If you’re serious about saving money and financial freedom, you’ve probably done some extensive research. And you may have heard about Dave Ramsey’s baby steps program.
You may be wondering does it really work and if it can work for whatever financial situation you’re in. Keep reading to find out.
Who is Dave Ramsey?
Dave Ramsey is a well known personal money management expert. His main philosophy is to be extremely responsible with your money – pay off all debt, invest to build wealth, retire, and give back generously.
After building up an impressive $4 million real estate portfolio at 26 only to lose it all by age 30, he rebuilt his wealth and now uses the lessons he’s learned to help others be financially responsible and build wealth to help their families.
He has seven best-selling books that have sold more than $11 million copies worldwide – Financial Peace, More Than Enough, The Total Money Makeover, EntreLeadership, Dave Ramsey’s Complete Guide to Money, The Legacy Journey, and Smart Money Smart Kids.
He also runs the extremely popular show The Dave Ramsey Show and is also the creator of Financial Peace University (FPU).
What are Dave Ramsey’s Baby Steps?
Dave Ramsey’s Baby Steps is a 7-step program that teaches how to change your mindset and habits around money so you can get out of debt for good and build wealth.
Baby step 1
The first step is to save $1000 for your emergency funds as fast as you can. This will help to cover any emergencies or unexpected life events so you don’t resort to credit cards or personal loans.
Baby step 2
Baby step 2 is to use the Debt Snowball method to pay off all debt except for your mortgage. You will pay off all credit cards, student loans, personal loans, and car loans. Start by listing all your debts (except the mortgage) from smallest to largest balance regardless of the interest rate. This is the debt snowball method and the order in which you’ll pay down your debt.
The reason the debt snowball method works is that the small victories of knocking out your smaller debts will motivate you to keep going. Also, as you knock out smaller debts, you’ll have more money to tackle the larger balances.
Baby step 3
After you’ve paid off all your debt, it’s time to build up a larger emergency fund. This is when you take all the money you’ve been using to pay down debt to build a fully-funded emergency fund. This should cover 3-6 months of expenses. This larger emergency fund will serve as a cushion in case of an unfortunate job loss, car breakdown, or unexpected medical expense.
Baby step 4
Now that you’re debt-free and have a fully-funded emergency fund, it’s time to start investing! Now’s the time to take 15% of your gross income and start investing in your retirement. You may have been contributing to your employer-sponsored retirement plan all this time but at this stage, you will invest at least 15% no matter your age.
Baby step 5
You’ve paid off consumer debt, built an emergency fund, and got serious about saving for retirement. If you have kids or plan on starting a family, it’s time to save for their college expenses. Even if your kids decide not to go to college, they’ll have a good nest egg to get them started when they’re out on their own.
Baby step 6
It’s time to pay off the house! This is the moment you’ve been waiting for. Your mortgage is often the largest and the debt that costs the most on interest. Paying off your home early could save you tens or even hundreds of thousands in interest.
Baby step 7
Here’s the fun part! Now that you’ve achieved financial freedom, continue to build wealth to leave an inheritance to your kids and their kids. You can also be incredibly generous and start giving back. Many people who have reached this stage that is comfortable and happy usually have so much wealth that they don’t know what to do with it.
Give back! Give to your favorite charities, your church, or someone you know who is in need. It feels great to give. And when you give generously, you’ll find that you’ll be blessed tenfold.
Why do the baby steps work?
There’s a lot of chatter out there that Dave Ramsey’s baby steps don’t work. Do you know why it doesn’t work for them? It’s because they haven’t truly changed their money habits or educated themselves to be financially responsible.
Getting out of debt is not easy. It’s a lifestyle change, a mindset shift, and it’s extremely hard at times. But if you’re determined and stick to the baby steps you’ll come out on the other side debt-free, stress-free and happy.
The point of Dave Ramsey’s baby steps is to teach how to better manage money and help you change how you handle money little by little. As you slowly pay down debt, you get more motivated and encouraged and start to make wise financial decisions.
If you’ve ever tried to make a budget and stick to it you’ll know it takes at least a few tries to get it right. No one starts a budget today and sticks to it right away. It requires small changes, a little at a time to become financially stable.
How to get started on the baby steps?
Do you want to try Dave Ramsey’s baby steps? Let me help you get started.
Prepare your mind
Seriously. Getting out of debt will be one of the hardest things you’ll ever do but the reward is completely worth it. Paying down debt means you won’t be able to live the way you’re used to living, eat the way you do now or buy all the things you like. It requires discipline and sacrifice – you’ll have to tell yourself NO many times.
Make a budget
The other ‘b’ word everybody hates. But being on a budget doesn’t mean you can’t spend money. A budget simply shows you how much money you can spend on what you want.
Start by writing down your income and all of your expenses. You need to know how you are spending your money so you can make adjustments. Figure out what you can cut back on and what you can eliminate.
To make it easy on yourself, try to keep at least one thing that brings you joy in your budget. Maybe it’s ice cream Sundays with your family where you go to the local ice cream shop to hang out. Maybe it’s the spinning class you love. Keep one thing that will keep you motivated on this journey.
Reduce spending drastically
Here’s the other hard part. You will need to cut back on expenses. Stop eating out, no more unnecessary purchases, and cancel subscriptions that aren’t important. You may even need to sell that car you’ve got a $20k loan on and buy a cheap used car until you’re debt-free. Sacrifices. It will be worth it.
Make more money
Hate to say it but cutting back on a few lattes at Starbucks will not make you debt-free. To pay down debt, you’ll need to make more money. Pick up some extra shifts, work a part-time job, start a homemade craft business, sell some stuff around the house. You need to generate more income to reach your financial goals.
After you’ve made these changes you’ll be on your way! Take it day by day. The hardest part is the beginning. The more you do it, the easier it will get.
If you’re married or in a relationship and live together, make sure they are on board. If your other half is not on the same page to get debt-free, this will not work. You will both need to make sacrifices, change habits, and most importantly, support each other through this process.
It is rough and may be stressful at times so having your significant other to pick up where you may fall short makes all the difference.
If you’re single, try to get a friend to do it with you or just to keep you accountable. Explain to them what you’re doing, what’s your goal, and how you’d like them to support you. They do not need to be involved in your personal finances but have them check in with you weekly to see where you’re at.
If you’re still wondering whether Dave Ramsey’s baby steps will work for you, check out Dave’s #1 best-selling book Total Money Makeover. There are many inspiring success stories of people who have learned how to manage their money and are debt-free!