Dave Ramsey’s 7 Budgeting Baby Steps: Dos and Don’ts

An expert in personal finance “Total Money Makeover” and “7 Baby Steps” are Dave Ramsey’s best-known works. Thousands of people have utilized Dave Ramsey’s 7 Baby Steps to get their financial lives back on track and are still doing so today. There is no guarantee that the program will work for everyone, and many experts say it isn’t the ideal way to reach financial freedom. Personal finance experts recommend the following dos and don’ts when completing the seven baby steps.

You may also read:-

Baby Step Action to take
1 Save $1,000 for your starter emergency fund.
2 Pay off all debt (except your mortgage) using the debt snowball method.
3 Save three to six months of expenses in an emergency fund.
4 Invest 15% of your household income for retirement.
5 Save for your children’s college fund.
6 Pay off your home early.
7 Build wealth and give.

Baby Step 1

The first thing Ramsey recommends is to accumulate $1,000 in an emergency fund.

In general, an emergency fund of $1,000 should be sufficient to meet most needs. It’s important to remember that just 36% of Americans claim they can pay for an unexpected $400 expense out of their own pocket. This indicates that the majority of individuals would borrow, sell something they own, or take on more debt to make ends meet when emergencies arise. A professor of finance at Creighton University in Omaha, Nebraska, Robert Johnson, advises students to set up automatic savings for unanticipated expenses.

A low-risk account, such as a bank savings account or money market fund, should be used as an example of an emergency savings fund, he suggests. As EDI Refinance editor-in-chief Melanie Hanson points out, it can be difficult to save any money at all if you are living on a shoestring budget. In order to save this $1,000 as rapidly as possible, “you may not be able to,” she warns. Rather than overstretching your budget in order to reach this objective, it may be best to contribute what you can easily afford and take your time getting there.”

Baby Step 2

Using the debt snowball strategy, Ramsey recommends paying off all your debts except for your mortgage.

Prioritize paying off your smallest bills first so that you can move on to larger ones in ascending order. Unless you own your home outright, start by making a list of all your loans, from the smallest to the largest, regardless of interest rate. Kamel advises that you begin with the smallest tasks first. All of your other debts should be paid in full, including credit cards. When it comes to your smaller debts, pay as much as you can toward eradicating them as soon as feasible. Change your behavior and the snowball method will work. You’ll have more money to spend once you’ve paid off your first loan, and more money means more snow.”

Recall that if you want to pay off a particular debt faster, you will need more monthly financial wiggle room to make additional payments. Only if you aren’t taking on any more loans will this strategy work.” As much as possible, Hanson advises, steer clear of large purchases that require financing. Some debts include additional considerations like interest rates and penalties for paying them off early.

Consider the avalanche technique instead, which suggests paying the bare minimum on all of your outstanding obligations each month and then putting any extra money toward paying off your debts that have the highest interest rates first. In the long run, this will save you more money than you would have otherwise paid in interest.

Baby Step 3

Three to six months’ worth of costs should be saved in an emergency fund, according to Ramsey.

If you can’t plan for the unexpected, like losing your job, you’ll want to make sure you have enough money saved up to handle it. According to Kamel, “the general rule of thumb is you want to calculate out how much money you would need if your regular income disappeared.” Six months of spending is a good goal for single-income households. At the very least, households with two earners should aim for three months.”

It’s common advice to save six months’ worth of living expenses for an unexpected emergency, according to Johnson. Savings accounts and money market funds are good places to keep these funds because of their low risk. Saving three to six months’ worth of spending in a higher-yielding savings account “may produce a large rate of return,” Hanson says. If you’re unable to save three months’ worth of expenses, don’t be too hard on yourself; anything you can save is better than nothing.

Baby Step 4

The fourth phase in Ramsey’s method is to invest 15% of your family’s income for your future.

Retirement accounts should be opened as soon as a person begins working.” What most people do wrong is not take enough risks,” Johnson says. “Investing in the stock market is the surest method to build true long-term wealth for retirement.” If your employer offers a 401(k) plan with matching money, don’t put off saving for retirement until you’ve amassed six months’ worth of expenses. If you do that, you’ll miss out on free money.

