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Want to achieve ultimate financial freedom? Finance guru Dave Ramsay has 7 simple steps that’ll help you get out of debt and get started on your journey to worry-free independence today.
Whether you’re one of Ramsey’s top listeners and number one fans, or you’ve never heard of the guy and are just looking to better balance your finances and build up some wealth, these tips will help you get started.
Dave Ramsey is a widely respected financial expert and money management, guru. He’s a household name in the USA as far as business and investments are concerned. On his popular website, he describes himself as “America’s trusted voice on money and business” – and with an amazing “rags to riches” backstory behind his belt, we at Investoralist tend to agree.
By the time he was just 26, Ramsey had established a multi-million dollar real estate empire. In the late 1980s, however, he was forced to declare bankruptcy and had to rebuild his life from the ground up – something he achieved by creating Dave Ramsey s Baby Steps.
Dave Ramsey has dedicated his life to helping others achieve financial freedom. Over the years, he’s built businesses, shaped brands and established a huge fan following on US radio stations with millions of listeners.
He’s also authored several best-selling books, like Financial Peace, The Total Money Makeover and Dave Ramsey’s Complete Guide to Money – as well as set up the Financial Peace University (FPU), a widely-used initiative that helps people pay off debt.
Living in the amazing US of A doesn’t come cheap and few people are lucky enough to live a debt free life.
There’s no doubt we’ll all face a number of financial challenges during our lifetime. From expensive mortgage payments and raising money for a comfortable retirement, to saving for your children’s pricey college education and just keeping up with the bills, there’s a lot to stay on top of in everyday life.
That said, we think Dave Ramsey s 7 baby steps can work some real miracles, helping people to get out of debt, rise above financial limitations, consumer debt and wealth barriers and achieve more financial independence and control. Let’s take a look at how the 7 steps work.
So, what are the 7 steps? And what can Americans do to get started today? Let’s take a look in closer detail, one at a time (or baby step by baby step).
Between credit card debt, mortgage payments, everyday living costs and other outgoings, the average American simply does not have enough spare money to shell out in the event of a financial emergency – and this can be a real problem.
What to do: For baby step 1, Dave Ramsey recommends setting aside a small amount of money each month to kickstart an “emergency fund” as early as possible in life.
Right now, it probably seems unrealistic to save up enough spare cash to cover 6 months of expenses at the drop of a hat, but by building up a $ 1 000 reserve sooner rather than later, most Americans can get started with bettering their personal finance today, improving their ability to control an unpredictable situation in the near future.
How to make it work: If $ 1 000 sounds like a lot of money, think small to make it work. Selling old belongings on sites like eBay or Amazon, eating out less and downloading specialized money saving apps to help you monitor your spending can help you build up that $ 1 000 reserves faster than you might think!
Make sure to opt for a savings account that pays the highest possible interest on your stored-away money, too – as this can greatly help to ensure that your emergency fund builds up super-fast, putting you in a much better situation as far as finance is concerned.
Of all the steps in this list, baby step 2 is one of the most ambitious – but that doesn’t mean it’s not achievable. After all, we’re talking about tried and tested techniques created by the man behind the Financial Peace University here!
If you’re following the steps in order, you should already have a $1,000 emergency fund set up by now and be beginning to realize that taking back control of your finances is easy if you take baby steps.
What to do: For baby step 2, Dave Ramsey recommends using what he calls the “debt snowball method” to start paying off each and every debt to your name one by one, little by little. This involves imagining your debts as a snowball rolling down a hill, starting off small but gathering more snow (or debt) as it rolls.
How to make it work: Using this debt snowball idea and applying it to each debt you have on record, you can pay off smaller debts first, add the freed-up cash to the minimum payment of the next debt, and so on. Now, the snowball method certainly takes some practice, but once you’ve started using the debt snowball in day-to-day life, it’s easier (and faster) than you’d expect to start making a big difference to your finances. Will baby step 2 pay off? We certainly think so.
Once you’ve waved goodbye to all that debt, it’s time to save, save, save. Your starter emergency fund you set up in baby step 1 should have already helped you save $ 1 000 (if not more, if you’ve been smart enough to use a savings account that gains plenty of interest).
From now on, you need to supercharge those savings to enable you to control 3 to 6 months of expenses in the event of an unforeseen personal finance emergency.
Now, as we’ve seen with COVID-19 and the recession of 2008, unprecedented world events that can take a serious toll on your finances are far from uncommon – and almost never predictable. This is why it’s absolutely essential to ensure you’ll fall on your feet in times of crisis, whether that crisis be a lost job or a national emergency.
What to do: In baby step 3, Dave Ramsey advises single-income families to aim for the “six months of expenses” mark – which can be reduced to “3 months of expenses” for dual-income households, if needs be. That said, it’s always best to aim higher.
How to make it work: One way to achieve this is to normalize an attitude of saving in your day-to-day life. Use money saving apps as much as possible, track your spending on Google Docs and try to better your targets month-on-month, eat at home as much as you can and be sure to raid those coupon books at every given opportunity. Oh, and be sure to use a high interest rate savings account again!
With the average American working until they’re 66 years and two months old, saving for retirement is often the last thing on most people’s minds – but Dave Ramsey thinks that this attitude needs to change.
What to do: Baby step 4 is all about abandoning that “tomorrow’s problem” mentality and putting at least 15% of your household income aside each month to help finance your later years in a comfortable way. After all, with 66 years of work behind your belt, you’re going to want to relax!
