I’ve been following Dave Ramsey for the last 5 years. My wife and I have been able to payoff all our student loans and our mortgage using his steps. I believe in what teaches for several reasons. His steps are actionable and focused. Following his steps you know exactly what to do next. Every step you complete is creating a better life for you and your family. Always remember there are many ways to financial independence on the income side, but there is only one way to be financially “independent” and that is having independence from having no debt.
Here are Dave’s Baby Steps that has Millions to financial independence:
Baby Step #1: Save $1,000 Starter Emergency Fund
In this step you’ll save $1,000 into a savings account and never ever use, except for true emergencies. This is your starter emergency fund. This savings account is there to help you from falling back into debt.
A true emergency is something unexpected, i.e. unexpected medical bills.
What’s NOT and emergency: new car tires – this is a known expense. Kids school clothes – this is a known expense. Property Taxes – this is a known expense.
Baby Step #2: Pay off All Debt using the Debt Snowball
You’ve completed Baby Step #1! Congratulations! Now you take all extra money and payoff your debt using a debt snowball. A debt snowball is where you add up all your debts smallest to largest. You will then pay off the accounts that have the smallest balance and pay minimum payments on all other accounts. Once one account is paid off you apply that payment to your next payment, and so on.
Baby Step #3: Save 3-6 months of expenses
Woo hoo. You’re making major progress. Now is the time to save up 3-6 months of your monthly expenses. Save at a minimum three months if you live in a household with two incomes. Save at a minimum 6 months if you live in a household with one income.
Baby Step #4: Invest 15% of household income into retirement accounts
Almost there. Once you’ve completed steps 1-3 it’s time to invest for the future. You will put 15% of household income into retirement accounts. If your household income is $50,000 you’ll be saving $7,500 a year!
Why 15%? When investing the only true thing you can control is your savings rate. If you focus on finding great investments that will win big you may not ever invest. So for now focus on your savings rate into diversified mutual funds. Then once you have this mastered you can look into ways to increase your return.
Baby Step #5: Fully Fund Kids College
Now is the time to change the family tree. You want to break this cycle of debt by allowing your kids to graduate from college without student loans. Anything you can provide will be great!
Baby Step #6: Pay Off Home Early
Now you are creating real security! Once your mortgage is paid off you have the security in knowing no one can take your home! You’ll have a lot of extra cash once the mortgage payment is eliminated.
Baby Step #7: Build Wealth and Give
Go out into the world and make a difference. The worries of finance are lower on your mindset because you have abundance. It’s time to help others!
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What are your thoughts on these steps?
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