Today we’re going to go through something that I heard about non-stop when I joined the #debtfreecommunity three years ago – Dave Ramsey’s 7 Baby Steps! These steps are a great place to start for those who have recently decided to take control of their finances and don’t know where to begin.
Let’s jump right into Dave Ramsey’s Seven Baby Steps:
Baby Step 1 – Save $1000
Uncle Dave’s very first step is to save $1000 in an emergency fund. You may be asking, “Emergency Fund? What’s that?!” Fear not, an Emergency Fund is nothing more than a stash of money set aside to cover unexpected financial surprises.
The truth is that the amount in your Emergency Fund should make you feel comfortable for some that could be $500, $1000, $2000 or more! Your emergency fund should not be limited to a specific number but it should make you feel safe a secure should an emergency come up. Whatever amount you choose, make sure that you top it up after you have had to dip into it – at the end of the day, you don’t want to get caught in the rain without an umbrella.
Building up your “baby” emergency fund is especially important for when you get to Baby Step 2 so don’t skip it!
Baby Step 2 – Pay off Debt
Now it’s time to come up with a plan to pay down your debt. Dave Ramsey talks about getting gazelle intense and using the debt snowball to pay down your debt.
Before we go any further let’s define some terms:
gazelle intensity: a term coined by Dave Ramsey in The Total Money Makeover; Dave urges his readership to make getting out of debt their sole focus – nothing else matters. Read more here and here.
debt snowball method: a debt payment strategy that involves listing your debts from smallest balance to largest. First, start by making the minimum payments on all your debts and throw any extra money that you have at your smallest debt (debt #1). Keep doing this every month until your smallest debt (debt #1) has been paid. Next, take the money that you were putting towards debt #1 and put it towards the balance of debt #2. You have just snowballed! Continue to do this until all your debts are gone!
Here’s a comparison between the debt snowball and another popular debt repayment method called the debt avalanche. If you are trying to save on interest, your best bet would be to go with the debt avalanche but if you want to see quick wins the debt snowball would be better. Either way, find the method that works best for you.
Personally, since both of my debts are similar in balance and interest rate my debt payoff date is basically the same using either method. However, I have opted to focus on making extra payments towards my student loan as I figure that I can sell my car at any moment to pay off that debt.
If you want to calculate your debt payoff date and compare the snowball and avalanche methods with your real numbers check out this Vertex42 Debt Reduction Calculator here.
Baby Step 2 can be long and tedious depending on the amount of debt that you have and your ability to bring in additional income to put towards your debt. I definitely recommend getting an accountability partner to keep you motivated along the journey.
Baby Step 3 – 3 to 6 month Emergency Fund
Congratulations! You’ve paid off your debt and can now focus on beefing up your emergency fund. Three to six months of expenses is recommended but I’ve seen people save up 12 months worth. Again, do what works for you and your family.
Baby Step 4 – Invest 15%
Baby Step 4 is seen as the prime time for you to start investing in your retirement.
This is another area that I don’t follow to the tee. You see Uncle Dave tells you to stop investing, even in your employer’s pension plan while on Baby Step 2. I didn’t listen because my employer offers me a match and I believe that investing early is important.
It doesn’t have to be much and as the saying goes a little plus a little plus a little makes a lot. And in the investing world time in the market beats investing in one big lump sum.
Last year, one of my goals was to start investing. Unfortunately, that didn’t work out but this year I hope to start learning more about investing and finding the right investments for me here in Barbados.
But let’s get back to Mr Ramsey and his teachings.
Baby Step 5 – Save Up for University
Now that you have a grasp on your present and future finances, it’s time to start thinking about what you’re kids are going to do in the future.
I don’t have kids yet, so I will most likely skip this step until I do.
But it always nice to think ahead – maybe your children won’t want to go to into formal education but at least you’ll have some money set aside to give them a head start in life – whatever path they choose.
Baby Step 6 – Tackle Your Mortgage
I don’t have a home and probably won’t think about getting one for another few years.
But, Dave recommends paying down your mortgage early after you’ve gotten rid of all your other debt, have a hefty emergency fund, started investing in your retirement and have put some money away for the kiddos.
What Dave and I can agree on is saving up the downpayment on your house at least 10%.
“Save a down payment of at least 10% on a 15-year (or less) fixed-rate mortgage, and limit your monthly payment to 25% or less of your monthly take-home pay.”
Get more advice on mortgages from Dave here.
Baby Step 7 – Build Wealth & Give
Finally, we’ve gotten to the good stuff! This is the place that all of us aspire to be on our financial journey!
All your debts are paid, you own your home outright, you’ve set your kids up for university, you’re investing like the true boss that you are. All that’s left for you to do now is – watch your investments grow and give back to your community!
When I first joined the debt-free community, Dave Ramsey was the only financial guru that was being talked about. However, over the years I’ve learnt that there are several ways to get the same results. I’ve learnt that it’s okay for me to tweak things to suit my own needs and that’s exactly what I’ve done. Dave Ramsey and his teachings were a good starting point for me but as someone who is single, in an entry-level job and not in the USA being gazelle intense was a bit overwhelming and not sustainable in the long run. All in all, I’ve found my groove and I’m content with the way that things are shaking up!