Once paying off debt has become a thing of the past, there are a number of ways you can supercharge your retirement savings.
How to make it work: Baby step 4 recommends closely scrutinizing your employer’s 401(k) and completely maxing-out the amount of contributions you can deposit into this fund. In most cases, you should be able to drop in up to $18,500 per year of your own money but using Roth IRAs could help to boost this by $5,500. You can also maximize your Roth IRA account by learning how Stash can help you save for retirement. Stash Retire is a great idea for people who are just starting to expose themselves with investments.
If you’re a bit more ambitious – which you should be – you can also follow the principles of best-selling other and finance guru Chris Hogan, who advises savers to set a Retire Inspired Quotient (R:IQ), which is a kind of savings and retirement age target that Americans can work towards using Chris Hogan’s intuitive retirement calculator.
Just like with other savings accounts, having targets, goals and ambitions and visualizing what you need to do and how much you must save to achieve them can work wonders, as can using Roth IRAs.
Read more: Roth IRA Charles Schwab Review
That’s right – baby step 5 is also all about saving! But this time Dave wants you to save big to help fund a debt free college education for your children.
Now, obviously if you have no children and are simply aiming to accumulate wealth for yourself, or yourself and your partner, you can skip this one out. But with average undergraduate tuition fees in the US ranging anywhere from $17,797 to $26,261, putting some money aside for your children’s college education is absolutely vital if you don’t want to end up burdened with credit card debt and other debt when your kids hit their teenage years. Unless you’d rather see them saddled with student loan debt for years to come?
What to do: It goes without saying that we all want the best for our kids and one way to achieve baby step 5 is to open an Educational Savings Account (ESA) or a 529 college savings fund, depending on which feels like the best fit.
Contrary to popular belief, it’s entirely possible for your children to bag a college diploma or degree without breaking the bank.
How to make it work: Save as much as you can from as early as you can and consider in-state and community college options with lower average fees to save yet even more money in this area.
Dave advises savers to follow baby step 4, baby step 5 and baby step 6 simultaneously – but be sure to initiate each step in the proper order to achieve ultimate freedom and control.
Outside of credit cards, car loans and regular household bills, mortgage payments are pretty much the top debt most Americans are dealing with on a day-to-day basis.
Recent estimates suggest the average US citizen shells out around $1,400 per month on mortgage payments. But the thing about buying a home is, once you’ve made all of those payments, that real estate is 100% yours. Forever.
While it might seem like pie in the sky thinking today if you’ve only just stopped renting and found your feet on the property ladder, it’s nowhere near impossible to pay off your home – it just takes a bit of strategizing and dedication.
What to do: Use refinancing options in your favor, save wisely and there’s no reason why you can’t shave valuable years off of your mortgage-paying life.
Maybe you could switch from a 30-year to a 15-year mortgage and take a second job to make the repayments, or perhaps your home has increased in value, enabling you to refinance onto a much better deal.
How to make it work: Dave’s top tip for baby step 6 is to make one additional mortgage payment in each quarter. This enables you to pay off your home faster using the extra cash you’ve managed to save by studiously following all the other steps.
Over the course of an average mortgage, just one extra quarterly payment could get you 11 years closer to financial independence, saving you upwards of $60k in interest payments in total!
Now, by this point you should be very familiar with the fact that Dave Ramsey is all about giving and sharing, so it should come as no surprise that baby step 7 wants you to give, give, give!
Once you’ve managed to fully succeed with baby step 1 to 7, debt is a thing of the past and you’ve no more house payments or credit card bills holding you back, Dave suggests you start thinking about generosity.
What to do: After having worked so hard that you’ve achieved ultimate financial control and independence, you can start sharing that extra cash with friends, family members, charities or even your local church – and start helping others to accomplish their dreams too.
How to make it work: Baby step 7 can be initiated using a combination of everything you’ve learned so far. Max out those Roth IRAs, that 401(k) and those retirement fund contributions to help your wealth grow in a snowball method style.
Then simply kick back and enjoy the beautiful feeling of easy generosity – i.e., “build wealth and give”, as Dave would say.
So, we’ve shared the knowledge – now it’s time for you to put these steps into action.
We understand that it can be quite a journey to go from saving an initial emergency fund of $ 1 000 to ramping up your retirement fund savings for baby step 4.
It can take even longer to pay off your home for baby step 6 and eventually achieve ultimate financial control for baby step 7.
Nevertheless, we believe in you and we know you can master all steps – even that confusing debt snowball baby step!
With a bit of hard work and perseverance, Dave Ramsey himself has proven that virtually anyone can give themselves the total money makeover, pay off all debt and better balance their finances. The trick is not to expect miracles overnight. After all, they’re not called “big steps”, are they?
The key to success with Dave Ramsay s 7 baby steps is to follow each strategy slowly, in order and – most importantly – one at a time. We understand that despite their baby-ish name, these steps still appear intimidating at first glance, which is why you need to break your ambitions down into manageable, budgetable goals that work for you. As Dave would say, take one baby step at a time.
We’d recommend using money-saving apps or Google Docs to create a sensible budget, then simply following each baby step sensibly and slowly, without outdoing yourself.
Here at Investoralist, we’re all about making investments easy. Ramsey s 7 baby steps are a great way to get started on your investment journey, but there are many other things you can do to improve your finance situation, from investing in stocks and shares, to trying out tax tips, venture capitalism and more.
Browse our diverse range of investment blogs and articles and make smarter investment and personal finance decisions today.