First off, who is Dave Ramsey?
Dave Ramsey is a radio show host and personal finance expert who has laid out a very simple and easy to follow game plan to get out of debt, accumulate wealth, and ultimately help his viewers and listeners live their best lives.
So what is this game plan? Well, he’s cut it down into 7 easy steps which have become the “7 baby steps”. These steps are as follows:
BABY STEP 1: Save $1,000 for starter emergency fund
BABY STEP 2: Pay off all debt (except the house) using the debt snowball method.
BABY STEP 3: Improve emergency fund to 3-6 months of expenses.
BABY STEP 4: Invest 15% of household income for retirement.
BABY STEP 5: Save for your children’s college.
BABY STEP 6: Pay off your home early.
BABY STEP 7: Build wealth and give.
MY THOUGHTS:
Overall, I love this plan, the simplicity of it is really what sets it apart from other plans out there. The numbers are given in exact terms so there is never any confusion about what you’re doing or which order to do things in, and you won’t hear him give conflicting advice either. This plan is tried and true.
“Personal finance is an emotional experience for everyone”
Baby step 2, the debt snowball where you pay off all your debts in order from smallest to largest is the point where most viewers will argue, saying that it is more effective to pay off your highest interest rate loans before moving on to lower interest rates afterwards. I would tend to agree on this point, as I myself paid off my loans in order of interest rate rather than size, and that worked for me but that being said I will admit the positive reinforcement of seeing the number of debts you owe getting smaller could provide enough of a morale boost and keep the fire lit under you in order to more than compensate for the losses you’re taking in the math department (due to leaving the higher interest loans longer potentially). Personal finance is an emotional experience for everyone and if those consistent wins keeps you more focused on the end goal then you should definitely order the debts that way. My advice would be- be conscious of how you personally behave and take stock of your own tendencies before making your decisions on how to proceed with this step and if you’re at all unsure then just follow the snowball method.
Step 4 is the real game changer here, I personally find the 15% number for retirement saving to be too small, but that’s coming from an early retirement enthusiast who has no intentions of working until 50 let alone 60+. We’ve been lucky enough (or worked hard enough) to be in a position where we can put away 50% for retirement without depriving ourselves too harshly in our day to day lives and while I do fully understand we are fortunate to be in this situation there is something to be said for striving to increase this 15% to a number that allows you financial independence as early as possible. When I run the numbers on a FIRE calculator online it’s eye opening to see with a 15% savings rate i’m nearly 40 years away from being able to retire, while with a 50% rate i’m looking at 13 or so years. As a 30 year old, 13 more years sounds just about perfect! For a great FIRE (Financial Independence Retire Early) calculator check out the one that we use from Networthify.com, click here to try it out for yourself.
Paying off the mortgage early is also something that I’ve thought often about and have in fact made a few steps towards. For 2019, we’ve been making double up payments on our mortgage to try and work it down faster, this has come at the expense of some of our stock market investing but I almost view this as something like a bond portion of our portfolio seeing how we get a guaranteed 3.19% return making any additional mortgage payments (which are principle only payments by the way). I can’t say if we will continue with these for the long haul but for now it is awfully nice seeing the balance drop at an accelerated rate.
“If you’ve become sick of having debt or just being broke then make the decision to follow the baby steps”
Which step are we on?
Well i’m glad that you asked, lets have a look:
BABY STEP 1: Save $1,000 for starter emergency fundBABY STEP 2: Pay off all debt (except the house) using the debt snowball method.BABY STEP 3: Improve emergency fund to 3-6 months of expenses.
BABY STEP 4: Invest 15% of household income for retirement. IN PROGRESSBABY STEP 5: Save for your children’s college. No Baby FIC just yet, so we’ll come back to this one.
BABY STEP 6: Pay off your home early. IN PROGRESS
BABY STEP 7: Build wealth and give. IN PROGRESS
Looks like we’ve put steps 1-3 behind us (for good, I hope), and we’re likely a year or two away from saving for our child’s education so that would leave us technically on baby step number 6. To think that just 3 short years ago we were on baby step 2 with almost $100,000 dollars in debt between student loans and a new car and it really goes to show what buckling down and taking your personal finance seriously can accomplish.
Conclusion:
I would strongly recommend Dave Ramsey’s baby steps to anyone looking to map out their financial future. I don’t necessarily agree 100% with every step but the overall concept is nearly fool-proof. If you’ve become sick of having debt or just being broke then make the decision to follow the baby steps, remain out of debt FOREVER, and build the life that you and your family deserve.
If you have any questions or feedback please feel free to comment below.