Do you want to get out of debt?
If so, you’ve probably heard of Dave Ramsey Baby Steps.
Although this system has helped many people become debt-free, it also has its share of pros and cons. To make an informed decision about whether or not to use the Baby Steps to get out of debt, you need to understand all the details involved.
In this blog post, we’ll take a look at Dave Ramsey’s baby steps to learn more and talk about the pros and cons.
Dave Ramsey’s baby Steps
- Step 1: Start an Emergency Fund
- Step 2: Focus on Debts.
- Step 3: Complete Your Emergency Fund.
- Step 4: Save 15% for Retirement.
- Step 5: Save for College Funds.
- Step 6: Pay Off Your House.
- Step 7: Build Wealth and Give.
1. Start an Emergency Fund
The starter emergency fund is the first of the seven baby steps.
What is an emergency fund?
An emergency fund is a savings account that you set up to cover unexpected expenses.
The first step in the Ramsey plan is to save $1,000 for emergency purposes. This may seem difficult, especially if you are carrying a lot of credit card debt, but it is important to start somewhere.
That way, if you have an unexpected expense, like a car repair, you can use the money from your emergency fund instead of using your credit card.
Unexpected expenses are one of the primary reasons people get into debt. A car repair, a medical bill, or an unexpected home repair can quickly cause people to go into debt.
An emergency fund ensures that you have the money on hand when the unexpected happens.
2. Pay Off Debt Except your House Using the Debt Snowball Method.
Do you have student loans, car payments, credit cards? It is time to pay them all off using the debt snowball method.
Before beginning this early baby step, you must have a financial plan. Begin by listing all your expenses and income and create a budget.
If you don’t know about budgeting, you can read how to create a budget for beginners.
What is the debt snowball method?
The snowball method involves paying off your debts from smallest to largest, regardless of the interest rate.
Once the smallest debt is paid off, you use the money you were using to pay that debt and roll it into the payment for the next smallest debt. This continues until you are debt-free.
This keeps you focused on paying off one debt at a time, rather than getting frustrated and feeling demoralized when it seems like you’re only making very little progress with an individual payoff plan.
There are pros and cons to using the debt snowball method. On the plus side, seeing your debts getting smaller and smaller can motivate you. However, you may end up paying more interest on debts with a higher interest rate.
On the other hand, there is the Debt Avalanche Method, and Dave Ramsey does not recommend using this method in this baby step.
What is a debt avalanche?
This debt payoff method is better for people who need to lower their monthly payments, especially those with a large balance with higher interest rates.
The term “debt avalanche” describes a strategy that has you paying off your debts from the highest interest rate (the most costly) to the lowest interest rate (the least costly).
The idea is that if you want to save money in the long run, it’s best to pay off the loans with higher interest rates first.
But if we’re talking about credit card debt or other small personal loans, this idea makes sense because you effectively reduce the time frame to pay high-interest loans.
No matter which method you choose, you decide what works best for you.
3. Fully Funded Emergency Fund (save 3 to 6 months of expenses)
Once all debts are paid off using the snowball method, there should be extra cash left over each month to increase your emergency funds savings for three to six months of expenses.
The most important thing is not to use this extra income on anything else but fully fund your emergency fund.
With a larger emergency fund, if there’s a job loss or some other unexpected expense, you’ll have the money to live on for a few months before finding another job.
Having 3 to 6 months of monthly expenses saved gives you peace of mind for a little while.
4. Invest 15% of Your Household Income for Retirement
Once you have saved 6 months of expenses, you move to baby step 4.
Begin preparing for your future by investing now. Not only will you be able to provide for yourself in retirement, but you’ll also be able to avoid having to take on debt to cover costs later on.
Dave Ramsey recommends investing 15% of your gross household income into retirement accounts like 401ks and Roth IRAs.
If your company has a 401k plan, make sure you sign up and invest as much as possible. Your company may even offer to match your contributions, which would be like getting free money!
If you don’t have a 401k through your job, you can open a Roth IRA account at nearly any bank or investment firm. Just make sure you’re investing in a diversified portfolio.
On the other hand, some people believe that 15% is too much to invest, especially if you’re starting. Others argue that you can’t afford NOT to invest 15% if you want to have a comfortable retirement.
Most important, whatever retirement savings percentage you decide to invest in, this retirement baby step will ensure you are financially stable during your retirement years.
You should invest in something, even if you have to open a brokerage account. You can invest in the stock market or mutual funds.
5. Save for Your Children’s College Fund.
If you have children already out of the house or graduated from college, move on to baby step 6.
Do not save for your children’s education if you have not followed the first four steps.
Don’t wait to start saving for retirement because many resources are available for children to go to school, such as scholarships, grants, work-study, etc., that children can get and hopefully go to school for free.
However, if you have young children at home and don’t want them to get student loans, this is an excellent time to save for their college fund.
