Dave Ramsey’s Baby Steps is a book that teaches people how to get out of debt. It outlines the steps that Dave Ramsey took to get out of debt and how you can do it too. The book has been around for over twenty years, but some experts are questioning whether it still works today.
Dave Ramsey’s Baby Steps is a financial plan created by the author of the book The Total Money Makeover. The steps are meant to teach people how to live debt-free and save money.
Do you have a fear of checking your bank account balance? Would you be wiped out if you had a financial emergency? Is living a debt-free life a distant dream? If you responded yes to one or more of these questions, you may be a good fit for Dave Ramsey’s Baby Steps, a seven-step program that helps people improve their financial situation and create wealth. The method may be utilized regardless of your financial position, and it has helped millions of people (for free) improve their lives! Interested? Continue reading to find out what we thought of Dave Ramsey’s Baby Steps.
What is Dave Ramsey’s background?
Dave has taught millions of Americans how to build money, get out of debt, and live their best financial lives via his best-selling books, immensely successful radio program (which he’s held for 25 years), as well as his website, podcasts, YouTube channel, and the Financial Peace University.
Ramsey’s Baby Steps method was born after he lost more than $4 million in real estate holdings during the 1986 real estate collapse, forcing him to file for bankruptcy and start again. His experience inspired him to create a method that he found might help others regain financial security.
Dave Ramsey’s Baby Steps: What Are They?
Dave Ramsey’s Baby Stages is a self-directed personal finance approach that uses seven easy steps to help individuals save money, eliminate debt, pay off their mortgages, and create wealth. What’s the greatest part? It’s totally free to use. Millions of individuals have changed their lives as a result of Dave’s Baby Steps. Continue reading to learn more!
Step 1: Establish an emergency fund of $1,000.
The “baby emergency fund,” as Dave Ramsey refers to it, is the first of Dave Ramsey’s Baby Steps. You just need to put away $1,000.
If you have existing debt, it may seem counterintuitive to put $1,000 into savings rather than paying it off, but the reasoning behind the idea makes a lot of financial sense.
Dave advises that everyone set up a modest emergency fund to protect themselves from unexpected costs. This emergency fund enables individuals to cover unforeseen expenses without adding to their debt load or taking on additional debt.
When something unexpected happens and you need to use your emergency money, Dave advises deferring any further debt payments until your emergency fund is completely replenished.
This initial stage entails a lot more than you may think. It not only helps you get started with your savings, but it also helps you develop the positive financial habit of paying for emergencies with cash rather than using your credit cards.
Don’t panic if saving $1000 seems to be a tough job. You have a number of excellent tools at your disposal to assist you in achieving your objective. Mint, Personal Capital, and You Need A Budget are all free and intended to assist individuals of all financial backgrounds and levels of financial literacy succeed in taking control of their money by creating a budget.
Furthermore, applications like Trim, Truebill, and Bill Shark may help you save an average of $512 each year by assisting you in locating and eliminating unwanted subscription services and memberships, as well as negotiating cheaper prices on certain monthly expenditures. Every dollar matters when it comes to growing your savings!
All of these applications and services are based on the same idea: getting the most bang for your buck. When circumstances are tough, it’s important to evaluate which services and goods you “must” have and which you can do without.
Step 2: Using the Debt Snowball, pay off all debt (excluding the house).
The debt snowball is a debt repayment method that encourages individuals to pay off their debts by rewarding them with “wins” on a monthly basis.
To utilize this technique, create a list of all of your debts (except your mortgage) and arrange them in order of least to biggest.
Then cease making further payments toward your obligations. Instead, start paying just the bare minimum on all of your loans, save the one with the lowest balance.
Spend whatever money you have left over (not from your main expenditure budget) on your lowest debt until it is paid off.
Continue to work your way through your remaining debts, starting with the lowest and working your way up to the biggest, until you are totally debt-free.
Avalanche vs. Snowball Mini-Controversy
Dave Ramsey’s favorite approach, the debt snowball, is described above. The debt avalanche approach, on the other hand, is a competing viewpoint. The avalanche approach requires you to pay the bare minimum on all of your obligations except the one with the highest interest rate. The debt with the greatest interest rate is paid off first, followed by the account with the next highest interest rate. And so on.
