Are you in debt? How did it accumulate? How long did it take? Did you know that being in debt isn’t God’s way? Do you know that you can get out of debt? Do you know Dave Ramsey’s baby steps? And that you don’t have to be a baby to do them? All you have to do is change!
The biggest thing to realize about debt and personal finance is that it not about math or rocket science. The you ask, what is it? It is your behavior. I had debt that I looked at and said, “I’ll never pay that back” and “I can’t do it” and “It’s impossible.” The thing that clicked for me was realizing how long it took me to get into all that debt. Adding up that time and doing the math to find that I could undo it in much less time. Contributing to that is the fact that I am doing better financially every year. That was the seed of hope.
Baby Step 0
This isn’t in Dave Ramsey’s program but I’m going to add Baby Step 0. Dave doesn’t really need it because once you get to his methods, books, and the Financial Peace University class you will have already accomplished Baby Step 0 or someone you know has at least brought it to your attention.
Baby Step 0: We admit we are powerless over money and our spending behavior has become unmanageable
If you are in debt, you need to get through Baby Step 0. Your money related behavior is out of hand and it is sucking the life out of you, your family and your future. It is not Biblical to be in debt:
The rich rules over the poor, And the borrower becomes the lender’s slave.
–Proverbs 22:7 NASB
I started making some small gains against my debt after it clicked then I began to believe that it was possible. I started driving it down, bit by bit until I was left with just my school loan. I was working hard on spending less and finding extra income with side jobs. At the point where I only owed about $6,000 left, I received an inheritance of. . . you guessed it. . . $6,000. Now that is pretty amazing. On one hand, I felt like I should do something “lasting” something material, something family oriented, or travel with the money. On the other hand, debt freedom not only lasts it grows so bang it was done. I was debt free. It was amazing, surreal, inconceivable.
Achieving Debt Freedom with the Baby Steps
When I got married we got to kill the student loan again, man did that feel good. Plus it was much easier because this time we used Total Money Makeover (affiliate link). At the time, I couldn’t afford the $100 for Financial Peace University class which I noticed at church. so I looked up this Dave Ramsey character and found Total Money Makeover (affiliate link) at the library. This book introduced me to the Baby Steps.
If you can control your behavior, I recommend this route. Get a book. Learn the Baby Steps. Connect with your spouse or another person to be accountable to. Follow the Baby Steps. They just work. Once you get started, Listen to Dave’s radio show, keep reading his other books and my blog to keep your attitude, energy, hope and education up. You can do this!
If you can’t control your behavior, you have two choices:
- Pony up the $100 and enroll in the next Financial Peace University being held near you. The link includes a class finder. You can find one anywhere in the country! Take the class and do all the steps above to change your behavior.
- Sign up for my Debt Freedom Mastermind: a three month group to learn the baby steps, budgeting, and the debt snowball. Click here to set up a Debt Freedom Mastermind Interview for this $1,500 value group offered at only $257.00
Dave Ramsey’s Baby Steps
Baby Step 1: Save $1,000 in a beginner emergency fund
Right now! Today! Scrape the couch. Dump the piggy bank. Empty the wallet. Get as much money together for starting this emergency fund. Put it into a separate savings account. Keep adding to it as much as you can until you reach $1,000. The beginner emergency fund becomes a little security blanket for “emergencies”. At this point in my freedom journey, my credit card was my emergency fund. Working baby step 1 gave me the kick I needed to stop using credit. You must remember and learn that most of the stuff you thought were “emergencies” aren’t really emergencies.
Baby Step 2: Pay off all debts smallest to largest with the debt snowball
You gotta feel some progress. Remember goalmentum and how a success can drive us on to future success and bigger successes. That’s why you start with the smallest debt. When I did it, I did the biggest interest rate and it worked because I was able to control my behavior. The key to the baby steps, is to make it easy for you. So simple anyone can do it. Don’t think about the math and spreadsheets. Just commit to get out of debt: work more, work longer, sell things, do ebay, mow the neighbors grass. As Dave says, “Make the kids think that they’re next.” Most of all, don’t add any debt and if you have an emergency put this step on hold and go back to Baby Step 1.
In this step you’ll realize how little things like eating lunch out at work, or picking up a Starbucks everyday can really add up. Also don’t forget to give God and his work in this world the first 10% but you don’t need to give more at this stage, just the 10% tithe. I’ll talk about offering in Baby Step 7.
