The 7 Baby Steps to Financial Freedom
We’ve been fans of Dave Ramsey for a long time, but we never really followed his teaching (AKA actually did what he teaches) until recently. There would be times when we would start, and we read his book, but we always made excuses and just let life get in the way.
We finally decided that enough was enough. We were tired of living paycheck to paycheck, never really making a dent in our credit card debt. We have big goals which include moving to the country and building our dream house, and we realized that if we were ever going to be able to do that, we were going to have to start doing something about achieving them.
This included making a budget and sticking to it. I think that was the hardest part of the whole process. Money is emotional. When we spend it, we feel things. Writing down a budget that limits that spending can be painful for some, but for us, it has been freeing. Instead of wondering where our money went at the end of the month, we’ve been telling it where to go, and that is a very powerful feeling.
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There are seven steps to financial freedom, according to Dave, and I’m going to lay them out and explain them for you in case you’ve never heard of them. Seven seems like a lot, but when you focus on one at a time, it allows you to get laser focused on your goals.
Dave calls them “baby steps,” and I think that’s a good way of looking at it. One baby step at a time to financial freedom. When you look at it that way, it’s not as overwhelming. We are currently in Baby Step 2. Keep reading to learn more about each step.
Step 1: Save $1000 for Your Baby Emergency Fund
In this first step, the very first thing you need to do is make a budget. The next thing you need to do is save $1000 as fast as you can. How you go about saving this $1000 is up to you. There are many ways to save money.
After we made our budget, we realized we didn’t have much left over to save, so we had to get creative. We sold things, we took on extra jobs in our side businesses, and we got hyper-focused on our goal. It took two months for us to save that $1000, and it felt good.
When you have that money saved, you need to put it somewhere you won’t spend it easily, like a separate checking or savings account. The purpose of this baby emergency fund is to cover surprise expenses (Christmas is not a surprise, BTW), like a blown out tire, a broken washing machine, or a busted out back window of your van.
That last one actually happened to us last August. It cost $300 to replace it, but it wasn’t an issue because we had that emergency fund. When you use any amount of that emergency fund, the goal is to stop working on whatever step you’re currently in and go back to Step 1 to get that emergency fund built back up.
Step 2: Pay off all Debt Except Mortgage
This is where we currently are as of writing this. The first step of Step No. 2 is to write down all your debts in order of smallest to largest, and I mean ALL of them. Every credit card, store card, gas card, student loan, car loan, bank note, medical bills, money you owe your parents, ALL of it.
This one was an eye opener for us. Seeing that total debt balance did not stir up good feelings. Actually, it made me angry. How have we allowed ourselves to rack up this much credit card debt? One little charge at a time, I guess.
I didn’t think we had used that much credit, but it’s true what they say: Every little bit adds up. The same is true for paying off that debt.
The quickest way to pay off debt is by doing what Dave calls the “debt snowball.” After you’ve made your list of debts from smallest to largest, you’ll then put every extra penny you earn towards that first debt on the list while making the minimum payments on all others.
When the first debt is paid off, you’ll then take the amount you were paying on that first one and add it to the second. Each time you pay off a debt, your “snowball” gets bigger and bigger until eventually (hopefully sooner rather than later) you’re debt free except for the mortgage!
Step 3: Save 3-6 Months of Expenses (Fully Funded Emergency Fund)
Now that your debt is paid off, you’ll want to take the money you were paying towards debt and put it towards your fully-funded emergency fund. The total number you use here will be 3-6 months of expenses, not income.
This will be used for bigger emergencies, like the loss of a job. Having that fully-funded emergency fund will ensure that if something big like that happens, you won’t have to go back into debt. If you lose that job, you’ve got 3-6 months to find a new one.
No stress. No worry. Dave recommends putting this emergency fund in a separate savings or money market account.
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Step 4: Invest 15% of Income in Retirement
Up until this point, you should only investing what your company matches in your 401(k) because it’s basically free money, and then when you reach Step 4, invest 15% of your household income. Start with continuing to invest what your company matches, and invest the rest into Roth IRAs.
If you’re married, you should have one Roth IRA for each of you. I don’t know much about investing, and we haven’t reached this step yet, so I’m going to stop right here. You’ll need to contact a financial adviser for investment advice.
Step 5: Save for Your Kids’ College
This step might be the most frightening of them all to me. We’ve got four daughters to save for, and I just don’t even want to think about that right now (college is SO expensive!), but if we stick to the plan, we will reach this step in no time.
I’m not sure if we will fund all of their education or a portion, but we are for sure going to help them out if they choose to go to college. There are basically two options for saving for your children’s college which will save you in taxes, and those are a 529 savings plan or an ESA, or Educational Savings Account. To determine which would be best for your family, contact a financial adviser.
Step 6: Pay off Your Home Early
The day we are finally completely debt free is the day I’m looking forward to most! Not having a mortgage is a dream of mine. I like to imagine what it would be like to have all that money instead of a mortgage.
Thinking about the freedom that would bring makes me tear up a little. In this step, Dave suggests switching to a 15-year fixed mortgage and putting every extra penny towards the principal of the loan until it’s paid off. Imagine what your “debt-free scream” will sound (and feel) like!
Step 7: Give and Build Wealth
Bryce and I haven’t had many opportunities to be generous over the course of our marriage due to financial limitations, but as I look over the 13 years of our marriage, I realize the each year our financial situation gets better and better.
There was one time when we had only been married for a couple years and were living with my husband’s family. We were broker than broke. Bryce had been working for a new company (which he was laid off from just a few months later) and he got his first ever Christmas bonus of $100.
I was excited about it because of course we “needed” it, but Bryce had other plans. There was this single mom we knew who needed it more than we did, so we gave it to her. When she called me crying with gratitude, I knew right then that I wanted to do more of THAT!
I hear stories of people giving outrageous tips to their server at the restaurant either just because they loved the service or the server revealed in some way or another that they were in a crisis, and I want to do that someday.
Being able give like that on the regular is going to require some hard work for a few years. Debt freedom and having a good start on retirement will do that for us so that we are able to “live and give like no one else!”
If you’re a total beginner to personal finance or you’re just wanting to get a better grip of your finances, I hope this helped explain some things and also helped you to not feel so overwhelmed. Becoming financially free does not have to be overwhelming.
Just take it one baby step at a time! If this helped in any way, please share with your friends on social media or pin it. Thank you so much for reading!
Where are you in your journey to financial freedom? I’d love to hear about it in the comments below!