In this commentary, I am going to discuss Dave Ramsey’s 7 Baby Steps and why it is working for me and my family. I am going to break down each step so that we all have a much clearer understanding of each one of them. This is also very helpful for those of you including myself who are looking to better their own financial future and freedom.
These 7 Baby Steps are taken directly from Dave Ramsey’s #1 best-selling book, The Total Money Makeover. You can get a hardcopy or an audio copy of the book from the link on the description box below.
Who Is Dave Ramsey?
Dave Ramsey is America’s trusted voice on money and business. He’s authored seven bestselling books. More than 25 years ago, Dave Ramsey fought his way out of bankruptcy and millions of dollars in debt. What he learned, turned into Financial Peace University—the program that has helped more than 5 million people change their financial futures and family trees. Now, his radio show and podcast, The Dave Ramsey Show, reaches more than 13 million listeners each week.
Just to give you a little background, I learned about Dave Ramsey a little over a year ago. Prior to that, my husband and I have always been keen on our finances and investments. But not that very intentional, until we listened to Dave Ramsey and started following the 7 Baby Steps.
Both my husband and I are savers since we were kids. The only huge difference between us is the purpose of saving. In my case, I used to save diligently every month, but at the end of the year, I always ended up spending the money on something that didn’t produce me any money or cash-flow. In other words, I had been spending all my savings at the end of the year to liabilities. Thank God I met my husband in 2013 and all of that changed! On the other hand, my husband is the total opposite. He puts them on things that have the potential to generate a cash-flow or asset.
So when we got married, we both decided to build our own financial literacy for our family’s future. But in the beginning, we were not following any sort of formulas. We were figuring things out on our own. We were making deals without establishing yet our emergency funds which were very risky. The good news is that we were able to pull the project through. We were blessed to know exactly our numbers on that project, and that put us forward to make that deal come into reality. Just like what my husband said, the only risk our family takes is a calculated risk.
How did we learn about Dave Ramsey? Since we were already into developing our financial knowledge, we learned about him from one of his online videos. And since then, we both decided to give it a try as it looks simple yet very goal-oriented. Indeed, it works for us!
So let’s start!
7 Baby Steps
Baby Step 1: Save $1000 for your Starter Emergency Fund
In this first step, your goal is to save $1,000 as fast as you can. The reason you need to have your emergency fund according to Dave is that in life, there are those unexpected events that you can't plan for. And there are plenty of them like a sudden medical bill or expenses. If you already have $1,000, place it immediately to a separate account and you’re done with Baby Step #1. If you don’t have it yet, then work it out as soon as possible. It could mean working extra hours on your job or doing side hustles.
You may ask, what if I don’t live in the US, how much do I have to save as my starter emergency fund? Here is what I suggest that you can do, convert the $1,000 in your own currency. For example in the Philippines, $USD1,000 is about Php 50-52,000 at this moment. In my case, I live in Belgium, so I just save Euro1,000.
Baby Step 2: Pay Off All Debt (Except the House) Using the Debt Snowball
Next, it’s time to pay off the cars, the credit cards, your personal, and student loans. Start by listing all of your debts except for your mortgage. Put them in order by balance from smallest to largest. This is called the debt snowball method, and you’ll use it to knock out your debts one by one. Dave Ramsey’s, Financial Peace University, shows you how to pay off your debt using the debt snowball method and start saving for the future.
Baby Step 3: Save 3-6 Months of Expenses in A Fully Funded Emergency Fund
Now that you’ve paid off your debt! This is not the time to just sit back and relax! Take that money you were throwing at your debt and build a fully-funded emergency fund that covers 3–6 months of your living expenses. This will protect you against life’s bigger surprises, like the loss of a job or your car breaking down, without slipping back into debt.
Let’s say, for example, your household monthly living expense is $2,000, which means you will have to save $6,000 to $12,000 in case one of you gets ill or loses a job. This allows you to live comfortably for 3 to 6 months while you are trying to find a new job or recover from an illness, whatever the situation is.
