Dave Ramsey’s baby steps are the perfect answer for anyone looking to pay off debt and start taking control of their finances.
It’s really awesome to me that everyday finances can be broken down to seven steps. These steps are more like seven mini-goals. You can start wherever you fall in your financial journey and try to accomplish your step.
Dave Ramsey’s baby steps have worked great for my family, so I know they can work for yours.
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How to start the Dave Ramsey baby steps, create a budget, and save money to pay off debt!
Who is Dave Ramsey?
Dave Ramsey is a financial expert who’s helped thousands of people get control of their finances, pay off debt, and start saving money. He is host to his radio show, the Dave Ramsey Show.
Dave owns DaveRamsey.com, where he shares his advice for getting out of debt, building emergency funds, and financial advice as it relates to households. Dave is the author of many best selling books and creator of Financial Peace University.
Financial Peace University is a course designed to help you take control of your finances. Financial Peace University is a Christian based course that has helped thousands of people get out of debt, save more money, prepare for financial crisis, and begin investing for the first time.
- Dave also recommends you follow these budget tips!
- How to SAVE a lot of MONEY!
- Here’s how to budget like a PRO!
My experience with Dave Ramsey’s Financial Peace University
My wife first mentioned our church was offering Financial Peace University and wanted us to go. I thought she was slightly crazy because we were doing ok for ourselves. Also, who wants to give up part of their weekend to sit in a classroom?
However, the course was on one of my favorite subjects, money! So I decided to make the time to attend.
Turns out going to the class was one of the best things we ever did. We followed the course, agreed to the terms of our finances as a married couple, and built a budget that we both could follow.
We started saving more money and it helped us pay off 40% of our mortgage in only two years! Together we are still paying down the house and have a solid retirement plan in place.
I was a little skeptical when my wife mentioned she wanted to be a stay at home wife (and eventually mom). We were already living on my income and using hers to pay off the house.
I was worried that we would lose that extra money and momentum that we had. However, having a stay at home wife had other benefits that I wasn’t thinking about. I would come home to a clean house, dinner ready, grocery shopping and laundry already finished. We had more time on our weekends to be less responsible and have more fun!
Making the decision to live debt free
Dave’s course and the baby steps will tell you the exact path you need to take to become debt free. However, you can’t become debt free if you take the course and don’t take the action required.
Becoming debt free is hard work and will take focus on all family members involved. Putting in the work is the only way to see results and for some it’s easier than others.
There will be times when you come home exhausted from work and a pizza sounds great. The only problem? You don’t have money left in your budget for pizza or eating out. You will have to stay strong and cook for yourself so that you can stay within budget.
Sadly, living within your budget can and will mean saying no to your children. You can’t give in if they want something and you don’t have the money. Saying no is something that is hard for a lot of parents but will make your child a better person.
- If you have debt you MUST read this guide!
- Ready to lose weight without spending money? Check out these tips!
- Budgeting is easy with this rule!
What are the baby steps?
Dave has seven baby steps for those looking to pay off debt and become financially secure. The baby steps are:
Baby Step #1 – $1,000 Emergency Fund
You want $1,000 set aside for emergencies as soon as possible. This is in case something happens, such as your car breaking down or if you need to see the doctor.
This fund is not for eating pizza! Also, I’ve learned it’s not ok to joke with your wife about using the emergency fund for pizza.
$1,000 should be enough to cover most minor emergencies. You can build this fund through saving money and building an effective family budget. A quick way to get your $1,000 is to sell the stuff you aren’t using.
You remember all the boxes in your garage that are taking up space? Clean your house and find what you don’t want anymore. List the items on Craigslist or have a yard sale and hustle your way to $1,000.
Most people have yard sales and sell their stuff only to turn around and buy more useless junk. Don’t fall into that trap. Put your money into your emergency fund once you have it and don’t think about spending it.
Baby Step #2 – Pay off all debt except your house
Your debts are going to severely hinder you from saving money. Dave recommends you paying off your debt once you’ve reached your $1,000 emergency fund goal.
How does Dave recommend you paying off debt? The debt snowball method!
What is the debt snowball?
The debt snowball method isn’t the fastest way to pay off your debt. However, it is one of the best ways to build encouragement and motivation to keep you moving forward.
Write down your debts and the total amount owed on each one. Let’s say you have student loans at $10,000, car payment at $15,000, and a credit card at $1,000. Remember don’t include your house payment in your debts.
Dave Ramsey recommends paying them off from smallest amount owed to largest, while paying the minimum payment on the remainder. You would attack your debt by paying off your credit card, followed by your student loans, and finally your car payment.
