If you’re looking for a way to take control of your finances, you’ve probably heard of the famous personal finance expert Dave Ramsey. Ramsey is known for his practical advice and “baby steps” approach to financial success.
In this article, we’ll dive into Ramsey’s baby steps and explain how they can help you achieve financial freedom.
What Are Ramsey’s Baby Steps?
The Ramsey Baby Steps are a series of steps designed to help you get out of debt, save money, and build wealth. Here are the seven steps:
- Save $1,000 for an emergency fund.
- Pay off all debt (except your mortgage) using the debt snowball method.
- Save three to six months of expenses in an emergency fund.
- Invest 15% of your household income into retirement.
- Save for your children’s college fund.
- Pay off your home early.
- Build wealth and give generously.
Let’s take a closer look at each step.
Step 1: Save $1,000 for an Emergency Fund.
The first step in the Ramsey Baby Steps is to save $1,000 for an emergency fund. This fund covers unexpected expenses, such as car repairs or medical bills. Setting aside this money can help you avoid debt when something unexpected comes up.
To save $1,000 for emergencies, you start by creating a budget and reducing unnecessary expenses. Look for ways to reduce costs on dining out, entertainment, or subscriptions. Consider taking on a side hustle or selling items you no longer need. Putting extra money towards your emergency fund can help you reach your goal faster.
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Step 2: Pay off All Debt (Except Your Mortgage) Using the Debt Snowball Method.
The second step is to pay off all your debt (except your mortgage) using the debt snowball method. This involves paying off your debts from smallest to largest, regardless of the interest rate. By first focusing on paying off your smallest debts, you’ll gain momentum and motivation to keep going.
Let’s say you have three debts as you embark on the Ramsey baby steps journey:
- Credit card #1 with a balance of $2,500 and a minimum payment of $50
- Personal loan with a balance of $7,000 and a minimum payment of $200
- Credit card #2 with a balance of $5,000 and a minimum payment of $100
Using the debt snowball method, you would make minimum payments on the personal loan and credit card #2, and put all your extra money towards credit card #1 since it has the smallest balance. Let’s say you can afford to put an extra $500 towards credit card #1 monthly.
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Credit card #1: $2,500 – $550 (minimum payment plus extra) = $1,950 balance
Personal loan: $7,000 – $200 = $6,800 balance
Credit card #2: $5,000 – $100 = $4,900 balance
Credit card #1: $1,950 – $550 (minimum payment plus extra) = $1,400 balance
Personal loan: $6,800 – $200 = $6,600 balance
Credit card #2: $4,900 – $100 = $4,800 balance
Credit card #1: $1,400 – $550 (minimum payment plus extra) = $850 balance
Personal loan: $6,600 – $200 = $6,400 balance
Credit card #2: $4,800 – $100 = $4,700 balance
Once credit card #1 is paid off, you would then move on to the personal loan, putting all your extra money towards that debt while making minimum payments on credit card #2. This method continues until all your debts are paid off. This method is one of the first steps towards achieving financial freedom and following the Ramsey Baby Steps.
Step 3: Save Three to Six Months of Expenses in an Emergency Fund.
Once you’ve paid off your debts, the next Ramsey baby step is to bulk up your emergency fund further. It is time to save three to six months of expenses to add to the $1000 that you had saved earlier.
This fund is designed to cover your living expenses in case of a job loss or other financial hardships. To create this emergency fund, use the money that you had been using for debt payments earlier. Be careful to set aside the fund for true emergencies only.
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Step 4: Invest 15% Of Your Household Income Into Retirement.
The fourth Ramsey baby step is to invest 15% of your household income into retirement. Follow the steps below to achieve this.
- The first step is to determine your household income, and then calculate 15% of that amount.
- Once you have your target, the next step is to identify retirement account options that suit your needs. For example, you can consider investing in a 401(k), IRA, or Roth IRA. It’s important to research and compare the features and fees of each account to determine the best fit for your retirement savings goals.
- You can also seek guidance from a financial advisor to help you make informed decisions.
- Finally, set up automatic contributions to your chosen retirement account to ensure consistent contributions towards your retirement savings.
Step 5: Save for Your Children’s College Fund.
Ramsey baby steps next recommends using a 529 plan or other tax-advantaged savings account to save for your children’s education.
