7 baby steps – All the tips you need to know 

In the book The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness by Dave Ramsey, 7 baby steps are presented so that you can finally take control of your money.

Through the 7 steps, you’ll learn how to save for emergencies, pay off debts and build your wealth more easily.

Read on for a detailed look at each of the steps.

Information about David Ramsey 

Ramsey is an American radio personality who offers financial advice. 

As such, he advises listeners on how to reduce debt using the debt snowball method.

In other words, Ramsey believes it’s better to pay off lower balances first.

Another point that sets the author apart is that he opposes the use of credit cards, encouraging the use of cash.

For families, he recommends using an envelope system.

As a result, money for entertainment, food and other monthly expenses is separated into different envelopes.

In this case, the family can use only the amount in the envelope during the month.

As well as not using credit cards, the author also encourages people not to take on student loan debt.

According to him, the idea that student loans are necessary for college is a myth.

Benefits of the 7 baby steps 

First, know that you’ll be focusing on one goal at a time.

At the beginning of the year, it’s common to set financial goals.

So maybe you want to buy a cell phone, a car and a house.

Basically, you understand what is a priority at the moment.

In other words, you can meet all your goals, but with patience.

Secondly, the steps serve to prevent you from getting into debt again.

You’ll see later that the first 3 steps are about avoiding and paying off debt.

Basically, you learn how to lead a debt-free lifestyle and have stable finances.

In this sense, the excuses for getting back into debt are put to one side.

Thirdly, the baby steps allow you to observe and celebrate your progress.

When you start using the strategy, it’s worth taking a moment to recognize your hard work and success.

Perhaps throwing a low-cost party would be a good option?

The important thing is that you recognize your efforts to keep yourself motivated to move forward.

Baby step 1 – save US$1000 on your initial emergency fund

Saving money by cultivating the habit of spending on necessities is the first step.

If you learn more about financial minimalism, you’ll already know some excellent strategies for saving money.

And in addition to saving money, you can choose to earn extra income so that you have at least US$1000 in your emergency fund.

This is the first step, because there’s no point in starting to create goals without having a certain amount of money to deal with unforeseen events along the way.

At this early stage, I worry about studying more about finances to learn how to handle money intelligently and earn more each month.

Baby steps – 2 pay off all your debts 

Except for your house, the author recommends paying off all your debts using the debt snowball method.

The advantages of doing this include the following:

Interest is reduced because you pay off your debts early.

The sooner you pay off the amount owed, the less interest will accrue over time, resulting in considerable savings at the end of the contract.

Secondly, there’s the improvement in your credit score.

By maintaining a history of punctual payments and making them early, your score increases.

At the same time, this ensures that you have access to lower interest rates when you apply for a loan.

With these baby steps, there is also a reduction in financial stress because you pay off debts early and don’t have to deal with the pressure of outstanding debts.

This gives you peace of mind and a sense of achievement.

On the other hand, it’s worth mentioning the freeing up of resources:

By getting rid of debts earlier, financial resources can be used to realize other financial goals.

And, of course, there is greater financial flexibility because you have no outstanding debts.

So it could include career changes or entrepreneurship.

How to use the snowball method

Identify all your debts and make a list from the smallest to the largest.

At this point, we also find out the interest rates on all loans, fines or monetary corrections.

Still taking the baby steps into account, it’s essential to analyze your monthly budget in order to cut down on unnecessary expenses.

As difficult as this process may be, it is gratifying to see that you are getting out of debt and spending less than you earn.

Next, negotiate with your creditors.

This way, you can see the possibilities of lower interest rates or better payment terms.

With all the information in hand, start paying off the minimum amount of all your debts.

Also, choose the smallest debt and start investing the extra money in your budget to pay it off.

Once you’ve paid off a debt using the baby steps, invest the entire amount in the next smallest debt.

So, if the minimum amount was US$50, and you were using an extra US$150 to pay off the debt, apply the US$200 to the next smallest debt.

Do this until all your debts are paid off.