The avalanche approach makes the greatest mathematical sense. Paying off high-interest loans first saves money on interest payments, which may then be applied to debt, which saves even more money on interest payments, and so on. This approach will pay off your debt quicker than the snowball method.
The avalanche technique is missing psychological reinforcement, which Dave Ramsey recognizes. The avalanche technique “rewards” you slower than the snowball method. Paying off your lowest debt first gives you a sense of achievement, which encourages your habit in the future.
Whether you go with avalanche or snowball depends on whether you believe you need the extra psychological support that the latter provides.
Getting Rid of Credit Card Debt
Regardless of what else is going on with your money, paying off credit card debt should be at the top of your priority list. This will not only save you money on interest payments, but it will also lower your credit utilization rate (the proportion of your revolving credit that you are presently using), which will boost your credit score significantly.
You may profit from balance transfers to low-interest credit cards if your credit score improves. On transferred balances, many cards offer a year (or more) of low interest. If you take advantage of them, your interest payments will be substantially reduced, and you will be able to put more money toward the principle.
Credit Karma and Borrowell (in Canada) are two websites that allow you to check and monitor your credit score for free. Make extensive use of these services, since maintaining a true picture of your entire financial health necessitates keeping an eye on your credit score.
It’s easy to get confused if you have a number of different loans with varying interest rates and payment due dates. Consolidating your debts, or combining them into a single loan with a single interest rate and monthly payment due date, is an option. If your credit is good enough, many banks and other financial organizations will enable you to do so.
If you’re having trouble getting a loan from a bank, try a peer-to-peer lending service like Lending Club, Prosper, or SoFi. These are websites that enable regular individuals to lend you money to help you pay off your debts. The risk you represent to lenders will determine your interest rate.
However, be cautious of unscrupulous debt consolidators and avoid being forced to pay even more interest than you currently owe. Do the math yourself or have it done for you!
Forgiveness of Debt
Debt forgiveness may be a possibility for a few fortunate individuals, particularly those with a lot of college debt. It’s a long shot, and it’ll take a lot of paperwork, but it’s a possibility. Earnest and Commonbond, for example, offer reams of information on the different loan forgiveness options accessible to individuals in the United States who are drowning in student loan interest and debt.
Step 3: Put together a three- to six-month emergency fund.
It’s time to start developing your emergency savings after you’ve paid all your debts. The aim is to save enough money to cover your expenditures for three to six months.
Saving so much money may seem intimidating, if not impossible (particularly after beginning with just $1,000 in savings), but you are in a great position to accomplish it at this stage in your financial path.
In worst-case situations, like as significant house repairs, medical crises, or job loss, having an emergency fund that can cover a few months of expenditures offers financial stability, which is particularly essential if you are the only provider for your family.
This method also has the additional benefit of assisting you in developing the habit of paying with cash rather than credit cards.
How Much Should You Put Into Savings?
Many variables influence whether you should save three or six months’ worth of money in your emergency fund. The following are the most important:
- Your risk appetite, as well as
- Your revenue is erratic.
In other words, a three-month emergency fund should enough if you’re willing to take on a greater level of risk and your income is consistent. If you’re afraid of taking risks and your income is uncertain or likely to be cut substantially and unexpectedly, you should save six months’ worth of expenditures.
Remember the following while calculating your expenditures for the next six months:
- Include each and every cost. Even the ones that only happen every two months, three months, six months, or a year. Don’t forget to include your property tax bill, even if you only pay it once a year.
- Allow yourself considerable wiggle room in case of unforeseen costs. Life throws you a lot of curveballs, and dipping into your emergency fund will need some additional cash.
- Be honest with yourself about your lifestyle. Don’t expect to be able to turn off your spending habits at the flick of a switch if you’re a large spender. Six months’ worth of expenditures is six months’ worth of all of your anticipated expenses, not simply the ones you’ll need to get by. That doesn’t mean you have to spend for caviar and chocolate fountains. If you’re accustomed to porterhouse steaks, that just means you shouldn’t budget for rice and beans.
How to Conserve
Keep these three figures in mind: 50/30/20. It’s an excellent financial budgeting rule of thumb. In layman’s terms, this implies allocating 50% of your income to needs, 30% to discretionary expenditure, and 20% to savings.
Now, not everyone will be able to save 20% of their earnings. Some individuals are devoting nearly all of their resources on basic needs. This is generally not their fault; it just means they’ll have to make some changes.
