Uncover the Secret to Financial Freedom - Dave Ramsey's 7 Baby Steps!
If you're feeling frustrated by the amount of money you're spending on old debts like student loans, credit cards, car payments, and mortgages, imagine how much better life could be if you were able to eliminate those debts and start building wealth for your future.
Although it's common to feel overwhelmed by debt, it may be easier to pay down than you think.
Thousands of people have found success using Dave Ramsey's baby steps to tackle their debts and reach their financial goals.
Instead of feeling intimidated, why not learn from his proven method and see what a little financial awareness can do for your finances?
Our consumer culture is always pushing us to buy more, but taking a step back to evaluate our spending habits can help us make more informed choices.
Baby Step #1
Baby Step 1, as Dave Ramsey calls it, is all about creating this emergency fund by setting aside $1,000 as quickly as possible.
For many people, this initial goal of saving $1,000 may seem daunting. However, it's important to remember that every journey starts with a single step.
Creating an emergency fund is one of the most crucial steps towards achieving financial freedom, and it's worth the effort.
To start building your emergency fund, ask yourself whether there are daily expenses or habits that you can do without.
Everyone has what Dave calls a "latte effect," which refers to small daily expenses that, when added up over time, can significantly impact your finances.
It could be as simple as skipping that daily cup of coffee or packing a lunch instead of eating out.
By being mindful of your spending, you can identify areas where you can cut back and redirect that money towards your emergency fund.
Another helpful strategy is to become aware of the seemingly insignificant purchases that you make on a regular basis.
Maybe you buy a lottery ticket every week or indulge in a snack from the vending machine at work. These small expenses may not seem like much, but they can add up quickly over time.
By consciously deciding to skip these purchases, you can save money that can go towards your emergency fund.
If cutting expenses is not feasible, you might consider looking for ways to increase your income. Perhaps you can pick up some extra hours at work or take on a part-time job.
There are also plenty of ways to earn side income, such as freelancing, selling items online, or participating in the gig economy.
The key is to take action and start building your emergency fund as soon as possible. Even if you can only set aside a small amount each month, it's better than nothing.
Once you have a solid emergency fund in place, you can start working towards other financial goals, such as paying off debt, saving for retirement, or investing.
Remember, creating an emergency fund is a crucial first step towards achieving financial freedom. It may not be easy, but it's worth the effort.
By being mindful of your spending, identifying areas where you can cut back, and finding ways to increase your income, you can start building your financial safety net and set yourself up for a brighter financial future.
Baby Step #2
Once you've built up a small cash reserve, it's time to tackle your debt through Baby Step 2 - the debt snowball method.
Begin by creating a list of all your debts from largest to smallest balance, and then immediately start paying off the one with the smallest balance.
To do this, apply extra payments directly to the principal of the smallest debt, whether it's a credit card balance, a store credit, or even a small car loan.
By directing extra money towards this one balance, you can reduce it much faster since the extra payments are being applied directly to the principal.
Make minimum payments on all other debts except for the one you're currently tackling.
Once you've paid off the first debt, take that payment and add it to the next smallest debt on your list.
Looking at the example below, the order to pay off the 3 debts are:
- Car loan - $12,300
- Credit card - $24,500
- House loan - $103,800
This process can take some time, depending on how much debt you have, but the good news is that it tends to speed up as you go along due to the snowball effect.
As you shed the unwanted baggage of debt, you'll begin to feel more in control of your financial destiny.
The debt snowball method can be a powerful tool for getting out of debt and setting yourself up for financial success in the long run.
Remember, the key is to stay disciplined and committed to the process, even when it feels like progress is slow.
Baby Step #3
Now that you've completed baby steps one and two by saving $1,000 and paying off your debt, it's time to focus on baby step three - building up your emergency fund.
Instead of throwing money at debt, redirect those funds towards saving three to six months' worth of expenses.
An emergency fund is essential for covering unexpected expenses, such as a personal injury, helping out a family member, a surprise car repair, or a sudden layoff.
Saving three months' worth of expenses is the minimum amount you should aim for.
However, if you're self-employed or rely on commissions for income, it's wise to squirrel away six months' worth of expenses to cover larger unexpected expenses.
