In our personal finance articles, for example our article on watching those expenses, we often talk about Dave Ramsey and the very positive impact he has had on our family’s personal finances. If you have been reading in the personal finance niche for any length of time, in particular if you are in the USA, the Dave Ramseys Baby steps has bound to have come up already. Despite the spread of his message across the USA and the impact has business has had, we notice, perhaps apart from the UK, he is not well known beyond American shores.
Baby Step 1: Save $1,000
for Your Starter Emergency Fund
The baby steps plan has a core focus of getting out of debt and staying out of debt. The first step towards this is having cash on hand for when “Murphy” pays you a visit. If the TV needs replacing you aren’t getting out the plastic and going further into debt. You are paying cash!
Baby Step 2: Pay Off All Debt
Using the Debt Snowball
Excluding the home loan on where you live, all other home loans on rental properties, holiday homes, etc do fall into the step. The debt snowball is getting out a pen and paper and listing all debts from smallest to largest. Don’t worry about he interest rates, terms etc, you have to attack those smallest debts first to 1. build the motivation to get through this financial slog (and it is, believe me) and 2. to free up monthly cash-flow to drive any more money to debt repayment.
Baby Step 3: Save 3–6 Months
of Expenses in a Fully Funded
This is you coming back to complete the emergency fund you started in step 1; that was just a starter fund to get you going and to keep “Murphy” at bay. You goal here in step 3 is to get this fund built up so you can cover three to six months of normal months expenses from a cash reserve so you aren’t going back into debt. “Murphy” will turn up, I guarantee it and with this fund you will be ready. But the only way you are going to build one quickly is first being out of all non-home loan debt.
Baby Step 4: Invest 15% of Your
Household Income in Retirement
Now you have cash in the bank, no non-home loan debt you are on your way and its a great feeling. I still remember making the last payment on the last credit card balance and chopping the card-up. Yes, I really did chop up each card after the final payment had been made on each one. I surprised how attached I was to one or two of those cards. But at step 4 you are well beyond this and its time to get that retirement savings up to at least 15%. We have been growing this and in recent times, including employer match, has reached 35%. But it didn’t start there and it takes time and patience.
Baby Step 5: Save for Your
Children’s College Fund
This was one step we skipped as we don’t have children; we aren’t planning on sending our cats to tertiary education and the nieces and nephews seem to be well provided for. However for most folks the sooner this is started the easier that funding will be. Although we see a growing amount of writing and opinion here on whether this option has the same value for many. I’m sure we’ll get to this topic in the personal finance article series.
Baby Step 6: Pay Off Your Home Early
Baby step 6 is where my wife and I are at the moment, making regular over payments on the home loan. We attacked this debt from two fronts. We first all kept reducing the length the term of the loan by increasing the monthly repayments. And second we made sure we made the voluntary over-payments available, up to 10 percent of the balance at the anniversary date each year. Of course this was made much easier for us with regular pay rises over that time. However we made sure that extra money did not go into lifestyle inflation, but rather reduced the financial leverage in our life.
Baby Step 7: Build Wealth and Give
We haven’t reached step 7 yet; the plans were for this to now be only a few years away, however with everything that is going on in world at the moment that goal might be pushed out a bit further. But one thing we have learnt along this journey is that very matter, it is a journey. The greatest benefit we have gained is the learning along the way. Learning about how money should be used in one’s life and our change in attitude and behavior towards.