First, rethink what “necessity” implies if you find yourself in this situation. Is cable television really necessary? Is your vehicle still on the road? When it comes to saving for an emergency fund, cutting your expenditures may make a significant impact.
Second, check whether you can raise the quantity of money coming in on a total basis. Is there anything you can do as a side hustle? Consider delivering for InstaCart, UberEats, or DoorDash if these services are available in your region. All three businesses compensate drivers for delivering meals to hungry customers.
Third, make the most of every dollar you have. When you shop at shops, grocery stores, and restaurants, apps like Rakuten, Ibotta, and Seated will offer you cashback. There’s no need to miss out on that 5% by skipping these services.
Finally, make the most of your free time by doing microtasks and online surveys. Swagbucks, Survey Junkie, and Pinecone Research are just a few of the sites that will pay you for your thoughts. You can convert a night of watching TV into a night of survey-taking profit.
Step 4: Put 15% of your income into your retirement fund.
If you have the contribution space available, Dave suggests investing approximately 15% of your salary into your retirement fund. If you haven’t been maxing out your retirement contributions yet, you may have some leftover space from past years that will enable you to contribute the entire 15%.
It’s critical to fund your retirement accounts to the hilt. Whether your retirement accounts are IRAs (for my American friends) or RRSPs (for my Canadian friends), maxing them out will provide you access to two very strong wealth-building instruments.
For starters, many companies will match a portion of your retirement contributions. Simply by virtue of the match, your immediate rate of return increases from 0% to 100%. Consider the case of a $100 investment in a normal account. You’ll have $108 at the end of the year if you get an annual return of 8%. If that gift is matched dollar for dollar, you’ll wind up with $216 at the end of the year. That’s a 116 percent return on investment.
In addition, retirement funds are tax-deferred. This means you won’t be charged taxes on your money until you take it out of the account. Compound interest increases the amount you would have paid in taxes in the account.
This may not seem to be a significant difference, but compare what happens to $100 in a tax-deferred account vs a taxable account. At an annual rate of 8%, $100 in a taxable account (where you pay taxes on your capital gains each year) becomes $1090 after 40 years. That $100 becomes $1760 in a tax-deferred account, where you don’t pay tax until the end of the compounding periods.
Investing in a Simple Way
Don’t worry if the very mention of investing sends you to sleep or makes you anxious. More applications and companies than ever before are available to assist you in learning to invest properly. Acorns, Betterment, and Wealthsimple are all companies that take a remedial approach to stock and bond investing.
These businesses will guide you through the process of investing, step by step, until you’ve mastered the fundamentals. Besides, investing isn’t nearly as difficult as you may imagine. We guarantee it.
What about real estate if securities aren’t your thing? New applications like Fundrise and Roofstock allow you to purchase entire or partial shares in residential or commercial properties, in addition to buying and holding land and structures.
Consider a real estate investment trust if you like both real estate and stocks (REIT). These securities include fractional real estate interests, although the interests may be spread over a broad range of locations and property kinds. This lowers the investment’s risk and volatility.
Step 5: Put money aside for your children’s college education.
If you have children, now is the time to start putting money down for their education. Discuss your savings goals with your spouse (if appropriate) and determine how much you want to save for your children ahead of time.
Dave emphasizes the necessity of balancing the expense of secondary education against its benefits. This isn’t to say you shouldn’t help your children; there are alternatives outside the traditional four years of college. There are many methods to reduce the expense of schooling. Your kid may be eligible for a variety of unclaimed scholarships, bursaries, and grants, or they may be able to earn credits or a degree at a nearby community college at a lower cost.
Depending on your child’s interests and abilities, one of many in-demand trade professions may be a good match. (Skilled employees are in short supply right now; as a result, there are alternatives to make learning programs more cheap.)
Make time to sit down with your children and talk about their goals and how you intend to assist them.
Step 6: Pay Off Your House as Quickly as You Can
This stage requires you to review your personal budget and reallocate any available money to your mortgage. This includes any bonuses or tax returns, as well as the money you were paying toward debt repayment in Step 2 and the money you were putting into your emergency fund.
These additional payments will not only add up and help you pay off your mortgage quicker, but they will also save you money on interest and fees.