Baby Step 3: Fully funded emergency fund of three to six months of expenses
Now that you’re out of debt, it’s time to improve that emergency fund and get it big enough to handle a real emergency. Set a goal of how much money you need for 3 to 6 months of expenses. To determine if you need 3 or 6 months, you need to think about your tolerance for “pain”, your ability to be mobile, and any other factors that affect your ability to make money or transition careers. I have a mark on my background so we’ve decided to go with the 6 month size.
So, how much do I need? My friend Vincent Pugliese has a book coming out early next year that I’ve had the blessing to read before it is published. I’ll put a link here when it comes out: Freelance to Freedom. In the book he talks about measuring your F.R.U.I.T. to determine what you need in an emergency fund:
- F for Food
- R for Residence: house payments, rent, maintenance
- U for Utilities: water, gas, electric, trash, phone, cellphone, ?internet?
- I for Insurance: health, home, auto, life, ?disability?
- T for Transportation: car expenses or bus tokens or something
I was surprised to find out how small that number is. If you have any income, giving is an important part as well but doesn’t need to be part of your emergency fund calculations. Once the income starts you need to add Giving to the F.R.U.I.T. for budgeting. I like to call it Give F.R.U.I.T.
In fact, I wasn’t too happy with my job so that when we reached our 6 month emergency fund, I left it. It is amazingly freeing to just say I’m done with out the feeling of fear in my gut about where my next lunch is going to come from. That was my biggest take away when we finally attended Financial Peace University, if you’re going to a job you don’t like and you have a fully funded emergency fund, you can just quit. That’s just what we did.
Baby Step 4: Invest 15% of pretax income into retirement savings.
As we entered this step, we wanted to go to Baby Step 5 but this comes first! One in three Americans have no retirement savings (Money Magazine) and “56% of Americans Have Less Than $10,000 Saved for Retirement”. What is it going to do emotionally for our kids if we’re living in the retirement slums because we didn’t put our retirement ahead of their college savings. In a couple of weeks I’ll be talking about where to put the retirement money and how to invest it. Basically start with matching funds, then tax free, then mutual funds. Stay tuned.
Baby Step 5: Invest for kids college savings
Now all the “extra” money goes to the kids college savings fund. There are two good tools to save for college: 529 college savings funds or Coverdell ESAs (Education Savings Accounts). As we’re thinking about the kids, think about giving them good habits so that they can start at Baby Step 4 and skip Baby Step 6. We pay our kids on commission and I’ll talk more about that in a few weeks. While you’re saving, set the expectation for your kids to complete college without debt! Also, it doesn’t need to be college. It could be a trade school, or some other career/income advancing training.
Baby Step 6: Pay off the house
OK, you’ve got a plan to pay for college or you’re already have that money set aside. Time for the last bill, the last one except for insurance and taxes of course. Time to pour all you can into paying off the house. It is possible if you’re starting early or have a good plan that you can work Baby Steps 4, 5, and 6 together at the same time. Here’s a scenario: You’re investing 15% into retirement. You just had a baby and set up a college account and you’re putting $100-200 per month in it. . . You’ve budgeted so you still have money left over, pour it into the house! There is a temptation to pour more into retirement but you don’t need to if you have 10-20 years to retirement. Imagine life without a house payment. I know what I could do with an extra $1,500 per month!
Baby Step 7: Build wealth and give a bunch away
I can’t wait to say, “ahhh, we made it.” without that house payment, it is time to build wealth and give a bunch away. Look at you! No house payment, no bills (except of course, utilities, insurance, and taxes). Eating like kings and queens. Giving to your community. Helping others. Oh it feels good. Take this feeling and personalize it. Visualize it. Make it real in your mind. I was going to say dwell on it but that might get you stuck. . . at least visualize it on a regular basis. Visualize it with your spouse and family. That will give you the energy and the resolve to take on the baby steps and achieve financial freedom:
“If you will live like no one else, later you can live and give like no one else.”
The first “live like no one else means to suffer, grind, and work. Is it worth it to do this work? Yes! If it isn’t, you need to work on your vision. The average debtor that follows these steps completes them in 5-7 years. Are you willing to do it to be free the rest of your life? Tell me in the comments if you’re going to follow the 7 Baby Steps!
If you’re in debt, join the Debt Freedom Mastermind a $1,500 value group offered at only $257.00 The first step is a Debt Freedom Mastermind Interview. Or if you would rather hear it from Dave: Dave Ramsey’s Baby Steps