The issues of money and the amount of stress it can cause us is something that has a sense of rising urgency. Many people are dealing with both rising costs and wages that can’t keep up.
So, what else can be done to reduce this so-called “money stress””? Dave Ramsey, a popular American radio personality and personal finance guru, has created a framework to reducing money stress that’s called the “7 Baby Steps”.
By taking control of our financial lives, it requires us to take a structured but long-term approach to reducing these money stress pain points. Ramsey’s thought process is that little “baby steps” are needed to make our financial lives better and by giving ourselves “wins” with each step, we can better conquer the next step.
In other words, it’s not an overnight process and it takes time. But, by implementing these actions and laying the foundation based Education, Encouragement, and Empowerment, we can better reach success with the 7 Baby Steps.
So, here’s what you need to know about Dave Ramsey’s 7 Baby Steps and how to understand them.
#1 Save $1,000 For A Starter Emergency Fund
This is great practice and helps us establish the goal of building a so-called “start emergency fund”. By covering unexpected events in life you can’t plan for, an emergency fund will provide a safety net of sorts while you’re trying to get yourself out of debt.
$1,000 will not get you far, even as an emergency fund, but it gives those who have not started managing their finances a starting point. A visit to the doctor, replacing a broken down appliance and other unexpected costs will not leave you stranded and stressed.
By establishing a starter emergency fund, individuals can also prevent themselves from putting these costs on to credit cards, which can put us further into debt given their punitive interest rates on outstanding balances.
Read Also: Working Adults Guide To Starting An Emergency Fund – And How Much You Should Have In It
#2 Pay Off All Debt (Except The House) Using The Debt Snowball
Next up is the aim of paying off all debts that you have accumulated. Start by listing out all your debts (except your mortgage) and rank them in order from smallest balance to largest – regardless of the interest rate.
Then pay minimum payments on everything, so you don’t incur unnecessary costs that will only increase your overall debt. But, attack your smallest debts in full first, so you can eliminate the number of debts that you have – which should reduce your stresses as you tick them off.
Once that’s gone, take that payment and put it towards the second-smallest debt, still making minimum payments on the rest. And so on and so forth. That’s the “debt snowball” method and individuals can use it to knock out debts one by one.
Read Also: Snowball Vs Avalanche: Which Is The Best Method For Paying Off Your Debts?
#3 Save 3-6 Months Of Expenses In A Fully Funded Emergency Fund
After paying off debt, it’s time to get down to taking that money that was going towards paying off debt and putting it towards constructing a fully-funded emergency fund. However, this one should cover 3-6 months of your expenses. Often, you will also see emergency funds that are worth 6-12 month of you expenses.
By having a larger buffer to protect you against life’s unexpected events, such as the loss of your job or serious health conditions, you won’t immediately slip back into debt if something untoward happens.
#4 Invest 15% Of Your Household Income In Retirement
The fourth baby step is to shift your focus away from debts and emergency funds towards the “what-ifs” and potential in the future.
To establish this habit, it’s best to regularly invest 15% of your gross income for retirement. That’s because, if you’re still working at retirement age (typically in your mid-60s in most countries), it should ideally be because you want to not because you have to.
Read Also: What Your $1 Million Retirement Savings May Be Worth By The Time You Retire At 65
#5 Save For Your Children’s College Fund
Reaching this step means you’ve paid off all debts (except your home) and successfully started saving/investing for retirement.
The next challenge to tackle then is to save for your children’s college/university expenses. Ensuring you can send your children off for higher education, without starting off their young working adult life saddled with debt. This is you setting them up for financial success.
#6 Pay Off Your Home Early
After this, it’s time to “bring it all home”. In that sense, step 6 is the “big one”. That’s because your mortgage is the only thing between individuals and becoming completely freedom from debt.
Can you imagine life without a monthly house payment? That’s how this step is framed and by aggressively paying off your mortgage early, you’ll be better able to achieve true financial freedom.
#7 Build Wealth And Give
Finally, after eliminating all debts in your life, you can do almost anything you want. Ramsey outlines this as the most fun step.
Work out your current net worth, keep building wealth and become outrageously generous – while also leaving an inheritance for your kids and grandkids.
By achieving financial freedom and leaving a legacy, it’s the perfect culmination of success for the 7 Baby Steps of reducing money stress.
Read Also: $773 To $3,015 A Month: Here’s How Much You Need To Spend During Retirement In Singapore Today
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