Have you heard of Dave Ramsey and his Seven Baby Steps for success in personal finance? If not, you are missing out on a fantastic resource for achieving financial freedom for your family.
In a basic sense, Dave Ramsey’s teachings on personal finance are conservative, Christian-based and old-fashioned.
Dave himself often describes his advice as “God’s and Grandma’s ways of handling money” on his mega-popular daily radio show. And he jokes about how strange it is that common sense has become so marketable within financial circles in the United States today.
It’s the simplicity of his message that makes it so appealing. When you read anything written by Dave Ramsey or listen to his radio show or podcast, you can understand it.
More importantly, you can follow his advice and implement it quickly, not because it is easy (it’s not) but because it is sensible and simple.
Unlike so many of today’s financial gurus, Dave does not advocate a get-rich-quick path to financial success. Instead, he offers common sense and provides the tools and motivation needed to achieve long-term family financial freedom.
At the heart of the “Dave Ramsey plan,” are his increasingly-famous Baby Steps. These seven steps will get you on a budget and take you from a very vulnerable financial status to one of substantial wealth and the ability to help others like you have never dreamed possible.
The Dave Ramsey Baby Steps
Baby Step 1: $1,000 to start an Emergency Fund
An emergency fund is for those unexpected events in life that you can’t plan for: the loss of a job, an unexpected pregnancy, a faulty car transmission, and the list goes on and on. It’s not a matter of if these events will happen; it’s simply a matter of when they will happen.
Baby Step 2: Pay off all debt using the Debt Snowball
List your debts, excluding the house, in order. The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first.
Our family reached the milestone of completing Baby Step 2 in February 2008 after paying off almost $55,000 of debt! I can’t express the level of financial freedom our family enjoys based on this accomplishment.
Baby Step 3: 3 to 6 months of expenses in savings
Once you complete the first two baby steps, you will have built serious momentum. But don’t start throwing all your “extra” money into investments quite yet. It’s time to build your full emergency fund.
It is recommended that your full emergency fund be saved in a high-interest (i.e. not your local back), easy-to-access (i.e. not a CD or bond) savings account. Personally, we use and highly recommended an online “Orange Savings” account with ING Direct. It is very easy-to-use, highly secure, FDIC insured and held by a company with a CEO that shares beliefs similar to Dave Ramsey (and myself).
If you sign up via my referral to ING Direct and deposit more than $250, you’ll even receive a $25 bonus! Please note I receive a $10 bonus for referring you to ING Direct. If you’re ready to sign up, just contact me using the Contact form or leave a comment and I’ll send you a referral code so you can get your $25 bonus!
Baby Step 4: Invest 15% of household income into Roth IRAs and pre-tax retirement
When you reach this step, you’ll have no payments—except the house—and a fully funded emergency fund. Now it’s time to get serious about building wealth.
Baby Step 5: College funding for children
By this point, you should have already started Baby Step 4—investing 15% of your income—before saving for college. Whether you are saving for you or your child to go to college, you need to start now.
Baby Step 6: Pay off home early
Now it’s time to begin throwing all of your extra money toward the mortgage. You are getting closer to realizing the dream of a life with no house payments.
Baby Step 7: Build wealth and give!
It’s time to build wealth and give like never before. Leave an inheritance for future generations, and bless others now with your excess. It’s really the only way to live!
There you have it…a simple, but not easy, road map to family financial freedom! Obviously, there are a lot of details to be learned as you go through the process, and I hope to shed light on those as I continue to add posts related to personal finance.
I have been a member at Dave Ramsey’s membership site since 2003, so I interact frequently with like-minded folks and see/answer a lot of financial questions on a regular basis. I also encourage you to check out another quality site devoted to teaching these principles at Enemy of Debt.
Of course, the most straightforward way to learn additional information is to read one of Dave Ramsey’s bestselling books. His first book Financial Peace Revisited provides the background and answers “why” his plan is what it is. His latest book The Total Money Makeover: A Proven Plan for Financial Fitness provides a clear plan for “what” to do along with many inspiring stories of families that have used these principles to achieve financial freedom.
Our family is currently doing Baby Steps 4-6, which are concurrent steps as long as you need to save for retirement, save for college, and pay down your home mortgage (provided you have decided to own a house). If you already know about Dave Ramsey, please leave a comment to let us know how you found this message and state where your family currently is in the Baby Steps.
Here’s to long-term Financial Freedom for your family!Photo by borman818