You should take advantage of any tax-deferred savings options your company may provide, such as an IRA or 401(k). Hanson recommends that most of the money in these accounts should be put in mutual funds, ETFs, or index funds. In this case, it’s critical to find the correct balance between investments and tax benefits. The preceding phases in Dave Ramsey’s plan emphasized the need of setting aside a small amount of money each month. Now that you’ve saved some money, it’s time to put it to use.” If you have an actively-managed retirement plan, keep in mind that you may have to pay third-party fees.

Baby Step 5

Putting money down for your children’s education is one of Dave Ramsey’s five financial goals.

In the event that you do not have any children, you can skip this stage. “If you don’t,” adds Kamel, “it’s time to start researching and saving money for your children’s education. Think about starting a 529 college savings account or an educational savings account. Talk to your kids about college as soon as possible so that you can ensure that these monies are put to good use.” Make sure you don’t spend all of your retirement funds on your child’s future schooling. The latter is more important than the former. In the end, whether or not your children go to college, you’ll want to retire.

Putting your retirement first is a smart choice, not a selfish one, says Kamel. In view of the escalating cost of college tuition and the possibility that your child may not end up attending college, Hanson advises prudence. Don’t contribute to a 529 plan if you don’t know what your child wants to do with his or her future; the money you save there can only be used to pay for college. Mutual funds are a better option.”

Baby Step 6

Paying off your mortgage early is the final step in the process.

If you’ve made it this far, you should have a better understanding of the snowball method’s effectiveness. This is essentially an alternative way to spend your money by paying down your mortgage faster or paying more each month, according to Hanson. “In order to pay off your mortgage even faster, you may want to look into refinancing or other options.” Paying off your mortgage early will provide you with a sense of financial freedom and peace of mind.

“You’ll be able to handle life’s setbacks more easily.” It also allows you to pay for other goals and necessities in your life, according to Johnson. When you pay off your mortgage early, your monthly payments will be greater, which means you’ll have less money for other investments, like saving for retirement or paying for a child’s college education. Some people may not be able to justify the high opportunity cost of paying off a relatively low fixed interest rate mortgage (typically under 4%) when they could be earning approximately 10% by investing in mutual funds and other assets.

To make money, Hanson says, “skip a baby step if inflation is larger than the interest rate on your mortgage.” For those who plan to pay off their mortgage early, be aware of early payoff penalties, which are more common with mortgages than with other types of debt. “”

Baby Step 7

Step seven of the Ramsey plan is to accumulate wealth and then give it away.

After this point, you should be debt-free. When you donate to your favorite organizations and important causes, “you’re giving back to the world,” adds Kamel. However, experts advise that before making any charitable contributions, you should think about items like health, disability, and long-term care insurance. To ensure that your money is going where you want it to, conduct thorough research on the charities, political organizations, or other important causes that you have chosen to support,” says Hanson. Donors with little or no experience are the most vulnerable to scams. If something seems too good to be true, it often isn’t.

Assessing The 7 Steps

When you follow Dave Ramsey’s baby steps, you may get out of debt faster and put yourself in a better position to accumulate wealth in the long run. However, they aren’t completely foolproof. It’s great that anyone can utilize Dave Ramsey’s 7 baby steps as a roadmap.” Depending on your circumstances, the speed at which you reach your goals will vary. But Nate Tsang, founder, and CEO of WallStreetZen thinks that each step is excellent financial advice that you’re better off following. Some of these tiny stages have value, but Johnson cautions that not everyone can handle them one at a time.

Oversimplified, these stages are. All of the principles are good, but the way they’re presented gives the impression that you have to finish one stage before moving on to the next,” he says. The majority of the time, financial planning doesn’t work this way.” In order to accomplish anything, one must juggle a slew of competing priorities and aspirations.

Kamel, on the other hand, is a firm believer in the 7 baby steps and maintains that they have worked for him.

Debt totaled $40,000 in 2013, with $36,000 coming from student loans and the remaining $20,000 from charge cards. In order to regain control, he explains, “I began to take baby steps. During the course of 18 months, I paid off all of my personal debt and recently paid off my home. When people stick to the plan, get focused, and remain hopeful, they’re more likely to succeed with modest steps.