Challenge yourself and see how thrifty you can be while you’re at this stage.

Also, remember baby step 1.

Don’t stop working for extra income when you have US$1000 in your emergency fund.

Keep working to have more and more extra money to pay off your debts.

It’s not forever, and when you’re living debt-free, you’ll look back and see that the work was totally worth it.

Baby steps – 3 save for three to six months in a fully-funded emergency fund

Now we need to talk in more detail about the emergency fund.

Basically, it’s a sum of money that you should set aside to be used only in cases of financial urgency.

It covers expenses that happen unexpectedly.

Those who have an emergency fund have peace of mind even in critical situations because they know they won’t get into debt.

We can therefore define an emergency fund as follows:

An amount that can cover your cost of living for a few months.

One of the benefits of having an emergency fund is that it provides you with financial stability.

This means that in times of emergency, you don’t have to take out a loan to maintain your cost of living.

As a result, you have greater emotional peace of mind by using one of the baby steps.

If you have these resources available exclusively for unforeseen circumstances, you don’t have to worry so much about your financial situation. 

Of course, there’s also financial freedom.

If you have an emergency fund, you don’t have to stay in a job that brings little satisfaction.

You can also leave your job and look for another career.

What’s more, you can better plan to buy a new car or take a trip.

How much should the emergency fund be?

There is no exact amount because it depends on how much you need each month to pay your bills.

However, many financial experts recommend that you have enough money in your emergency fund to cover 6 months of your monthly expenses.

In other words, you can support yourself for up to 1 semester if your income is totally compromised, such as if you lose your job. 

So, if you need US$1500 every month, your reserve should be US$9000 (US$1500 x 6).

But when can the amount obtained with baby steps be used?

Although the name suggests that the emergency fund is used in times of unforeseen circumstances, it’s interesting to know exactly what those times are.

Let’s think about a self-employed sales assistant who has a car as his work tool.

If the vehicle has a problem, he needs resources both to fix it and to cover the budget on days when he won’t be working.

But note that we can’t say the following:

The value of the emergency fund is used to fix your car when it breaks.

This doesn’t apply in all cases, because there are people who don’t use their car for work, so if it breaks, their salary won’t be affected.

In this case, if the person only uses the car for leisure, the smartest thing to do would be to save the money to repair the vehicle instead of using the emergency fund.

In addition to unemployment, another interesting example of using the money saved would be a health problem.

If you or a family member were to fall ill, you would need to buy medication, pay for medical care, hospitalization, etc.

The emergency fund can be a great ally to give you greater peace of mind at such a difficult time.

Baby steps – 4 invest 15% of your income in retirement

The first three steps are aimed at getting out of debt or avoiding debt, so they are short and medium-term goals.

But now it’s time to think about your long-term goals, more specifically your retirement.

The creator of the 7 baby steps recommends that you take advantage of your company’s 401(k) match.

In case you didn’t know, 401(k) matching is an employer-sponsored retirement plan.

As a result, you contribute part of your pre-tax earnings.

And depending on your employer, they may match the contributions up to a certain amount.

This causes the compensation package to increase.

For example, let’s say an employer agrees to match contributions of 5% of an employee’s salary.

If this employee is paid $1000 a week and contributes 5%, his employer does the same.

So, although he only had $50, the balance became $100.

Over the course of a year, the $50 a week that the employer deposits amounts to a total of $2600 and over 10 years, the amount is $2600, without calculating any interest income.

But when it comes to applying the baby steps, here’s what you should know:

Each employer may structure their plan differently.

In this sense, instead of determining a percentage, your employer may allow you to choose a fixed amount.

In addition, some matching contributions can be defined as a percentage of the employee’s contribution. 

With this, the employer matches 50% of the employee’s contribution with a maximum dollar amount or no limit at all.

And of course, there are generous employers who match up to 100% without limit.

Ideally, you should find out about your employer’s type of plan.

Baby steps – Invest the rest in Roth IRAs

Another savings option is the Roth IRA, which is generally used as a retirement account.

