Learning to live debt-free is the best decision you can ever make. Before stumbling onto this new lifestyle, I read several personal finance books. Nothing really resonated until I found Dave Ramsey. His plan was laid out step-by-step, instead of just teaching money principles. I appreciated that the plan made common-sense and I could start right away. Read on to see how Dave Ramsey’s Baby Steps is the key to getting out of debt.
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Why did we choose Dave Ramsey’s Baby Steps?
Dave Ramsey’s book, The Total Money Makeover, ranks as one of the most influential personal finance books I’ve ever read. Since learning about the debt-free community, my husband and I have paid off $72K in consumer debt.
I’m a personal finance geek. I’ve read several books including, The Automatic Millionaire by David Bach, Women and Money by Suze Orman, and Think and Grow Rich by Napoleon Hill. Through the years, I’ve incorporated a hodgepodge of strategies from these books, but still found myself in $72K of consumer debt.
I stumbled upon Dave Ramsey’s book when I realized that my family was not ready to live on one income. I was a casual listener to his radio show and actually had his book downloaded onto my Nook for several years. Like before, I chose to do what I was comfortable with, thought I knew better, and cherry-picked finance tips here and there.
Knowing that we needed to make a change, I decided it was time to pick a plan and stick to it. Dave’s main philosophies were not that much different to most of the teachings in the books I’ve mentioned before. His plan includes a lot of common-sense strategies. Dave’s financial information was nothing brand-new or earth shattering. Living on a budget, paying down debt, and saving for retirement are common themes in most personal finance books. So, why did Dave’s Baby Steps win over all of the over books I’ve read?
The difference is the simplicity of it. The baby steps provide a step-by-step plan and will teach you how to tackle debt, create a zero-based budget, and save for the future. Instead of reading what I should do and why, Dave’s baby steps cut the fluff, offered a simple plan, and walked me through the whole process.
Pre-Baby Steps
Before I jump in to the baby steps, there are a few pre-baby steps that I did that are equally as important. Living debt-free is a cornerstone to my success. For that reason, I think these five pre-baby steps will increase your success. You can read a more in-depth blog post on this subject here, but here’s a quick synopsis.
- Decide to do it: Decide to become debt-free
- Get on board with it: Get your spouse or partner on board with becoming debt-free. If you’re single, find an accountability partner.
- Dream it: Write out your financial goals in technicolor lights. Be as detailed as possible
- Face it: Add up all of your debt balances, not just your monthly payments.
- Budget It: Prepare a zero-based monthly budget
Baby Step #1: Save $1,000 Emergency Fund
An emergency fund will help weather small inconveniences that you can’t predict. Save $1,000 for an emergency fund which you’ll tap into when life throws you unexpected curve balls instead of reaching for your credit card.
Baby Step #2: Pay off all consumer debt (excluding your mortgage) using the Debt Snowball Method
Pay down all consumer debt using the debt snowball method. Focus on paying debt in a specific order, from the lowest balance regardless of the interest rate. Now, all of you math nerds out there, are probably screaming at me right now. You can instantly prove that paying down debt with the highest interest rate first saves the most money, but you’re forgetting one thing.
It’s not all about math and common sense. Paying down debt can take months or even years. Sludging through months of living on a budget, cutting costs to pay down debt is not as easy as it sounds. There will be times when you want to give up, but paying down the lowest balance is motivating. You’ll get quick wins fast which will keep you motivated to stay in the game. When you pay off the smallest debt, you’ll roll the money over to the next smallest balance. As you pay off each debt, your debt snowball payment increases each time. In no time, you’ll be surprised at how much money you’re paying.
Another popular method is the debt avalanche where you focus on paYying each debt with the highest interest rate first. In the long run, this method is quicker and saves more interest paid than the debt snowball. The downfall is that it’s less motivating, as it normally takes longer to pay off your first debt. If you give up before you finish paying off debt, it doesn’t matter which plan you choose.
My experience with Baby Step 2
I finished paying off $72,000 of debt in July. I tweaked it a little, as the first debt paid I paid off was not the lowest balance at the time. My husband and I had purchased a cemetery plot about a year before we started our financial journey. If we paid back the loan by a specific date, they would refund us all the interest we had paid. So, naturally, we pushed this debt to the front of the line, and paid it off in 5 months, a month earlier planned and got $500 back.
We were stoked! Our second debt of about $500, an Iphone, was paid off the next day. I can’t tell you how excited we were to make so much progress so fast. If we had tackled my school loans first (the highest balance and interest rate), we would have never paid off two loans so quickly. Paying off two debts gave us the motivation to stick to the plan. The debt snowball worked!
Baby Step #3: Save 3-6 months of expenses in a fully-funded emergency fund
This step builds upon step 1. Since you’ve paid down all of your consumer debt in baby step #2, you’ll build a bigger amount of savings to cover major devastating events like a job loss or a major medical expense.
Baby Step #4: Invest 15% of your household income in retirement
Baby step 4 prepares you for your future. You’ll invest 15% of your income towards retirement.
Baby Step #5: Save for your children’s college fund
If you have kids, save for their college fund. I have personally felt the financial consequences and regret signing up for school loans. It took me over 10 years to face the music and finally tackle my loans. Every time I sent a monthly payment, I realized what I could do with that money. I don’t want my kids to live through the regret and stress of accumulating so much school debt.
In the end, every parent wants the best for their kids. I believe a good education is just one of the many tools to ensure their success. Saving doesn’t necessarily mean that you’ll be fully funding their education. It’s all up to you, but I believe kids should also have some skin in the game and save too.
Baby Step #6 Pay off your home early
Most people pay off their homes in the typical thirty-year time frame. In this baby step, pay off your home as quickly as possible. Imagine the financial freedom in your retirement years. You own your home outright and you don’t owe a single cent to anyone!
Baby Step #7 Build wealth and give
Enjoy this last step. This is where all of your hard work and grit really pay off. Build wealth by increasing your investments and give generously to others in need.
Other Things to Note about the Baby Steps
Like any other plan, it doesn’t work unless you work the plan. Here are a few reasons why they work:
- The baby steps are easy to follow.
- The baby steps are motivating. You experience financial progress very fast.
- The baby steps change your money mindset without you even realizing it.
Some reasons why they won’t work:
- The baby steps are clear-cut, but extremely rigid in structure. Some find this too restrictive, and hard to follow, but the plan works if you work the plan.
- The baby steps are stressful. In the beginning, a $1,000 emergency fund may not cover serious events. Some give up when they have to dip into their emergency fund. But, you have to remember that you’re learning how to break your reliance on debt.
- The baby steps preach a debt-free lifestyle. Most can’t commit to this philosophy, but it’s worth it if you just give into it.
Last Things to Note about Dave Ramsey’s Baby Steps
The baby steps are clear and concise, and if followed, can lead you down a path to financial freedom. My husband and I have paid off $72,000 of debt all on one income. We now have a fully funded 6 month emergency fund, saving for my son’s college fund, and saving for retirement. Our life has changed for the better because of these baby steps. I encourage you to follow these steps if you want to live out your tall order dreams too.
If you want to achieve financial peace and security, try out these baby steps for yourself. If you’re completing any of Dave Ramsey’s baby steps or have any questions, please share your comments.
