Become Debt-Free with Dave Ramsey’s Baby Steps
It’s no secret here at the Frugal Sisters, we love to budget and save money anywhere and everywhere we can. Along the way to frugality, we have come across some inspiring individuals. One person we stumbled across on our journey to become Debt-free was Dave Ramsey. As a financial guru, Dave breaks down the personal finance world into Baby Steps. We all need baby steps sometimes, right? Dave’s methods are very effective for those having trouble managing and saving money as baby steps are much easier to manage rather than just diving in and feeling overwhelmed.
Personal finance books can be daunting and intimidating to read. Let’s be honest, they usually are not the most attractive and thrilling books for even the most avid reader. Once we got a copy of Dave Ramsey’s book, “Total Money Makeover” from our local library we were hooked! I couldn’t put it down and instantly become immersed in trying to follow the baby steps.
Yes, I failed a time or two along the way! And that’s ok, it won’t come easy at first, but the key to success is to keep pushing and trying harder until you see progress. That progress motivates you and it worked perfectly for me as it turned into an obsession, trying my best to get through the baby steps as quickly as possible.
So, what are the baby steps? The graphic below outlines each of the baby steps. You can click on the graphic to load a printable that you can keep on your refrigerator, desk or wherever you’d like to help keep you motivated! Below the printable I will break down each step in more detail.
Baby Step 1: $1,000 Emergency Fund
As much as we can prepare for the future, unexpected expenses and emergencies come up. Having a $1,000 in an emergency fund will help you tackle those unforeseen circumstances. You will be glad you have this fund when you get that unexpected flat tire or vet visit! With no savings, events such as this can derail you financially and it could take you weeks or months to recover.
You want to build your initial emergency fund as quickly as you can. This is key for the rest of the baby steps so that you do not put anything on credit and go further into debt. Have a yard sale or get an extra job, anything that will help get extra money for your emergency fund. Stop any retirement contributions, if you’re employer allows it, so that you can make it through these crucial first steps as quickly as possible to save more in the long run.
Baby Step 2: Pay off Debt using Debt Snowball
First, list all of your consumer debts, from smallest to largest, minus your mortgage. Once you have this done, you are going to pay every dollar you have left over from your budget to the smallest debt first while continuing to pay the minimum payment on all other debts. After you have paid off your smallest debt, add what you were paying on it to the next debt on top of the minimum you were already paying.
Paying the smallest amount regardless of interest rates and adding that amount to other debts once paid off will give you momentum and create the snowball effect. Once you have the snowball going you will be able to attack and become debt-free more quickly.
Baby Step 3: 3-6 Month Emergency Fund
Yes, we are repeating step 1 again but on a much larger scale. Now that you are debt free, other than your mortgage, it’s time to start focusing on building more financial security. Having 3-6 months of living expenses into an emergency fund will help you prepare for life’s biggest obstacles, such as a job loss or large house repair.
You should begin this step by adding up all of your necessary expenses for 3 to 6 months. Add up just enough that you could get by on if needed. For most, this might be around $10,000. Set up a new checking account for this fund so that it is accessible when you need it. At this point, you have said goodbye to debt and you will never look back!
Baby Step 4: Invest 15% into Retirement
This is the step where you invest in your future. It’s now time to make up for those retirement savings you had to stop while going through the previous baby steps. You will want to contribute at least 15 percent of your income into retirement. While this may sound like a lot right now, remember, at this point, you are debt free and have plenty of cash in your emergency fund to feel secure. And with all of the money you had been putting towards debt and savings, it should be able to cover the 15%.
Baby Step 5: Save for Children’s College Fund
Now it’s time to start funding college for those little ones. Don’t let college sneak up on you. The years pass by in the blink of an eye and that little one will be graduating high school before you know it! Make sure that you are prepared as college expenses only increase over time.
You can put the funds into a savings account that draw some interest or start a 529 account. Starting a 529 college savings account is a very smart way to save for your children’s college expenses. It is a tax-free account, meaning you do not have to pay taxes on an income that you place into a 529 account. The money in this account also earns interest to help grow your fund. Many times, these accounts grow faster than a standard savings account. Do your research and pick the saving method best for your family.
Baby Step 6: Pay off Mortgage Early
Ahh, this is the one everyone loves and usually wants to skip straight too after paying off all of their consumer debt. If you have a 30-year fixed mortgage, this is a great time to refinance to a 15-year loan. Get aggressive in this step and throw everything you can towards the mortgage. This is going to save you interest, PMI insurance and shave years off your loan. Who doesn’t want a paid-for home, right? Keeping momentum will help you fulfill this dream and a lot of freed up cash.
Baby Step 7: Build Wealth and Give
Now comes the fun! Give generously, bless those around you, and no longer worry about debt, payments and finances as you’re doing it. You’ve worked really hard to get to this step and it’s time to enjoy life even more without the weight of debt. It’s a good idea to max out your retirement contributions or IRA so that you can continue this new lifestyle throughout your retirement and leave behind some money for your children or grandchildren.
Working to become debt-free is no easy task, it takes lots of endurance and patience. Along the way, you will more than likely have a few bumps in the road, but staying on course will pay off. Take a lot of time to think about Baby Step 7 and how good your life can be without the burdens of money and debt. Continue to remind yourself of this to stay motivated. You will create budget habits and discipline that will last for decades to come. Most importantly, don’t forget to have fun along the way and to enjoy the journey!
If you’re interested in learning more about how to build your emergency fund, check out our post: How to Build & Maintain Your Emergency Fund
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