During late bull markets, if the economy gets shaky, it's advisable to stick to the six-month end just in case.
It may seem like a lot of money, and that's because it is.
You want to have plenty of funds to cover any emergencies without having to rely on debt.
Remember, building up your emergency fund is a crucial step towards achieving financial stability and peace of mind.
Baby Step #4
Now that you've completed the first three baby steps, it's time to start thinking about your retirement.
Even if you feel like you're too young to start planning for retirement, you don't want to be one of those people who wait until they're only a few years away from retirement to start planning.
That's why Dave Ramsey recommends that you start investing 15% of your gross income every month in a tax-advantaged account like a 401k or an IRA for both you and your spouse.
For instance, if you earn an average of $59,000 per year, you need to invest around $739 per month, starting at age 24, at a 10% rate of return.
By the time you reach 50, you'll have over $1 million.
While it may seem tedious to some, it'll be exhilarating when your investment gains surpass your salary.
It's crucial not to get nervous when the market fluctuates, and your accounts lose value, as this is a normal occurrence.
Instead, continue investing and relish the fact that you can buy investments at lower prices.
In summary, starting to save for your retirement early and consistently investing 15% of your gross income in a tax-advantaged account is essential to build a solid retirement fund that will allow you to enjoy financial security in your golden years.
Baby Step #5
Baby Step 5 involves setting up a college fund for your children after paying off all your debts except for your home and starting to invest for retirement.
The way you pay for your child's education is critical to ensure that they don’t end up with a pile of loans at the start of their career.
If your children are in high school, it's not too late to start saving, but you will need to be more focused.
For younger children, consider using a 529 college savings plan or an ESA education savings account, which are specially designed for college savings and offer tax breaks.
The savings you set aside for them now will give them a head start and enable them to graduate debt-free, so they can start building their wealth.
However, before moving to this step, make sure you have completed the previous ones.
Instead of jumping to this step, you could help your children explore lower-cost alternatives, such as community college.
Baby Step #6
Now that you've tackled your debts, saved for retirement, and set up a college fund for your kids, the only thing remaining is to pay off your mortgage and become completely debt-free.
Although this may take some time, the impact of additional principal payments on your balance will be significant, as most mortgage payments initially consist mostly of interest.
With all smaller debts eliminated, it will be easier to make extra payments towards your mortgage.
Once you've paid off your home, you'll have more money to invest and to donate to charity.
Imagine how free you'll feel when you own your home outright – even your grass will feel different!
Baby Step #7
Baby Step 7 is all about living and giving like no one else.
It's the most fun and exciting step because you're finally free from the burden of debt and can focus on creating remarkable wealth for yourself and your loved ones.
At this point, you've paid off all your debts, including your home mortgage, and have started investing for retirement and your children's college education.
You're now in a position to direct extra income towards retirement and investment accounts, so you can begin earning more interest for yourself.
Maxing out your 401k and IRA is a great way to continue living like no one else in your retirement years without having to rely on Social Security and working income.
If you're interested in purchasing rental property, you can do so by paying cash and not getting a mortgage.
You can also start being incredibly generous by donating a portion of your income to a charity or church.
Imagine the legacy you'll be able to leave to your children or charity as you accelerate your wealth building for the years to come.
Once the mindset of eliminating debt is in full effect, it becomes easy to save more and spend less.
Being extremely cheap and frugal is not necessary or even desirable.
Instead, simply live on less than you earn so you can save a portion for your future and pay cash for things like vacations and new cars.
The satisfaction of taking control of your financial future through paying off nagging obligations and beginning to earn compound interest is liberating.
You're in control of your future instead of the credit card company profiting by your undisciplined spending.
When you first begin the Baby Steps, you might feel like you're a lifetime away from achieving your goals.
Getting from $100,000 or more in debt to becoming financially free might take a while, but the progress you'll be making will no doubt begin to motivate you and keep you motivated.
Not to mention, things accelerate and become easier as you progress.
If you're sitting under a mountain of debt that makes you feel trapped, just start by making these incremental moves.
Your future self will thank you.
- Ivan