Have you heard of the 7 baby steps?
Chances are, you have! But, if you haven’t you’re not alone.
When we decided to get serious about our finances, years ago, we turned to the one and only personal finance guru Dave Ramsey.
Now we knew at the time that these “7 baby steps” weren’t going to change our financial future overnight. But over time, these seven baby steps did that and so much more.
Not only have they given us guidance, free guidance at that. But clarity to see where our money is going and where it should be going to meet our financial goals.
Do you think these 7 baby steps will work for you? Heck, did they work for us? Come find out below!
Who Is Dave Ramsey?
Have you heard the name before?
Dave Ramsey is one of the most well known “money experts!” He created a multi-million dollar company and has changed the lives of hundreds of thousands of people with his financial advice.
He is known for his extremely popular radio show, which we listen to, along with 14 million other followers every week. He is also the creator of Financial Peace University, a program that teaches you how to control your own money.
If you haven’t caught his radio show, you should. What I love most about it is his no-nonsense approach to money. He isn’t afraid to tell people when they are being dumb with their money.
Some people don’t like this about him, but I find it quite comical.
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What Is The Dave Ramsey Method?
Dave Ramsey is known for his “7 baby steps.” He uses these 7 baby steps to teach you how to get out of debt, build an emergency fund, save for retirement, pay off your mortgage, invest, and more.
If this is something that interests you, I highly recommend you check out his book Total Money Makeover. This was the first book
I got the book as a gift and read it in 2 days. I told David to read it, and he read the whole thing on a flight from DC to Seattle. That book forever changed our outlook on how to handle our money.
What we love most about the 7 baby steps is its simplicity. These steps are so simple, anyone can follow them!
How Do I Get Started With The Baby Steps?
Are you ready to commit to yourself to get out of debt? If so, you are in the right spot.
Make the commitment
If you are ready to get started with the 7 baby steps, you must get everyone in your household on board. This is extremely important if you or your significant other are “spenders.”
We get it, we like to splurge from time to time too, BUT if you aren’t both on board with getting out of debt and riding this journey out together, you won’t make it very far.
Do you currently budget your money? If you do, great! If you don’t, today is the day you will start.
Budgeting was our first step to success. If we didn’t start budgeting our money eight years ago (gosh that makes me feel old because it feels like yesterday), we wouldn’t financially be where we are today. Heck, we would more than likely still be drowning in debt.
Budgeting doesn’t require much other than a little bit of brainpower and a piece of paper.
If you don’t know where to start with budgeting, we have this totally free budget binder that will help you get started.
What Are The Dave Ramsey Baby Steps?
The 7 baby steps are as they sound. They are 7 baby steps to financial freedom, each of which you need to complete before moving onto the next step.
You are not supposed to skip or jump around from one step to the next without completely finishing each step first. These Dave Ramsey steps have been proven to work by hundreds of thousands of individuals just like you and me.
Baby Step 1
Save $1000 for your starter emergency fund
Having a mini emergency fund saved is extremely important and the first thing you should do in baby steps 1. Have you ever run into a mini-crisis and didn’t have the funds to deal with it?
I think we all have at one point or another.
If you haven’t yet, you will. Having this mini emergency fund in place will take this weight off your shoulders and help you sleep better at night.
What do I use my emergency fund for?
You can only use your emergency fund for emergencies. You would not use your emergency fund for something you want, such as that new pair of shoes you saw at the store.
That would be something you would budget your money for, not an emergency.
Here are a few examples of things you would use this fund for:
- Medical expenses
- Car repairs
- Home repairs
- Loss of a job
Now there are plenty of other emergency situations in which your emergency fund would be okay to use. These are just a few that pop in my mind first. Use your best judgment to determine what you would consider an emergency.
Where do I keep my emergency fund?
Your emergency fund should be kept in an account, separate from your savings or checkings. You don’t want to risk accidentally spending your emergency fund.
You do want to keep your money in an easily accessible account. If an emergency arises, you want to get your hands on that money in 1-2 days.
We recommend keeping your emergency funds in a high-yielding savings account. This is an account that will be separate from any other savings account and only for emergencies.
There are quite a few good online banks that offer very competitive interest savings accounts. This means your money will be gaining interest while it sits, which is what you want.
Baby Step 2
Pay off all debt using the snowball method (except your home)
This is where all the fun begins! This step will take some time depending on how much debt you have piled up, but boy is it going to be worth it.
Being completely debt-free is going to change your life. It’s changed ours!
Come check out how we paid off our debt and saved 100k on a single income in our early 20’s here.
What is the debt snowball method?
The baby steps by Dave Ramsey recommends using the Debt Snowball method to pay off your debts. The snowball method is a strategy where you start with paying off your smallest debt first.
To begin this process, sit down and write out all of your debt, smallest to largest. If you need a place to keep track of your debt, make sure to grab our free budget binder below.
Now it’s time to start paying off your smallest debt first. This might be a car loan, credit card, or school loan. Every extra dollar you come across, send it to paying off that one debt.
Once your first debt is paid off, it will free up more of your money. You will then use that money towards your next debt and so on. This is what is known as the snowball method.
You want to continue with this process until all of your debt is completely destroyed.
We used this method to pay off over $30,000 in car loans and credit card debt in just over two years!
Baby Step 3
Save 3-6 months of expenses in a
Once all of your debt is destroyed, it is time to fund your emergency fund fully. This means that you want to save 3-6 months of expenses.
If someone in your household loses their job or is injured, you will need these funds. Having a fully-funded emergency fund will prepare you for the unexpected.
An emergency will arise at some point, and you’ll be ever so thankful you tackled baby step 3.
How much should I save?
Add up all of your expenses for one month. This includes everything from your bills, mortgage, rent, groceries, and so on. Once you’ve figured that out, multiply it by 3-6 months.
