Baby Steps to Financial Freedom

Baby Steps to Financial Freedom - Dave Ramsey has some great advice, and here's how one family is applying it and making progress - even on a tight budget!

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Are you familiar with Dave Ramsey? I’ve found that most people today have heard of “The Total Money Makeover” guy. In case you’re not, Dave Ramsey is a financial expert who once lost everything and then worked his way out of debt. He is very successful today, now teaching others how to get out of debt and make the most of their money. His original book is a good one and well worth a read!

One of the basics of Dave Ramsey’s teachings is what he calls his “Baby Steps to Financial Freedom.” I don’t completely agree with everything Dave says (most things, but not all). That said, his baby steps are a logical and helpful way to make progress towards your financial goals.

Since we are working through Dave’s baby steps, I thought it would be helpful to share what Dave’s approach is – and what we’re doing with them.

Let’s start with Dave Ramsey’s official 7 baby steps to financial freedom.

1. Save $1000 in an emergency fund. This is the first thing you should do, and you should attack it with a high source of energy. Do whatever you can to raise the $1000 as quickly as you can. Stop eating out. Cancel cable. Sell things on Craiglist. Get a part-time job or work overtime. Once you have raised the money, put it in a separate emergency fund account. Your emergency fund needs to be cash but not too easily accessible because this is an emergency fund – to be used only in the case of true emergencies.

2. Pay off all debt (except mortgage) with debt snowball method. The snowball method is very effective. First, list all your debts from smallest to largest. Continue making minimum payments on all your debts but put any extra money at the smallest loan. Again, be creative to get out of debt. Once you have paid off the smallest loan, roll that payment into your next smallest debt. By doing this, you will gain momentum with paying off your bills.

While you are paying off debt, Dave advises you to stop doing anything else. Stop saving for retirement. Stop your investments. Stop adding to your emergency fund. Use those payments to get out of debt as quickly as you can.

Dave Pay Off Debt with Snowball Method

3. Save 3 to 6 months expenses in your emergency fund. Now that you are done with debt, it’s time to build up your emergency fund to a full 3 to 6 months of living expenses. You know your family income and what is right for you. Focus on adding to your emergency fund until you have met the goal that makes you comfortable, with a minimum of 3 months expenses.

4. Invest 15% of income in retirement funds. The next step is to start planning for your future and invest in retirement funds. Dave recommends ROTH IRA’s and any 401k / 403b plans you might have through work. If you have a matching challenge set up at work, be sure to participate. The recommendation at this point is to invest as much as you are able now because the longer it accumulates, the better off you will be when you retire.

5. Save for your children’s college funds. Now that you’ve prepared for your own future, you can start saving for your children’s future college needs. There are countless ways to save for your child’s college, with 529 plans being particularly popular these days. Investigate all the options and start saving for college because it will be here sooner than you think!

6. Pay off your home early. According to Dave, it takes the average American family 5 to 7 years to pay off their mortgage early. Now that you are investing and saving, put everything extra you can into paying down the principal on your mortgage so you can pay your home off early. When you have paid off your home, think of all the freedom you will have being completely debt free!

Dave No Payments

7. Build wealth and give! Now that you’ve reached the final step, you can really have fun living – and giving – like no one else! You can build wealth, leave an inheritance, and give generously because you have prepared for your future. What an exciting way to live!

There you have it. Those are Dave Ramsey’s baby steps. You can download a free pdf printable of the baby steps here at Dave Ramsey’s website. Now, here is how we are working our way through them.

I am excited to say that we are currently on step 3. We saved our $1000 emergency fund at the beginning of our marriage. This past February, we paid off our only remaining debt on our Tahoe. It is a good feeling to be debt free. Now, we are working on step 3, building our emergency fund.

We set a goal of $5000 (cash) for emergency fund, because we already have another $5000 in cash value life insurance that we can draw upon in case of an emergency. I’m excited that we’re only a couple hundred dollars away from reaching our emergency fund goal. Hopefully, we can have that fully funded very soon. Our emergency fund was the first one we set up of our 13 different savings accounts.

We also recently set up a ROTH IRA for my husband and are contributing a small amount each month. My ROTH IRA is just accumulate interest, as I built it up during my single teaching years. Dave recommends not investing until you have fully funded your emergency fund. However, since we are so close, we went ahead and starting investing a little bit now. This was a personal choice that may not be right for you.

We are paying an occasional extra payment on the principal of our house. We do have a 30 year mortgage but it is our full intention to pay it off early. We refinanced a couple years ago so our interest payments are very low, for which we are thankful.

As with all the baby steps, there are variables that will affect your goals. Work at making wise financial choices for you and your family. I do believe in the power of the snowball method when paying down debt. I also strongly believe in being creative in funding your emergency fund accounts and paying down debt.

My husband and I are Lutheran school teachers. Well, my husband still is and I’m now staying at home. Our salary is not big. Our budget is very tight. In fact, you can read more about how we’re living now that our income has been cut in half. If you’re determined – and creative – you can achieve financial freedom.

We cut back on all extras and we both pick up side jobs throughout the year to earn extra money. Andy sells glow sticks over the 4th of July, mows lawns, and keeps stats for high school basketball to earn extra income. I teach piano lessons, sell custom children’s books, baby-sit for others, and answer surveys. We are willing to do whatever it takes. It’s not always easy and it’s certainly frustrating at times to wait until we have money in savings to complete projects. However, the freedom we have with no debt payments and money in savings, cannot be discounted.

Here’s my encouragement for you. I know it can look overwhelming at times – especially if you have a lot of debt. Take these baby steps. Work slowly and surely through them. It’s never too late to start paying down debt and saving money!

Let’s encourage one another! Whether you are on step 1 or step 7, you are to be commended for working hard to achieve financial freedom! If you feel comfortable, chime in on the comments and tell us where you are on these baby steps. If you have any insight or encouragement, please share that as well.

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4 Comments

  1. Thank you for the tips. I thought I had a lot of jobs I am a massage therapist, braided, I do transportation for kids and balloon decoration for parties.I am on step 2. I put my emergency fund in change only quarters nickels and dimes. God forbid someone breaks in my home they can’t or don’t won’t to carry it out, if you need a $100 who wants to count change, and if it’s a fire I can hopefully still have my change. Im having a lot of fun paying things off. But it can be a little over whelming at times. I have bundle my cable internet and phone all together. And saved $135.00 I have started to unplug unnecessary things and my light billed dropped by $65.00 I down sized my cell phone package by dropping insurance and unnecessary things I wasn’t using and dropped my pone bill by $60 I’m on a budget plan for gas and only pay $69 a month for a 5 bedroom house. I’m working hard to accomplish my goals. I will get there as long as time allows

    1. Good job on reaching step 2! And that’s a clever idea to keep your emergency fund in change. It also helps you avoid the temptation to spend it when you would have to count and bundle all the coins yourself. Keep up the great work, Shunta!

  2. Thank you for the encouragement. It is always good to see how others are applying Dave’s advice. Congratulations on paying off the Tahoe! I read his book after we first got married, and we had through step 3. Shortly after that my husband lost his job, and we ate through our savings. It was very discouraging to have to go through that money, but that is what it is for! We are working on building our savings back up. This month my husband and I have committed to eating out way less. We thought about cutting the cable, but we are in a contract that would cost us more to cancel than to keep it! So we are waiting until the contract is up.

    1. We were further along when we took out the loan on the Tahoe, and I REALLY don’t want to have to do that again. So, we’re working on building our savings up, too. I’m so thankful you had savings when your husband lost this job! Every little bit counts, so good for you, to eating out less and finding ways to build up your savings. And I would do the same with cable.

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