Debt can eat up a substantial portion of your earnings, making budgeting more difficult. And it’s becoming more of a problem in the United States. According to a 2019 Bankrate poll, nearly 30% of Americans have no emergency savings at all. If you don’t have any money, you may have to rely on credit cards to pay for unexpected expenses. According to a ValuePenguin survey, the average household debt in the United States is $5,700, with credit card balance-carrying debt-carrying households having a debt of $9,333. As a result, many families are paying hundreds of dollars per month in debt repayment and thousands of dollars in interest each year. Dave Ramsey’s Baby Steps, a seven-step plan for paying off the debt, preparing for accidents, and improving your entire financial picture, is becoming increasingly popular as a solution to these challenges.
Who is Dave Ramsey?
Dave Ramsey is a financial guru who learned how to handle his money as a result of a big amount of debt he accumulated as a result of real estate losses when he was younger. He used the teachings and principles he learned to start his own coaching business and self-publish his book, Financial Peace University. His company developed from there, eventually renaming Ramsey Solutions by 2014, but the emphasis on teaching individuals how to get out of poverty and gain financial control remained the same. Dave Ramsey does this through his books Dave Ramsey’s Complete Guide to Money and The Total Money Makeover, as well as his radio call-in show, The Dave Ramsey Show. Thousands of people all over the world have benefited from Dave Ramsey’s debt-relieving advice. He combines tough love, faith, and money management guidance to help individuals make better financial decisions.
What Are Dave Ramsey’s 7 Baby Steps?
The Dave Ramsey Baby Steps are the core of all of his teachings. These are a set of doable steps that you can take one at a time to improve your financial situation. Let’s take a closer look at them.
Baby Step 1 – Save $1,000 in an emergency fund
People get into debt for a variety of reasons, one of which is that they are unprepared to deal with unexpected events. As a result, by setting up a small emergency fund, you can avoid needing to depend on bank cards or private loans the very next time your car gets damaged or your pet becomes ill. Dave Ramsey suggests setting aside $1,000 for an emergency fund in this step. If you lose your job or become unable to work, this isn’t designed to be your long-term emergency fund. That stage will come later, but for the time being, this smaller emergency reserve will suffice.
The tasks you must perform to achieve this step will pave the way for your future success. You’ll learn how to budget to ensure that your income exceeds your expenses, helping you to save the cash you need for an emergency fund. You’ll be able to break free from the paycheck-to-paycheck cycle as a result of this. Dave Ramsey believes that from now on, you should be “gazelle intense.” This entails reducing every expenditure you can and living modestly on rice and beans dinners, and foregoing cable and other forms of pleasure. Simultaneously, you’ll do everything you can to boost your earnings. Dave Ramsey frequently advises selling everything you own and getting a second job. He even proposes that busy parents do secondary jobs like delivering pizza or driving for Uber.
Baby Step 2 – Pay off all non-mortgage debt using the Debt Snowball.
Baby Step 2 is the most difficult for many people, as well as the step that requires the longest amount of time to get done. Using a tactic known as the debt snowball, you’ll start by paying off most of your debts except your mortgage in this step. To use the debt snowball approach, compile a list of every one of your debts and arrange them by balance, with the lowest at the top and the biggest at the bottom of the list. You spend all of your additional funds toward your debts after paying your minimum living expenditures each month, starting with the lowest loan. This allows you to achieve quick wins while still keeping you motivated and committed to the objective of repaying off your larger loans. If you are in a lot of debt, this phase may take a long time to complete. But keep in mind that the more you reduce your spending and raise your earnings, the faster you’ll be able to complete this phase.
Baby Step 3 – Save 3-6 months of expenses
Once you’ve paid off all of your debts, you can focus on building a bigger, fully-funded emergency fund. This will come in handy if you have a severe emergency, such as replacing your roof or losing your job. With this fund in place, you should be able to handle almost any situation without having to rely on debt once more. The improvements you made in the previous steps, such as cutting your spending and increasing your income, should help you achieve this step even faster. To finish this phase, you’ll need a budget in place, for example, because you’ll need to know precisely what your monthly spending is.