Once you have collected the savings for the 3-6 months of expenses, you will have to put it in a separate account that is very liquid. It could be another savings account where you can easily access it at any time in case of an emergency.
Baby Step 4: Invest 15% of Your Household Income in Retirement
This is the time to get serious about retirement—no matter your age. Dave suggests that you take 15% of your gross household income and start investing it into your retirement. From where we live at, we don’t have 401k plan or IRA’s, but we do have legitimate private companies where they do offer different retirement programs with Pretax or tax advantage benefit. In our case, we opened 2 separate accounts for our retirement, one for myself and one for my husband. If you don’t have one yet, check out with your Financial Advisor what are the benefits you can get from it. For us, it’s mainly to get a tax advantage.
Baby Step 5: Save for Your Children’s College Fund
Next, it's time to save for your children’s college expenses. Nevertheless, I’m grateful that in where we live at, college and university education are not that expensive at all. The reason for that is because Belgium gives free access to education until the end of compulsory schooling which is 18 years of age. College and University are not expensive either for European citizens as they are largely funded by the government. However, this doesn’t mean we don’t have to save money for our children. They still need to buy books, fund their projects or research, and go out for excursions and activities like skiing, camping, and on the job trainings.
FYI, if you don’t have kids or you have no plans to have kids, then you may fund your niece or nephew instead. That is a definitely a life-changing event to the person you’re helping.
Baby Step 6: Pay Off Your Home Early
Can you imagine your life with no house payment? According to Dave, your mortgage is the only thing between you and complete freedom from debt. He said that any extra money you can put toward your mortgage could save you tens of thousands in interest. In my opinion when it comes to paying your main residential house, yes I agree that it can be very beneficial to pay off the home mortgage as early as possible. Not only it can save you some interest but most of all it gives you peace of mind. However, when it comes to real estate investment, I do believe that it doesn’t necessarily have to be paid off earlier for some special reasons. For example, if your mortgage is being paid off by your tenants and the little extra over is kept for savings. Then I do believe that it is not really that bad to have a long mortgage.
Baby Step 7: Build Wealth and Give
This is the most exciting part from all of the baby steps! According to Dave leaving a legacy means, you can live and give like no one else! He said that in this step, we should keep building wealth and become insanely generous. Leave an inheritance for your kids and their kids. Also,this is the perfect time to give to your religious or church groups, or fund someone in college, or donate to your chosen charity.
Luke 6:38 Amplified Bible (AMP)says
38 Give, and it will be given to you. They will pour into your lap a good measure—pressed down, shaken together, and running over [with no space left for more]. For with the standard of measurement you use [when you do good to others], it will be measured to you in return.”
If you’re a Filipino and you’re watching this video, you might be asking. What about the pasalubong or Balikabayan boxes, my trip to Maldives, the budget for parties and treating my friends, or shopping my Vuitton and Chanel. Well, this is what Dave Ramsey said, “Live like no one else, so later you can live like No One Else.” This is where delayed gratification comes in. Delayed gratification refers to the ability to put off something mildly fun or pleasurable now, in order to gain something that is more fun, pleasurable, or rewarding later.
What Dave was trying to say is that, Rather than buying something impulsively or sending money, you’re encouraged to put it off for a bit for a potentially better reward. It won’t solve all of your problems, but it’s a useful skill that can help you well beyond getting your impulse spending under control.
But if you really can’t resist on spending on shopping, sending money to family or friends, and going out on too many vacations, this is what I suggest that you can do. Open a separate account which you may call for example a Recreation account. Put away $10 – $20 or depending on how much you want to commit on saving every month. Send the money to that specific account every single month. At the end of the year, that’s also $120 – $240 which can cover your weekend getaway or your summer shopping spree. It also makes it a lot easier for you financially in case you really need spend on certain things.
So that's it for now. I hope that you get informed about Dave Ramsey's 7 Baby Steps and that you'll be able to execute them 1 step at a time. My family and I are also doing our Baby Steps and we are currently on Baby Step #4.
If this information is helpful for you, why not share it with your family and friends?