Basically, what would it take to survive for 3-6 months if you have no income coming in?
We personally have a 5-month emergency fund. This means if my husband lost his job (the breadwinner), we would be able to get by with the bare minimum for 5+ months.
We are more than confident, that we could both find good (new) jobs in a pinch if it came down to it but if not we would be prepared.
Baby Step 3b
Save for a down payment on a house
Do you currently have a mortgage? If so, great! If not, now is the time to start saving.
Once all of your debt is paid off, and you have a 3-6 month emergency fund saved. It’s time to start saving for a down payment for a home.
According to Dave Ramsey, no more than 25% of your household income should go towards your mortgage each month.
This means if you make $5000 a month, after taxes, you should spend no more than $1250 on a mortgage. This number would also include property taxes and insurance.
You should also always purchase a 15-year
This was one baby step we didn’t do but we wish we would have. Thankfully, we have a plan to pay off our home in under 15 years, so it all worked out.
Baby Step 4
Invest 15% of your household income for retirement
Are you currently investing for retirement? Either way, investing 15% of your yearly income is baby step 4 and a huge ste
It personally took us years to reach this baby step, and that’s okay.
Once our emergency fund was fully funded, we picked up a side hustle for us to make meeting this requirement easy.
You can also meet this 15% requirement by eliminating some of your monthly expenses and using that money for baby step 4.
Related article: The Crazy Side Hustle That Made Us Over $22,000 In A Month
Where should I invest?
There are a few different accounts in which you should invest in first. If the company you work for offers a 401k match, that should be the first place you invest.
For example, your company might match 6% of your yearly income. Let’s say that 6% comes out to $300 a month. If you invest that $300 a month into your 401k each month, they will match that an add an extra $300 of their own money.
This is free money, and always the first place you should look to invest.
Next, depending on your age, you should invest in a Roth IRA. Roth IRA’s are amazing because once you hit retirement age, you can take your money out tax-free.
You will not get taxed on the money you take out once you hit retirement age of 59 1/2.
In 2019, you can contribute $6000 to your IRA per year. Each year these changes, so make sure to look into this.
What should you invest in?
Dave Ramsey insists you invest in 4 different types of funds.
< Growth and Income
< Aggressive Growth
We highly recommend doing your research on each type of mutual fund. Once you think you have your head wrapped around the terminology, it’s always good to get an opinion from a professional.
When we first started investing, we reached out to our “trusted bank,” and they were able to recommend us to a financial advisor. Once again, make sure to do your research before letting anyone advise you on your money choices.
Baby Step 5
Save for your children’s college funds (baby step 5)
Do you currently have kids or plan to in the near future?
This step tends to be overlooked because, let’s face it, your kids might be young, college is a long way off, and you’ll have time to save money down the road, right?
Saving for your children’s future is extremely important. Saving money now isn’t only going to be your child’s safe haven from student loans;
We all know how incredibly expensive school can be, image dealing with school costs at retirement age.
According to U.S News, the average yearly price for tuition and fees for public schools is $10,116 and $36,801 for private schools.
Yes, this is the price for one year of college, and it’s increasing each year.
Now, we aren’t saying you need to pay for your child’s entire degree, and Dave Ramsey doesn’t recommend that either BUT every little bit helps.
How much should you save per child?
This number really is up to you and what you can afford. Remember, your retirement is more important than saving for your child’s college fund.
Sit down and figure out how much it costs for four years at a local college near you. Divide that by the number of years your child has left until they are college age. From there, you should be able to figure out how much per month you need to save. Or at least a rough guestimate.
Take into account the price of college is only going to go up with every additional year.
What are the ways to save for college?
< Educational Savings Account (ESA)– An ESA allows you to save $2000 per child per year. Did I mention this money grows tax-free! When it comes time to take the money out it will not be taxed.
Once your child is in college, this money can be spent on tuition, room and board, food, transportation, books, school supplies, and more.
< 529– This plan is similar to an ESA account except its not as lenient. A 529’s main purpose is to pay for
Baby Step 6
Pay off your mortgage early
Are you debt-free, have a 3-6 month emergency fund, investing 15%, and saving for your child’s college fund? If so, now it’s time to start paying off your mortgage.
Reaching this step feels beyond amazing! Can you imagine what it would feel like paying off your home 10+ years
If you think it’s not possible, let me tell you it is (watch me).
You’ve made it this far; there is no stopping you now.
We are currently on this step and have found that finding side hustles that we can do from home will help us pay off our home almost 15-20 years early. How crazy is that!
If you’ve reached this step and just don’t have extra money to throw towards your mortgage, it’s okay. We didn’t either at first. Find extra ways to make money, put tax returns, and bonuses down.
Make sure you protect your house with the right home insurance, this article can help you choose the right policy for your budget.
Baby Step 7
Continue to build your wealth and give like no one else
You MADE IT!!! It’s time to build wealth and give like no one else. If you’ve reached this baby step, that means all of your hard work as paid off.
Summary Of Dave Ramseys Seven Baby Steps
It doesn’t take a huge income to complete these steps, just time and diligence. Stick to the process and don’t question it. It’s worked for thousands of people just like you, so why not give these 7 baby steps a try.
What do you think does Dave Ramsey’s 7 baby steps really work? My answer is yes!
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We are on baby step 6 and juggling an entire house renovation at the same time. Some of that reno was planned, some was not. It’s been 10 years since we started this journey and we’ve made a $1.2M turnaround. The steps work. Next stop, mortgage free, then retirement. It’s in sight.
That’s awesome you guys are that far through the Baby Steps and taking on a full house reno which, by the way, is fun for us to follow the progress on that! It sounds like you guys had a plan in place and have done really well at executing it! That’s exciting to hear!