Any extra money you get should be used to pay off your debts early. Let’s say you have $500 a month to pay your loans. The minimum payment on your loans might sum up to be $250, leaving you with an extra $250. Use the extra $250 as leverage and pay off your smallest debt first, in this case the credit card.
Baby Step #3 – 3 to 6 months of expenses saved for emergencies
Once you manage to pay off your debts, you should be able to take the money used towards debt repayment and build your emergency fund.
You already have your small emergency fund of $1,000, but that won’t protect you from major events. This fund is meant to protect you from incidences such as a job loss or extreme hospital bills.
If you already have an effective budget, you should know how much money you require each month for surviving. You’ll need to keep the lights on, feed yourself, and pay for your house, etc. Your goal is to save enough money that allows you to live for 3 to 6 months if your income ever stopped.
Baby Step #4 – Invest 15% of Income into pre-tax retirement
It’s time to build wealth now that you’ve got 3 to 6 months of expenses saved in your emergency fund. You should be prepared for a financial emergency. Now it’s time to start investing so that you can eventually retire.
Dave Ramsey recommends investing 15% of your income into pre-tax retirement fund. You should look at taking advantage of any company match because it’s free money. Dave suggests that you can get a 12% return on investment (ROI) through investing.
Start building your way up to the 15% of your income. If all you can invest at the moment is 6%, then invest 6%. You should be able to continue living with your budget. Should you get a pay raise, consider upping your contribution so that you’re investing more but still receiving the same pay.
For example, if your gross monthly income was $2,500, investing 6% of your income would be $150. Getting a 5% raise would put you at $2,625 in monthly income, an additional $125. Now you could start investing $275 per month or roughly 10.5% of your new income.
Investing the 10.5% of your new income would result in you seeing no difference in pay. This means you’ll continue receiving the same paychecks you’ve always seen, but you’ll be investing more of your income.
Baby Step #5 – Fund your children’s college education
The fifth baby step is to fund your child’s college education. Once you’re stashing away enough cash for yourself and your retirement, your child’s future comes next.
It’s important to put your retirement first because it takes time for your investments to grow. It’s nice to be able to pay for your child’s education, but it shouldn’t cost you working for the rest of your life.
Start a college fund early in your child’s life if possible. There is no shame in having your child help out by getting a job through high school and summer breaks to help pay for college.
Baby Step #6 – Pay off your home
It’s time to pay off your house now that you’re building wealth through investments and have funded your child’s college education.
One of the biggest financial successes you’ll have is paying off your house. How much are you paying for rent or mortgage payment? Imagine if you didn’t have to spend that much money every month and how it would change your finances.
Paying off your house will allow you to invest more or take more vacations.
Baby Step #7 – Build wealth and give generously
Your finances should be doing well once you have reached baby step #7. Dave Ramsey’s last baby step is all about continuing to build wealth for your family and so you can help others.
You can significantly change your families tree by being smart with your money. If you retire with four million dollars and only spend one million before you die, your children can keep that money and continue to build wealth.
Dave Ramsey also suggests that once your wealthy, you should give back to those less fortunate. The more you earn the more you can give away.The seven Dave Ramsey baby steps for paying off debt!Click To Tweet
You need an effective budget to work with each baby step
The key to success with the baby steps is to save as much money as possible. Saving money happens when you can reduce your expenses and make more money.
You need a strong budget to maximize your savings potential. A budget is the plan for your money so that you can keep track of your finances. Without a plan, your money will be spent and you’ll wonder where it went.
Dave Ramsey is a huge fan of paying in cash and the cash envelope system
Dave Ramsey suggest that you pay for everything in cash. He recommends putting your budgeted money in a series of envelopes. So if you budget $400 for groceries, you would have one envelope labeled “groceries” and you would place $400 in the envelope at the beginning of each month.
Paying for items in cash is a physical limit for spending your money. It’s easy to swipe a credit card and not know how much is in your grocery budget. However, it’s hard to not know how much is in your budget when you try paying for groceries if you only have $50 left in your envelope.
Paying with cash also registers as pain in your brain. Credit cards make it easy to overspend since there is no pain associated with swiping. The mental pain associated with paying with cash will help you limit how much you spend.
Start saving more money
Budgeting and saving money go hand in hand. You’ll find it easier to save money if you are diligent with your budget.
I’ve also created a free course to help you save more money and build an effective budget. This course is designed to help families understand common financial pitfalls and to budget better.