency fund to cover unexpected life events without going into more debt.
Is the Snowball Method effective in Step 2 of Dave Ramsey’s Baby Steps?
The Snowball Method encourages you to pay off smaller debts first, gaining momentum as each balance is paid off.
Why does step 3 require saving 3-6 months’ expenses?
Step 3 entails saving for a fully funded emergency fund as a financial safety net in extreme life events like job loss or significant medical expenses.
How much should I put towards retirement in step 4?
Dave Ramsey advises investing 15% of household income into retirement savings accounts like Roth IRAs and pre-tax retirement plans.
What does Step 5 of Dave Ramsey's Baby Steps involve?
Step 5 focuses on beginning college funding for children. Only initiate this step once your financial security is established through previous steps.
In the end, your financial journey is ultimately unique to you. Although Dave Ramsey's Baby Steps is a great stepping stone, you must tailor these steps to your needs and goals.
Remember, attaining financial freedom isn't a sprint but rather a marathon! You might face setbacks, but persistence will lead you to success.
Whatever plan you follow, the most important thing is to start. So get out there and make those critical first steps towards ownership of your financial future. You got this!