The 529 plan or a Coverdell education savings account (ESA) are two types of kids’ college education accounts to invest in. The great thing is that these contributions offer tax-free earnings and distributions.
The advantage of children’s college fund pay is that it will give them a head start in their education and life instead of getting a student loan.
The con of saving for your children’s college fund is that they may decide not to attend college. However, if they choose to go to college, they will not get a student loan.
6. Pay Off Your Home Early.
According to Bankrate, the average American owes a $208,185 mortgage balance. With the rising cost of home ownership, this may seem far-fetched.
However, you can pay off your home early if you plan and stick to your plan following Dave Ramsey’s 7 baby steps.
Baby step 7 – pay your mortgage every two weeks instead of once a month. Doing this will shave years off your mortgage and save you thousands of interest.
You can also make extra payments towards the principal, which will reduce the amount of time it takes to pay off your mortgage.
Another option is to refinance your mortgage and get a lower interest rate, reducing the amount of time it takes to pay off your mortgage.
When you have a lower interest rate, you will save money on the amount of interest you pay over the life of your loan.
While there are many benefits to refinancing, there are also a few drawbacks to consider:
Cost: There can be costs associated with refinancing, such as
- application fees
- closing costs
- prepay penalty in some cases
Despite the cost of refinancing, you come out better by increasing your payments or refinance instead of making minimum payments.
If you follow these baby steps, you can join many others who have paid off their mortgage early.
7. Build Wealth and Give
Dave Ramsey’s baby step 7 says to build wealth and give. When you have an emergency fund, pay off all your debts, have 6 months of expenses, save for retirement, save for your children’s education, and pay off your home early, you can start building wealth.
Building wealth is not just about making and hoarding money. The best way to leave a positive legacy is by giving back, and it is a good feeling when you can help someone.
We all have a finite time on this earth, so why not make sure you’re leaving behind something bigger than yourself?
Your gifts can help others continue making an impact after your death by donating towards causes that are important to them or personally touching other people’s lives.
When giving back, do you wait until you get out of debt to give? For most people, the answer is no. If you enjoy sharing, give regardless of where you are in the step.
What is the Significance of Dave Ramsey’s 7 Baby Steps?
The Dave Ramsey 7 baby steps are designed to help people get out of debt.
Each step is designed to help you achieve a specific goal. For example, step one enables you to create an emergency fund to avoid using credit cards in emergencies.
These steps help develop a good money habit and build discipline.
Pros and Cons of Dave Ramsey 7 Baby Steps
If you want to improve your personal finance, the Dave Ramsey baby steps is a great place to start.
However, as with most things, there are pros and cons. Not everyone thinks the baby steps are great. For example, the emergency fund baby step savings of $1000 may be low for some but not for others. Decide what works for you.
Here are some things to consider:
5 pros of Dave Ramsey 7 baby steps
- It helps you get out of debt
- Provides a plan to help you stay disciplined
- It teaches you how to save money and live within your means
- Encourages you to become financially independent
- It helps you build wealth over time and attain financial security
6 Cons of Dave Ramsey 7 baby steps
- The steps may be too aggressive for some people
- Dave Ramsey’s plan may not work for everyone. When it comes to personal finance, each person has to decide what works for their situation.
- Investing 15% may not be enough for retirement.
- It may take longer than anticipated to pay off all debt
- There are no guarantees that each baby step will work the way you planned.
Decide why you want to achieve financial freedom.
Why do you want to achieve financial success? You have to have an end goal in mind to plan.
Many people who want to attain financial stability crave the feeling of finally being free from the constant worry and stress that debt, or lack of money, brings.
Some of the reasons why people want to achieve financial freedom include:
- Have more control over one’s life and decisions
- Give the ability to provide for oneself, family, and loved ones
- Retire earlier and live a more comfortable lifestyle
- Ability to give back to the community and support causes one believes in
- Achieving financial freedom provides a cushion for unexpected expenses
Make time to learn
It is essential to educate yourself on the steps to achieve your financial goals.
Most important, before you start the first baby step in this financial journey, get a financial plan and learn about personal finance.
Here you can learn ways to save money, pay debt or enroll in Financial Peace University (available online and in many churches).
The road to success is not easy, but you will find it works with patience. Many people have completed Dave Ramsey’s baby steps and achieved financial independence.
For encouragement along the way, listen to the Dave Ramsey show to keep you motivated. You’ll hear of others that have followed the baby steps and are debt-free.
You, too, can do the same!
Conclusion to Dave Ramsey Baby Steps
If you’re looking for a surefire way to achieve financial stability, Dave Ramsey’s 7 baby steps are the answer.
This tried and true plan has helped many people get their finances in order, and there’s no reason it can’t work for you either.
Ready to get started?
Please pick up a copy of his book, The Total Money Makeover, and let Ramsey guide you on the path to financial success.
Have you used these steps to get out of debt? Or are there other ways you tried that worked for you? Share your experience in the comments below.
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