Ramsey advises saving 3-6 months’ worth of expenses rather than incomes since your bills are what you’ll be paying if you lose your job. Furthermore, putting aside 3-6 months’ worth of expenses is less scary than putting aside 3-6 months’ worth of money. Separate, high-yield savings account online, where you can still access it quickly while also earning interest, is a fantastic place to keep your fully-funded emergency fund.
Baby Step 4 – Invest 15% of gross income into retirement accounts.
The next stage, according to Dave Ramsey, is to start saving and investing your money for retirement since you’re finally debt-free and have a properly funded emergency fund. If you have a workplace retirement plan, setting up automatic withdrawals might be as simple as meeting with your HR department. You’ll have to find out how to accomplish this on your own if you’re self-employed or your employer doesn’t offer a retirement plan. For many people who aren’t investing pros, this stage can be overwhelming, so Ramsey maintains a set of financial planners to whom he can recommend clients for more assistance. It’s worth noting that Dave Ramsey’s recommendations for investment advisors aren’t fully unbiased, as these specialists must pay a fee to be supported by him.
Baby Step 5 — Save for kids’ college
Many parents want the best for their children, even if it means carrying the full tuition expense. Relying on student loans might put a strain on your children’s finances and limit their work prospects after graduation. Many parents want to avoid this. Therefore they must start saving early so that they can pay for tuition later. To gain a tax break, Ramsey advocates putting money into a 529 (college specific) savings plan or an Educational Savings Account). This also protects your money from being taken out for non-educational purposes, as you can only use the funds in these bank accounts to pay for authorized college fees, not a last-minute trip. If you have money left over after investing 15% in your retirement fund, you can combine this step with Baby Step 4. Despite the importance of your children, Ramsey recommends putting your retirement resources first. Although taking on debt isn’t ideal, it is a viable choice for your children to attend college. You, on the other hand, are unable to take out a retirement loan. If you don’t have children, you can skip this step and go straight to the next.
Baby Step 6 — Pay off your home.
Mortgage debt differs from other sorts of consumer debt in that it’s easier to set aside until you’ve established other, better financial habits. In this step, you’ll continue with Baby Steps 4 and 5, but you can now concentrate on clearing the last obstacle. If you haven’t paid off your mortgage yet, now would be the time to do so. You’ll spend all of your excess money toward paying down your mortgage, just like you did with your loan in Baby Step 2. This allows you to buy your home altogether, eliminating the need for mortgage payments as you approach retirement.
Baby Step 7 — Build wealth and give
The final stage is to leave a legacy by donating your money. Assisting family and friends or donating to philanthropic organizations that are meaningful and relevant to you are examples of this. You can also concentrate on accumulating wealth to live a more secure retirement, leave an inheritance to your children, or establish a foundation to carry on your legacy when you pass away. It’s up to you to decide how to spend your money now that you’re debt-free.
Who Should Use Dave Ramsey’s Baby Steps?
Dave Ramsey offers a color-by-number approach to bettering your financial situation. He advises individuals to follow his money-saving plan to the letter, with few or no exceptions.
This may be useful for certain people, particularly those who are unsure of the best options for their financial circumstances. Because many Americans fit this description, it’s easy to see why Dave Ramsey is so famous. It’s easier to be instructed what to do step by step than sifting through all of the available data and making the decision.
The reality is that you can apply and adapt Dave Ramsey’s Baby Steps savings plan for your situation, even if you object to some of his advice or the sequencing of the steps. You are not required to follow his instructions to the letter. If you’d prefer to start with a larger emergency fund or earn rewards properly using credit cards, you can do so.
So, now to the real question, do these steps work? The answer is yes! His advice is a fantastic beginning point for anyone trying to take charge of their finances. You may use it as a blueprint or roadmap rather than a precise plan. This concludes this about “What are Dave Ramsey’s Baby Steps, and Do they work?”
