Dave Ramsey’s 7 Baby Steps – It worked for me!

Throughout my financial life, Dave Ramsey’s comments on finances have always been in the back of my mind.  I followed Dave Ramsey’s 7 Baby Steps – It worked for me.  However, I did pivot from time to time.  Lost my way, then found my way back again.  As they say, life happens.

Even though I graduated college almost debt-free.  A small loan was needed to complete my last semester.  I paid this off quickly but began my new life with credit cards.  It was the American way.  I then proceeded to get married twice, have children, buy a house increasing my indebtedness substantially.

Time to revisit Dave Ramsey’s 7 Baby Steps

So now we are drowning in debt and living paycheck to paycheck. However, we do have some savings but must begin to climb out of debt.  We are at Baby Step 2 and we aggressively attack our debt.  Here is what we did:

1. We stop all unnecessary spending
2. Review our budget to cut unnecessary bills and expenses
3. Stop dining out and bag lunch
4. Create a payoff schedule for each credit card
5. Stop our 401k contributions
6. Look for better-paying jobs

We also did something extremely unorthodox and not acceptable in Dave’s eyes.  Down to our last $20,000 in debt and we’re working on a home improvement project on our home using an equity loan.  We decided to pay off the last of our debt and pay everything off when we sold the house.  As luck would have it worked for us!  I am positive that this has not worked for everyone and I would not advise anyone to do this.  We were in the right market at the right time and Lady Luck was with us.

We saved our way through Dave’s Ramsey’s Baby Step Three

Just after the great recession, I lost my job. I realized the importance of having that emergency fund that Dave speaks so highly of.  In the event of a long-term stint of unemployment an emergency fund would come in handy.  Realizing our vulnerability, we immediately began to save like nobody else.  Decide that you are going to pay yourself first and save. Begin saving 10% of your income. Take your monthly expenses and multiply them by 3 or 6. 

For example, if your monthly living expenses are $2,000, then you need to have $6,000 or $12,000 saved.  So, if you make $40,000 a year, which is about $2700 a month after taxes and any pre-tax deductions, 10% would be $270/month or $67.00 per week. It should take about 2 years to reach this amount.  It could be less time if you add any additional money from raises, bonuses, and/or gifts.  Once this is done time to move on to the next item in Dave Ramsey’s 7 Baby steps-it was working for me.

I invested the slow way and had to catch up

Since we were investing on and off while living our lives, we had some catching up to do.  The great thing was we were making more money.  While enjoying our newfound debt freedom it made me into a saving addict.  I went all into building our investments.  Fortunately, when we did lose our jobs instead of cashing out our 401ks we reinvested them in other mutual funds to continue to grow our retirement funds.  When we started new jobs, we re-started our 401ks from scratch.  Even with these ebbs and flows of investing we are on schedule to hit our retirement goals. 

Invest As Soon As You Can

I cannot impress upon everyone to save something, to invest always in your future.  The earlier you start the better, however, it is also good to start wherever you are in your life.  You are not going to need all of it at once so your investments can continue to work for you.  Remember, that one million does at 4% a year can generate $40,000 in income yearly.  Read my last blog Can You Live off of  $40,000 a year?  Okay, maybe this might be ambitious if you are far behind. However, even with about $500,000 saved you can generate $20,000 in income yearly.

Your goal should be to save up to 15% of your gross income for retirement.  Nevertheless, one size does not fit all.  Only you can determine how much you will need in retirement.  Since I am a budget queen, I created a rough draft of my retirement budget when I was in my 30’s. I only did an actual budget in my 50s.  Here is a handy tool for you to calculate your retirement savings from Bankrate.  Use it to plan your great escape from the 9 to 5.

“The best day to start saving is today, even if you can save only a little bit.” 

New York Times

We are currently working on Dave Ramsey’s Baby Step 6

Working on the home now.  This is our retirement home so the goal is to have it paid off by the time my husband and I retire. We recently refinanced our home to a 15-year mortgage to pay it off within 10 years.  Dave Ramsey would be so proud of us. I can’t wait to let him know. 

I recommend that everyone try to achieve this goal. Retiring with as little debt as possible is key to enjoying the proverbial golden years. Based on our property taxes it will cost us about $120 a month to live in our current home once the mortgage is paid off or roughly $1440 a year. But, we are guaranteed that the property taxes will go up but payments are still doable.

Let’s review Dave Ramsey’s 7 Baby Steps – Can it work for you?

I believe in Dave Ramsey’s plan and have used it as a guide.  I did not follow it step by step but used it as a gauge to stay on financial point. After reading his book I did not feel it was necessary to buy it for my financial freedom.  If you follow the steps outlined below you should be okay.  It does take a budget, controlling your spending, and saving.  Another point is the paycheck.  This is your main source of income.  Strive to make as much as you can and invest as much as you can as soon as you can.

Dave Ramsey’s Dave Ramsey’s 7 Baby Steps – It worked for me!

BABY STEP 1 – Save $1,000 to start an emergency fund

I Always had some savings so this was a no-brainer for me and one of the easiest steps for us.

BABY STEP 2 – Pay off all debt using the debt snowball method

Did the snowball and avalanche method to pay down debt, but I also used some of the equity of my house.  I don’t advise this for anyone.  We still use our credit cards but we pay them off every month.  This takes discipline not to overspend.  However, we use our credit cards for points to reduce our travel and other expenses.  This has been a huge saving for us.

BABY STEP 3 – Save 3 to 6 months of expenses for emergencies

Did not get serious about this until the Great Recessions – this is super important and I advise everyone to save for emergencies.  Read my blog Emergency Fund Savings for tips on getting started.

BABY STEP 4 – Invest 15% of your household income into Roth IRAs and pre-tax retirement funds

This is super important to retiring comfortably.  Start as early as you can to take advantage of compounding interest.  It is your best friend. Over time it turns hundreds of dollars to thousands of dollars. Use this handy tool from Investor.gov to see the effects of compounding interest.  We increased this to 15% as soon as we were able.

BABY STEP 5 – Save for your children’s college fund

We saved for both of our children to attend college and they both left debt-free.

BABY STEP 6 – Pay off your home early

Working on this.  It is our current 10-year plan. Hopefully, it can be completed sooner.  We will be throwing every extra dollar to reach this goal.

BABY STEP 7 – Build wealth and give

We are actively building wealth with various retirement and investment plans.  No need to wait to start this step.  I believe it should be an ongoing goal once you are debt-free. Compounding interest needs as much time as possible to grow wealth.  We can’t wait to get to the giving part.

Overall, this plan works, we were still able to live, go on vacation, and overall enjoy our life. While remaining debt-free and still using credit cards!  Sorry Dave not sorry.

Here are additional resources:

Living Below Your Means

What is the Purpose of a Budget

Wealth Accumulation

Why Can’t I Save Money

Last Of The Boomers

Let’s Budget, Spend, and Live!

Sabrina

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