Saving for your children’s college fund can be a daunting task, but with proper planning and consistent saving, it can be achievable. Here are some steps you can take to save for your children’s college fund:
- Determine the total cost of college education: Research the average cost of college education, including tuition fees, room and board, textbooks, and other expenses. This will give you a better idea of how much you need to save.
- Start saving early: The earlier you start saving, the better. Consider opening a college savings account, such as a 529 plan or Coverdell Education Savings Account (ESA), which offer tax advantages.
- Set a realistic goal: Determine how much you need to save each month to reach your goal, and adjust your budget accordingly. Consider cutting back on non-essential expenses to free up more money for savings.
- Make regular contributions: Make regular contributions to your college savings account, even if it’s a small amount. Consistent saving over time can add up to a significant amount.
- Encourage contributions from family and friends: Consider asking grandparents, aunts, uncles, and other family members and friends to contribute to your child’s college fund in lieu of gifts for special occasions.
- Explore scholarship and grant options: Research scholarship and grant opportunities for your child to help offset the cost of college.
Step 6: Pay Off Your Home Early.
Once your debts are paid, your emergency fund is stacked and your children’s education is safeguarded, the sixth Ramsey baby step is to pay off your home early. This involves making extra payments towards your mortgage to pay it off faster. You’ll free up more money for investing and giving by eliminating your mortgage payment. Here are some steps you can take to pay off your home early.
- Increase your mortgage payment: Make extra payments on your mortgage each month. Consider increasing your payment by an additional 10-20% to pay off your home early.
- Refinance your mortgage: Refinance your mortgage to get a lower interest rate or a shorter term. This can help you save on interest and pay off your home faster.
- Use windfalls: Use unexpected income, such as tax refunds, bonuses, or inheritances, to make extra payments on your mortgage. You should also have excess monthly cash left over that is used to go toward debt payments and building a college fund.
- Cut expenses: Look for ways to cut expenses in your budget, such as reducing entertainment expenses, other non-essential expenses, and eating out less. Use the savings to make extra payments on your mortgage.
- Consider downsizing: Consider downsizing your home to a smaller or less expensive one, which can help you pay off your mortgage faster.
- Make bi-weekly payments: Make bi-weekly payments on your mortgage instead of monthly payments. This can help you make an extra payment each year, which can help you pay off your mortgage early.
Remember, paying off your home early requires discipline, sacrifice, and a long-term commitment. Stick to your plan and make consistent progress towards your goal.
Step 7: Build Wealth and Give Generously.
The final step in the Ramsey Baby Steps is to build wealth and give generously. This involves continuing to invest and build wealth while giving to charitable causes and supporting your community.
Why Are the Ramsey Baby Steps So Effective?
The Ramsey Baby Steps are effective because they provide a clear roadmap for achieving financial freedom. By breaking down the process into manageable steps, Ramsey makes it easy for people to take action and make progress toward their financial goals.
The debt snowball method, a vital part of the Ramsey Baby Steps, is also highly effective. By focusing on paying off your smallest debts first, you’ll gain momentum and motivation to keep going. This can help you stay motivated and stick to your plan, even when it gets tricky.
Another reason the Ramsey Baby Steps are effective is that they emphasize the importance of living within your means and avoiding debt. This is crucial because debt can be a significant obstacle to achieving financial freedom. By prioritizing debt repayment and saving, the Ramsey Baby Steps help you break free from the cycle of debt and start building wealth.
The Ramsey Baby Steps are also effective because they focus on long-term goals like retirement and college savings. Starting early and investing consistently can build a significant nest egg over time. This can help you achieve financial security and enjoy a comfortable retirement.
Finally, the Ramsey Baby Steps are effective because they promote a balanced approach to financial success. While building wealth is essential, giving generously and supporting charitable causes are also important. This can help you create a sense of purpose and meaning in your life and positively impact the world around you.
Why Not Get Started Today?
The Ramsey Baby Steps are a powerful tool for achieving financial freedom. By following these steps, you can take control of your finances, eliminate debt, and build wealth over time.
While working through all seven steps may take some time and effort, the result is well worth it: a life of financial security, freedom, and purpose.
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This article originally appeared on Ash & Pri.