Step 7: Amass Wealth While Giving Back
There are just two things left to do at this point: continue to build and increase your money via companies and investments, and begin giving back.
Your trip should be pretty simple from here. Continue to invest and look for new methods to make money. Don’t live above your means, and give back to your community by assisting those in need and supporting charity and non-profit organizations that are important to you.
What are the benefits of taking these steps?
Each Baby Step program step was created to assist you get a better knowledge of the hows and whys of personal finance while guiding you through the areas that are most essential to your financial well-being.
You will build an emergency fund and long-term savings, pay off debt, and move toward house ownership as part of the program, allowing you to concentrate on building wealth and preparing for retirement.
Is It True That These Seven Steps Work?
Yes, to put it simply. The lengthier answer is that these procedures work as long as you follow them exactly. Your outcomes will be considerably better if you actively concentrate on and commit to each step as you do it.
If you’re still not convinced, have a look at the numerous glowing testimonials on financial blogs, YouTube, and Dave’s own website.
There’s no danger in attempting Dave Ramsey’s Baby Steps, and they’re simple to put into action right now. This is a fantastic place to start if you’ve been searching for strong recommendations to start creating a better financial future for yourself.
The Advantages and Disadvantages of Dave Ramsey’s Baby Steps
The Baby Steps program offers a basic, easy-to-follow strategy that may be utilized by individuals of all income levels and debt levels.
For millions of individuals, the program has been shown to be successful.
The Baby Steps program was created to do more than just advise individuals on how to improve their financial circumstances. They also assist individuals in gaining a strong grasp of personal finance and money.
Many in the financial sector have argued that the program is excessively strict, or that it contains stages that do not apply to everyone. Step 5, for example, (saving for your child’s post-secondary education) is a hotly debated topic due to the diversity of family circumstances, views, and parenting styles.
Some people disagree with Ramsey’s tough stance on credit cards. Dave thinks that once debt-free, individuals shouldn’t use credit cards at all, although many people find them to be helpful tools and excellent sources of cash back when used properly.
It’s essential to realize that you may still follow the program while making appropriate adjustments to meet your own requirements. Simply make changes if you know you can trust yourself to use credit cards without carrying a debt, or if you know your kid will attend trade school rather than college.
Is it possible to make the process enjoyable?
Budgeting and saving aren’t often thought of as enjoyable activities, but that doesn’t mean they have to be. You may do a variety of things to stay motivated and involved throughout the process. The Modest Wallet Facebook Community has a few members who share their experiences and encourage one another to remain motivated.
Put yourself to the test.
Creating challenges for oneself is one of the greatest ways to keep things interesting. Perhaps you want to beat your monthly savings target, reduce your food spending to a particular level, or pay off your debt in half the time.
Mini-goals should be set.
Setting modest, attainable objectives along the road to give you a feeling of accomplishment and success is another excellent approach to make money more enjoyable. Breaking down your bigger objectives into smaller milestones may help you feel more in control of your path. Smaller objectives (or baby steps) have the added benefit of providing built-in motivation.
Take pride in your accomplishments.
Making time to celebrate or rewarding yourself with a little treat when you achieve objectives and milestones is a wonderful way to stay focused and motivated. (Keeping the incentives modest also enables you to enjoy success as it happens without jeopardizing your efforts or depleting your budget.)
Dave Ramsey’s Baby Steps approach is an excellent tool that anybody can use. Millions of Americans have already used the program to improve their lives and achieve financial control, and it’s totally free, so you have nothing to lose and everything to gain by giving it a go. You’ll be happy you did if the testimonies are any indicator.
Dave Ramsey’s Baby Step 2 is the first step of 8. The first step is to start by cutting up your credit cards and stopping all debt. Reference: dave ramsey baby step 2.
Frequently Asked Questions
How does Dave Ramsey Baby steps work?
Dave Ramsey Baby Steps is a financial plan that helps you save for your future while providing a budget to help you reach your goals.
What are the seven baby steps from Dave Ramsey?
These are the seven baby steps from Dave Ramsey. 1. Save money 2. Pay off debt 3. Invest in your future 4. Build an emergency fund 5. Buy a home with cash 6. Retire early 7. Give back to others
What is the Dave Ramsey method?
The Dave Ramsey method is a personal finance advice podcast and book series by Dave Ramsey.
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