If you’re into personal finance, you’ve probably heard the name Dave Ramsey a time or two along your financial journey. I was introduced to Dave Ramsey’s Baby Steps when I was 19, and those steps definitely saved me from making a lot of mistakes during my undergrad and grad school years. I lived by Dave’s Total Money Makeover book, though I never followed these steps to the letter because life sometimes happens…I’m personally not a fan of the religiosity behind the steps, but aside from that, it really did change my life when I was introduced to these baby steps. Although a bit extreme at times, what I learned from these steps are the reason I maintain a mostly debt free lifestyle today. This post briefly explains my experience with each of the steps and what it takes to accomplish them. This is part one of a two part post, so be sure to subscribe so you don’t miss part two coming later this week!
Baby Step 0
It’s hard to think about your financial future when you’re struggling to make ends meet in the present. This step is all about getting caught up on the “four walls” (baby-step lingo for your house). Diehard Ramsey fans suggest this can be done by selling things you aren’t using in your home, canceling subscription services, picking up extra shifts at your job, or picking up a second job for a short period of time. I have mad respect for individuals working to get caught up on their household and bills, and if this is where you are–that’s 100% okay.
Baby Step 1
This assumes that you’ve got your “four walls” covered for the month and are making minimum payments for all your debts. This step involves saving a $1,000 emergency fund as quickly as possible. This requires creating a budget and really sticking to it. They idea here is that you won’t have to take on any new debt in the event a true emergency takes place…and we all know Murphy’s Law will happen (the idea that if something can go wrong, it will). If you have to dip into your fund, always replenish it before moving on to baby step 2.
When I was in Baby Step 1, I was there for two years…between making rent and living my life on my peanuts for income during my undergrad years…I was not up to par to save an emergency fund with gazelle intensity. As soon as I had my emergency fund stocked up, something always happened that made me need to start building my fund again. $1,000 in the bank may seem like an insurmountable goal, but it definitely is possible. Whether you pick up extra shifts, sell unused items in your home, reduce your living expenses, or rely on a cash windfall (hello income tax season) to get your to your goal…know that you can do it.
Baby Step 2
This baby step assumes that your “four walls” are current and that you have at least $1,000 in your emergency fund waiting in case you need it. This step involves paying off all debt (except the mortgage) by using the snowball debt repayment method. This means that you pay the minimums on all of your debts except for the one with the smallest balance. Once you’ve paid off the smallest debt, you roll that payment into the next smallest balance…by the time you reach one of your larger debts, you have a nice chunk of change to throw at it.
The diehard baby-steppers are against keeping and using credit cards, even after completing baby step two…and for those who a CC may be a temptation to overspend, I 100% get freezing them and no longer using them. I personally use my credit cards for the cash back and the points–and I immediately pay off the balance the day after I make a purchase. I also didn’t get a credit card until 2016–four or so years after I was introduced to the baby steps.
I used the snowball method strategy to help me pay down on my student loans. I managed to finish my undergrad and first graduate degree 100% debt free, but I needed to borrow around $7500 for my second master’s degree. I took these out in three different loan installments and made consistent payments while I was in school. I also applied any cash windfalls straight to my loan balance (those education tax credits helped me come tax time immensely). Doing this saved me hundreds of dollars in interest payments alone, and I wouldn’t do it any other way. I have a little more than $1000 left on my balance, and the only reason I’m hanging onto it like a pet rock is so I can get a better mortgage interest rate since I’m looking to buy in a handful of years (this is also very anti-Dave advice, soooo…).
Baby Step 3
At this point, your “four walls” are current, you have a $1,000 emergency fund, and you’ve used the debt snowball method to pay off all of your consumer/medical debt. This baby step is all about having 3-6 months of living expenses saved in a fully funded emergency fund. This money should cover all of your household’s necessary expenses in the event of a job loss so you have some time to get back on your feet without panicking about the bills. Ideally, you’re supposed to come up with this money in your budget from the last payment amount you were throwing at your debt snowball.
This money should also be kept in a high interest savings account, like Marcus by Goldman Sachs, that is separate from your regular bank. That way, you aren’t tempted to use it…and it’s generating interest so your money is at least trying to keep up with inflation. Traditional brick and mortar banks don’t really provide you with interest on your balance you deserve…and those online banks are able to do so because there isn’t an overhead to keep the lights on like at traditional banks.
I am personally aiming to get to the six month mark in my FFEF because my long-term disability insurance (LTDI) at work kicks in after 6 months. I’m not planning on ever needing my LTDI, but in the event that I do, I won’t have to worry about making ends meet while I wait for that insurance payment to kick in. I live in a reasonable cost-of-living environment, so I’ll note that my 6-months of living expenses is probably the average person’s two or 3-months of living expenses. Whatever you decide, choose an amount that’s right for you.
Be on the lookout for an explanation of baby steps 4-7 later this week.