You might have heard of Dave Ramsey. He's an American personal finance advisor with a big following. He also hosts a radio show, is an author and a businessman. Did you know that he has a seven step program called Dave Ramsey Baby Steps. It's a process and progression of getting your finances in order for certain things in life. Your personal finances are important and if you need to take control of yours, the Dave Ramsey Baby Steps method might be ideal for your situation. Let's take a look at what it's all about and how it could help you and your bank balance out.
Baby Step 1
The first step of the Dave Ramsey Baby Steps method is focussing on your starter emergency fund. You might need an emergency fund for all sorts of reasons. What would you do if you were hit with an unexpected bill? How would you find the funds for fixing the car if it broke down? Could you afford the rent if you lost your job tomorrow? An emergency fund is there to help you out of problems. Whilst we know birthdays an Christmas will come around each year and we can plan for them, there are things in life we can't plan for. The unexpected. The first baby step is saving $1,000 for your starter emergency fund. That could be £1,000 if you're in the UK.
Baby Step 2
Next up on the Dave Ramsey Baby Steps list is step two. This is paying off all of your debt, with the exception of your mortgage. You'll be using a debt snowball for this step. You need to list all of your debt in order of balance, from smallest to largest. Forget about the interest rates for now. Once you have listed all your debts, from the credits cards and student loans to car finance, you need to pay off the minimum repayment on each of them, apart from the smallest one. Whilst maintaining minimum payments on the others, attack that smallest debt until it vanishes. Then move up and concentrate on shifting the next on the list. Continue to meet those minimum payments on the rest whilst you work through the list, knocking out your debts one after the next.
Baby Step 3
Once your debt is gone, celebrate for a moment. But don't lose momentum. Next on the list is building a fully funded emergency fund. The starter emergency fund from step one is simply $1,000 which will help you out if something happens. Now we need to focus on creating an emergency fund which is exactly the amount you'd need if things happen. You need put away 3-6 months worth of expenses. This will allow you to continue to live if you were unable to find a job for a few months, or the car was written off and you had to buy a new one. Having an emergency fund, one that properly works, allows you to help yourself without sliding back into debt.
Baby Step 4
The next step on the Dave Ramsey Baby Steps method is looking towards your future. Have you even started thinking about your retirement. We work so hard, the twilight years of our life need to be comfortable and financially stable. With this in mind, step four is taking 15% of your gross household income and putting it towards your retirement. Investing your money in your future is important and we can do this in different ways. It might be through a pension with your company, a private pension or other investments.
Baby Step 5
We then look at the future of our children. Let's take a quick look at where we are. We are debt free (apart from the mortgage) and have started saving towards retirement. The next step, step five, is saving towards your children's college fund. Putting money aside which will make your kid's college education easier is important. Nobody wants to worry about money when they should be concentrating on exams, course work and enjoying the experience of university. There are saving accounts tailored to saving towards college that you could look into.
Baby Step 6
For step six of the Dave Ramsey Baby Steps process, it's time to look at the mortgage. This is maybe one of the biggest debt you've got or will have. Whilst you might be keeping up the monthly repayments, can you imagine paying it all off early and being completely free of debt? Imagine what you could do with that house payment money every month, if you weren't paying for the house. By putting extra payments towards your mortgage you can clear your mortgage sooner and save paying thousands of pounds or dollars of interest! Even an extra £50 or $100 a month will help clear your mortgage quicker and you'll pay less interest over the course of the mortgage term. Your mortgage might have a limit that you can overpay every year. Be sure to look into this as if you break that limit, you might incur charges, which could negate overpaying!
Baby Step 7
The seventh and final step of the Dave Ramsey Baby Steps method is building wealth and being generous. Dave Ramsey says that people with no debt, can do anything they want. The last step is maybe the most fun. You've worked your way through the process and find yourself here. Your kid's college fund is sorted, your house is paid off and you have plenty put away for your retirement. Build your wealth, give some of it away and plan an inheritance for those you love for when you're not here. But before you do pass on, make sure you've enjoyed your life. Money can give us the freedom to do what we want but we can also find happiness in generosity.
What do you think of the Dave Ramsey Baby Steps programme? What step do you find yourself on right now and where would you like to be this time next year? How about in 5 years, or ten years time? Find financial freedom by working through the steps.