Dave Ramsey is a successful Businessman, Radio and YouTube Show Host, and Author. His large empire includes the “The Dave Ramsey Show”, several published books including “The Total Money Makeover” and “Financial Peace”, Ramsey+ Membership Services including the “Every Dollar” budgeting app, and Financial Peace University courses. What Dave is perhaps most well known for is his 7 Baby Steps. Dave created the 7 Baby Steps to help people achieve Financial Peace.
BABY STEP #1
Save $1000 for an Emergency
More than 40% of American’s can’t afford a $400 emergency expense. Before you do anything else, you should save $1000 strictly for emergencies. Consider signing up with one of many free budgeting softwares like Mint, Personal Capital, and NerdWallet. Or sign up with Dave Ramsey’s Every Dollar.
BABY STEP #2
Pay Off All Debt
In this step, Dave refers to debt as any line of credit or loan except for your mortgage. It includes credit cards, student loans, home equity loans, home equity lines of credit, car loans, and personal loans. Dave encourages the use of the Debt Snowball Method to pay off your debts. This method involves paying your debts in order from your smallest balance to your largest balance, regardless of interest rate. Imagine a snowball getting bigger and bigger as it rolls down a hill. Debt Snowball gives you encouragement as you gain momentum in paying off your debt.
BABY STEP #3
Pay into a 3-6 Month Emergency Fund
After you have paid off your debt, continue building up your emergency fund in a liquid account like a savings or money-market account. Don’t invest this money in stocks or a retirement account.
BABY STEP #4
Invest 15% of Your Household Income Towards Your Retirement
If you have a 401k, make sure you match your employer’s contributions. If you don’t have a 401k, consider contributing to an IRA. I contribute to both my 401k and Roth IRA. As of 2021, the contribution limits for a 401k and Roth IRA are $19,500 and $6000, respectively.
BABY STEP #5
Plan for College
A 529 Education Savings/Investment Account is one of the best ways to save for college. If you have or plan to have kids, or if you want to go back to school yourself, a 529 is a triple-tax advantaged account that you can use to pay for an education. Your contributions are tax deductible and your growth and withdrawals are tax free if you use the money for qualified educational expenses such as tuition, books, software, computers, and on-campus housing.
BABY STEP #6
Pay Off Your Mortgage Early
If you own a house, you have a great debt and a great asset. The equity built in your home increases your net worth and your borrowing power. Your wealth will grow so much faster when you pay off your home, allowing you to experience a sense of financial freedom that most people never experience.
BABY STEP #7
Build Wealth and Give
Dave Ramsey is not only a finance guru, he is also a devout Christian. The three major world religions, Christianity, Islam, and Judaism, all promote donating to the poor. Once you have completed baby steps 1 through 6, you should be in a situation where you can contribute more to your community and the world. You can spread your wealth and help others succeed. You can choose to donate to your local religious organizations, the Girl Scouts, or Palestinian & Lebanese Refugees through ANERA. Spread Good Karma and live a comfortable life.
How do the 7 Baby Steps work?
The Baby Steps are designed to accelerate your net worth. Steps #1 and 2 should take the longest to achieve. Once you save your $1000 emergency fund, you can put ALL of your net income into paying off your debt. Once you pay your debt, you can put even more money into saving for your 3-6 month emergency fund. This will allow you to finish step 3 rather quickly. When you get to Step 4, 15% of your household income won’t feel like much because you took care of your debt and emergency savings goals. You may be tempted to contribute more than 15%, but instead you should contribute to your children’s education fund and your mortgage. Once you reach financial peace, you can start giving back to your community.
If you were to follow the 7 Baby Steps properly, you must complete them in order. In reference to the first 4 Baby Steps, you can take a step back, but shouldn’t skip any steps. For example, if you are on Step 2, but need to spend $500 on an emergency expense, you will need to go back to Step 1 to reach your $1000 emergency goal.
The only acceptable steps to skip are Step 5 and 6 because you may not own a home and you may not have children or a plan to go back to college. You can still choose to save for college, then give that money to a niece or nephew in Step 7. If you rent and have reached Baby Step #6, consider saving to buy yourself a house in cash.
Conclusion
Dave Ramsey’s 7 Baby Steps have helped thousands, if not millions of people over the past two decades. It is a proven method that works for most situations. It teaches you how to better manage your money and it encourages you as you build momentum. I have completed Baby Steps 1 through 3, but I decided to defer Steps #4 and 5. Paying off my mortgage is my main priority now. I consider my house to be my greatest investment and my greatest debt. Once I pay it off, I will focus on my retirement (Step 4) and education (Step 5) accounts. As for Step #7 Giving, I believe you should give every year, no matter what step you are on. I make it my mission to try to donate 2.5% of my income each year. Are you a follower of Dave’s 7 Baby Steps? Which Step are you on? Comment below if you’d like to share your progress.
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