It’s likely that you have heard about the “Dave Ramsey Baby Steps,” but do you actually know its meaning?
If you have lost control of your finances, it’s never too late to seek practical advice to help you get back on your feet. That can be easier said than done, however.
To help you get started toward a brighter financial future, here are 5 of the 7 Dave Ramsey Baby Steps you’ll wish you had considered earlier.
These ‘baby steps‘, as the name reflects, may sound simple, but implementing them can pay off big time for you in the years ahead.
Who is Dave Ramsey and What Are the Baby Steps?
Before we delve into the subject, it’s important to have an idea of who Dave Ramsey is and what the baby steps are. Dave Ramsey is a well-known financial expert and is ranked one of the best among his peers. He’s well known for giving advice on debt, known as the snowball method. His advice is simple, yet very effective.
He also has a radio show called “The Dave Ramsey Show” where he discusses those baby steps. Head over to his website to learn more about the legendary financial guru.
Dave Ramsey came up with these “baby steps.” These steps are things what we all have heard of and are familiar with.
What Are The Dave Ramsey baby steps?
Baby Step 1: Start a $1000 emergency fund;
Baby Step 2: Pay off your debt;
Baby Steps 3: Save 3 to 6 month of expenses in a fully funded emergency fund;
baby Steps 4: Invest 15% of your household income in retirement;
Baby Steps 5: Save for your children college fund;
Baby Steps 6: Pay off your home early;
Baby Steps 7: Build wealth and give.
Feeling Overwhelmed With Your Finances?, You have options and there are steps you can take yourself. But if you feel you need a bit more guidance, simply speak with a financial advisor. SmartAsset’s free tool matches you with fiduciary advisors in your area in 5 minutes. If you are ready to meet your goals, get started with Smart Asset today.
This article will only discuss 5 of the 7 Dave Ramsey baby steps and elaborate more on them. Depending on where you are in life, some of these baby steps may not apply to you. For example, you may decide that you don’t need children.
Therefore, you don’t need to save for a children college fund. But implementing any of these baby steps may be the best financial decisions you can ever make in your life.
Check out: 8 Financial Tips I Wish I Knew in my 20’s.
5 of the 7 Dave Ramsey Baby Steps You’ll Wish You Had Taken On Earlier:
1. Dave Ramsey Baby Step 1: Building a rainy day fund.
One of the Dave Ramsey baby steps is to establish an emergency fund. Why this is important?
It’s important because you never know what life will bring you. You may lose your job. Your car may need a major repair. Or you may need to buy a new washing machine.
And if you don’t have money set aside for these unexpected expenses, Dave Ramsey explains, you may be forced into debt. Or you may be forced to sell an investment you that you have worked so hard to build. That’s why having an emergency fund to cover you when things get tough is one of the smartest financial decisions you’ll never regret.
An emergency fund, simply stated, is the amount of money you have set aside to cover these unexpected expenses. There is no hard rule on how much to save in that fund. Dave Ramsey recommends $1000.
But other experts recommend at least three to as much as six months’ worth of living expenses. While $1000 may not be enough, it’s better than nothing.
While you can keep that money in a regular account, a better option would be a [high interest online savings account]. This way you can earn interest on your money. But the main thing to remember is to keep it separate from other savings accounts you may have.
In conclusion, having an emergency fund can give you some financial breathing space when things go wrong in your life.
2. Dave Ramsey Baby Step 2: Paying off your credit card debt.
There are, no doubt, great benefits to having a credit card. It’s convenient. You can use it to raise your credit score. You can amass reward points, cash back, etc…However, using it irresponsibly can lead to debt.
In a recent survey, credit card debt ranked as United States’s bad debt, with data from the Federal Reserve Bank of New York showing that the country as a whole in the 3rd quarter of 2018 has a staggering credit card debt of $ 36 billion – a $15 billion increase from the previous quarter.
Dave Ramsey recommends using the debt snowball. That means paying as much as you can on the debt with the smallest balance first while making the minimum payment on the others. Once you knock it down, move on to the next debt.
That’s why one of the Dave Ramsey baby steps you’ll never regret in your life is to ditch your credit card debt.
3. Dave Ramsey Baby Step 4: Start saving for retirement.
One of Dave Ramsey baby steps is to start saving for retirement.
Saving for retirement is crucial, because you’ll have to support yourself financially in the years that you can no longer work. Equally important, however, is saving early. Your money has more time to grow and, thanks to compounding interest — which is when any interest earned accrues interest on itself, and grows faster. For example, if you start saving at 20, you need to save far less each month to retire with $1 million than if you start saving 10 years later.
So the earlier you start saving for retirement, the more money you will have by retirement. You can do that in several ways. One is to participate in your employer’s 401k plan if they offer one. In 2019, the maximum amount you can contribute is $19,000, up from $18,500 in 2018. If you’re 50 years old or older add an extra $6000.
A major advantage in participating to a 401k plan is when your employer offers a match, which is basically free money. So if you decide to contribute 6% of your salary, and your company’s offer a match of 6%, that’s essentially 12% of your salary goes to your retirement account.
If your job doesn’t have a 401k plan or if you want to contribute more than $19,000, you can still contribute to a tax-deferred retirement account either by opening a traditional IRA or a Roth IRA. As Nick Holeman, a certified planner at Betterment, says “once you have maxed out your 401k account, you should waterfall your way down to other tax-advantaged accounts. In 2019, you can contribute up to $6000 in a traditional or a Roth IRA.
So while it can be tough to save for retirement especially if you’re paying other debt like a mortgage and/or student loan, you certainly won’t regret retiring with over $1 million.
Related: How to Become a 401(k) Millionaire.
4. Dave Ramsey Baby Step 6: Pay off your mortgage early.
For most people, one of the main things holding them back to complete freedom is their mortgage debt. And their main goal might be to pay it off as early as possible. But given the cost of a home, that can be a hard dream to realize.
But don’t despair yet. There are some ways to pay off your mortgage early. One of the ways to do is to refinance your mortgage. Refinancing simply means that you get a new loan to replace the loan you currently have in the hope to get a lower interest rate. Doing so can save you thousands of thousands of dollars over the lifetime of a loan.
To find out what deals are out there, and to avoid the hassle of applying with different mortgage lenders, check out LendingTree where you can view and compare mortgage rates from multiple lenders in one place.
Another way to tackle your mortgage loan as early as possible, as Dave Ramsey suggests, is to find some extra money and put it towards your monthly payment. So, if at the end of the month, you can’t find any extra money from your paycheck to contribute more towards your mortgage payment, take a part-time job or a side hustle. It can be as simple as completing surveys online or tutoring.
5. Dave Ramsey Baby Step 7: Build wealth.
The last of 7 Dave Ramsey baby steps is to build wealth and give. Dave Ramsey’s idea of giving is giving to charity or help someone else in their journey to financial freedom.
While an emergency fund can help mitigate some of the unexpected situations you might encounter in life and while a retirement fund can allow you to live comfortably in retirement, none of that can offer the level of financial protection for you and your family than having significant wealth. As Dave Ramsey states: “imagine what it would feel like to leave an inheritance for your kids and their kids.”
So whether it is to enjoy a lavish lifestyle or to give money to charity, building wealth is something you will not regret in life.
Do the Dave Ramsey Baby Steps Work?
In all honesty, those baby steps do indeed work. They have helped thousands achieve wealth. However, it does take discipline and hard work. But if you implement them, you too can achieve financial freedom.
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