Are you familiar with Dave Ramsey’s baby steps? You can read all about them in The Total Money Makeover. Here’s a quick overview:
Baby Step 1: Save $1,000 cash in a beginner emergency fund.
Baby Step 2: Pay down ALL your debt but the house using the snowball method.
Baby Step 3: Build your beginner emergency fund up to 3 to 6 months of expenses.
Baby Step 3b: Save enough for a 10-20% down payment on a house.
Baby Step 4: Invest 15% of your household income for retirement.
Baby Step 5: Save for your children’s college.
Baby Step 6: Pay off the house – early!
Baby Step 7: Build wealth and be outrageously generous.
We’d been hearing about Dave Ramsey and his baby steps for years and now that we’ve brushed up on them we’re excited to be following them – mostly to a T. Read on to find out how and why we’re deviating from Dave’s plan!
Beginner emergency fund: check!
We didn’t bring our emergency fund to $1000 until after we had started step 2 for a fairly common reason: we didn’t want to slow down our debt payments. However after reading The Total Money Makeover and listening to countless hours of The Dave Ramsey Show podcast we knew we needed to finish step 1 before going any further. It’s important not to spread yourself too thin (sending small amounts of money to your emergency fund, retirement, investments and debt each month) because you will feel like you’re not getting anywhere and be more likely to give up!
Snowball your debts
We’re currently on step 2 but we are not using the debt snowball and here’s why:
Dave’s snowball method is all about building momentum quickly by knocking out small debts first. Each quick win gives you a rush and the motivation to keep going.
The other way to go about this is to pay off the highest interest rate debts first. This is called the avalanche method and it is the “mathematically correct” way to do it, but that’s not why we’re doing it. Well, yeah, it’ll be nice to save a couple hundred bucks in interest but the true reason is because we don’t have any incredibly high or incredibly low balances, but we have some scary high interest rates! You bet I’m going to knock out those 20% plus APR debts first and get them out of our lives for good.
Fully-funded emergency fund & buying a house
Baby step 3 and 3b are easy to get behind. Having an emergency fund of 3-6 months of living expenses was a revolutionary concept for me – it’s hard to imagine the sense of security that will give us! Not everyone will do step 3b but because we don’t own a home yet that will be our next stop before we move on to the next three steps.
Invest 15%, save for college & pay off the house
Next comes steps 4, 5 and 6 simultaneously. Before I read The Total Money Makeover I was not at all on board with step 5, saving for children’s college! I thought college is outrageously expensive and who’s getting anything out of their degrees these days anyway? I was so relieved to read Dave’s take on it – he’s not asking us to save up a quarter of a million dollars to send our kids to the best school in the country to become doctors and lawyers. No, he simply wants us to save what we can and if that’s only enough for community college then so be it. At least our kids will be starting their adult lives with the advantage of an education and no ruinous debt.
As for steps 4 and 6, again these are no-brainers that I can’t wait to get started on.
“Live like no one else”
As Dave’s catchphrase promises, by the time you reach step 7 you’ve been living like no one else – a bare bones, scorched earth, rice and beans, beans and rice lifestyle and now it’s time to truly live and give like no else – build wealth, change your family tree, retire with dignity and give generously. Who wouldn’t want to reach baby step 7?
So, are we on the Dave plan?
Dave Ramsey’s baby steps are as fundamental as they are controversial – people love to hate this plan because while it will literally walk you to a life of financial peace it does not provide instant gratification. But after reading the success stories in the book and hearing hundreds of debt free screams on the radio show, it’s safe to say we’re on the Dave plan.