Dave Ramsey’s Baby Steps to Financial Peace
Finances are the number one cause of fights among married couples in the U.S. Money is consistently one of the primary worries of people living in the U.S. These statistics are eye opening, but what’s even more eye opening is when you also consider that the U.S. is one of the most economically prosperous country in the world. Additionally, researchers have found that once our basic needs are met, more money doesn’t solve our problems or stresses about money. So what is going wrong?
In a previous post I discussed the dangers of debt and how the middle class as become a slave to it. Today I want to provide a solution that anyone call follow to take back control of their finances, and decrease the stress they have in their lives revolving around finances.
That solution is Dave Ramsey’s Baby Steps. Dave Ramsey is an entrepreneur who has built one of the largest, and most successful, companies providing financial counseling in the world. He has built this company on the back of his 7-step wealth building process that has been tested and proven true millions of times. His process is based on the premise that debt is dangerous and unnecessary in our lives, and we should do everything we can to eliminate it as quickly as possible so we can take full advantage of our greatest wealth building tool… our income.
Today I want to give a brief overview of his plan to help you determine if it’s right for you.
If you want to dive deep into his program and all of the psychology and math behind the plan, you can find his book here (using this link will provide a small kickback to us here at CTM which will go towards supporting our mission). I highly recommend it. With that being said lets jump into the steps…
Step 1: Save an emergency fund of $1000.
The first step in his process is to save an emergency fund of $1000. Today, only 40% of Americans are able to cover a $1000 emergency without using a credit card. By saving up this small emergency fund you create a small buffer between you, and needing to take out more debt if an issue arises.
Step 2: Pay off your debt (excluding your home).
Once you have an emergency fund in place the next step is to pay off all of your debt starting from the smallest debt, working your way up to the largest debt. Many people believe that you should pay off your debts in order of the highest interest rate to the lowest interest rate, which mathematically is technically correct, but unfortunately doesn’t work in practice. The reason this method doesn’t work in practice is because people aren’t robots. We need quick wins if we are going to stay on the path of paying off debt. By paying off our smallest debts first we get quick early wins that give us hope, energize us, and help us to push through the adversity we will face in paying off the larger debts.
Step 3: Save a full emergency fund.
After you have paid off all of your debt it’s time to save for a fully funded emergency fund. A typical emergency fund is 3-6 months of expenses, but you can save more if you have a particularly volatile income or if it brings you significantly more peace. This emergency fund will be there for your if any major unexpected expenses come up, or you become unemployed for a period of time. You should protect your emergency fund from being used at all costs, up until the moment you are about to go into debt to pay for something. The emergency fund is for true emergencies, don’t dip into it for anything less.
Step 4: Save 15% of your income for retirement.
Dave believes that you should hold off on saving for retirement until you are totally debt free and have an emergency fund. This step is one of his most hotly contested steps but there is a method to his madness. The idea with waiting is that when you know you are putting off your retirement savings to pay off debt, that will make you work harder to pay off the debt quicker. Once you pay off all of your debt you will have a significantly easier time accumulating wealth and preparing for the future.
The reason for saving 15% is that over the long run, if you consistently invest 15% of your income into the stock market, you will likely have enough money to sustain you through retirement. It’s important to note that the vast majority of Americans don’t currently save 15% of their income, so they are under-funding their retirement, which will likely force them to work long after they wanted to retire.
Step 5: Save for your children’s college fund.
College is expensive, and its only going to get more expensive. Its important that you save ahead of time so that your child doesn’t have to take out student loans to attend college, if that is the path they decide to go in life.
Step 6: Pay off your home early.
This is when you finally take control of the largest asset that most people own, their home. By paying off your home early and eliminating that mortgage payment from your monthly budget, you will free up a significant amount of money to save, invest, and give!
Step 7: Build wealth and give.
Once you have paid off all of your debts, saved for your kid’s college, and begun saving consistently for retirement, the only major financial thing you have left to do is continue to build wealth and give outrageously. One of Dave’s saying is “right now we need to live like no one else, so that later we can live like no one else”. Meaning, we have to work harder than everyone else now so we can get out of debt, and once we are free, we can live like no one else by having more fun and giving more than everyone else.
Dave Ramsey’s baby steps is the plan that I’ve been following in my life, and I must say that it has brought me a significant amount of financial peace. Unfortunately, I’ve only been able to cover a very broad overview of his plan. There are many nuances and intricacies that go into each and every one of these steps, all of which he covers in his book, his podcast, and in his course financial peace university.
So, go out and conquer your finances, find financial peace in your life, and begin living the prosperous life God intended for you. Good luck.