This way, income grows tax-free.

However, be aware that contributions are limited to US$6,500 in 2023 (US$7,500 if you’re 50 or older).

For 2024, the public over 50 has a limit of US$8,000 and US$7,000 for everyone else.

It is also important to be aware that contributions cannot exceed earned income and there are income restrictions.

It is worth noting that contributions can be withdrawn at any time.

However, earnings are subject to a penalty if you try to withdraw before you reach the age of 59 and a half.

In this way, you can prepare for both your own and your spouse’s retirement, if you are married.

It’s not about accumulating wealth simply to be rich, but to have a comfortable future.

But, you might think: 

I don’t have enough knowledge to invest 15% of my income. Maybe it would be better to skip this baby steps strategy.

Don’t do that because it’s a serious mistake.

If you don’t know how to invest, consult a financial advisor or do some independent research online about good investment options for beginners.

Baby step 5 – save for your children’s college fund

If you are a first-time parent or if your children are young, this is an essential step.

Having a college fund is often a sure-fire way to help your children transition into successful adulthood.

According to a US News survey, the average tuition for the 2022-2023 school year ranged from $10,423 for in-state public colleges, to $39,723 for private colleges.

In other words, college isn’t cheap, so setting up a fund for your child’s college is one of the baby steps.

To do this, you can open a 529 plan.

Savings plans, usually sponsored by state governments, encourage saving for future education costs. 

They are generally tax-friendly, as states allow you to deduct your contributions from your state income tax.

As a result, when you withdraw the money for college, you won’t be taxed.

There is the possibility of putting money into your own state’s plan or another state’s plan.

The point is that each state has its own specific plan.

So if you live in Alabama but prefer the Florida plan, go ahead.

It’s never too late to start saving for your children’s education

Although the ideal is to start saving when your child is young, you can start paying for a plan when they are 14, for example.

Another fundamental tip is that you don’t compromise your retirement to create your child’s college fund.

In the baby steps’ strategy, investing in your child’s education comes after investing in your retirement, and this is no coincidence.

In an ideal scenario, you would have money for both, but when that doesn’t happen, it’s essential that you understand the following:

Putting yourself first is not selfish.

Let us give you a simple example:

“In the event of a loss of cabin pressure, secure your own oxygen mask before helping the children traveling with you.”

The same goes for your retirement and your child’s college fund.

If you don’t retire first, you’ll hardly be able to help your child in the future. 

Although the creator of the 7 baby steps does not indicate the use of student loans, financially it is possible to get a loan for almost everything in life, except retirement.

So you should prepare to cover all your expenses when you no longer have a steady income.

Baby step 6 – pay off your house early

Living mortgage-free is probably a big dream and definitely one of your long-term goals.

That’s because when you get rid of such a large debt, you can use the funds for other ventures.

For example, a trip, a party, renovating your house, buying a dream product, and so on.

So, taking the baby steps into account, use your extra funds for your mortgage.

Over the course of your life, this strategy ensures that you save a lot.

This is because interest is accrued according to the remaining balance of the loan.

As a result, when the balance is reduced early, interest rate costs also decrease.

In this sense, apart from the amount you will invest each month in your retirement and your children’s college fund, the rest should be used on the mortgage.

Ramsey recommends potentially refinancing a 30-year mortgage or an adjustable rate mortgage to a 15-year mortgage. 

In addition, you can make an extra mortgage payment every quarter.

That way, you pay off your home 11 years early and save $65,000 in interest fees.

Baby steps – 7 build wealth and donate

Remember your 401(k) and Roth IRA? 

Maximize your investments and keep control of the rest of your income.

With that, you’ll reach the moment when you’re 100% free.

So you don’t have to worry about debts or mortgages.

As a result, as your retirement fund grows, you can use the remaining assets for fun and also to help other people.

Finally, we recommend that you visit the website of the creator of the method for any questions you may have.

Daniel 2 de April de 2024