Dave Ramsey's Seven Baby Steps

For those just starting out on their financial fitness journey, personal finance guru Dave Ramsey provides a good starting place with his Seven Baby Steps.  The steps are as follows:

Baby Step 1

$1,000 Emergency Fund

An emergency fund is for those unexpected events in life that you can’t plan for: the loss of a job, an unexpected pregnancy, a faulty car transmission, and the list goes on and on. It’s not a matter of if these events will happen; it’s simply a matter of when they will happen. 

If a real emergency happens, you can handle it with your emergency fund instead of paying for it with credit cards or personal loans and falling deeper into debt.

Baby Step 2

Pay off all debt using the Debt Snowball

List your debts, excluding the house, in order. The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first.

The point of the debt snowball is simply this: You need some quick wins in order to stay pumped up about getting out of debt! Paying off debt is not always about math. It’s about motivation.

Baby Step 3

3 to 6 months of expenses in savings

Once you complete the first two baby steps, you will have built serious momentum. But don’t start throwing all your “extra” money into investments quite yet. It’s time to build your full emergency fund. Ask yourself, “What would it take for me to live for three to six months if I lost my income?” Your answer to that question is how much you should save.

Use this money for emergencies only: incidents that would have a major impact on you and your family. Keep these savings in a money market account. Remember, this stash of money is not an investment; it is insurance you’re paying to yourself, a buffer between you and life.

Baby Step 4

Invest 15% of household income into Roth IRAs and pre-tax retirement

When you reach this step, you’ll have no payments—except the house—and a fully funded emergency fund. Now it’s time to get serious about building wealth.

Dave suggests investing 15% of your household income into Roth IRAs and pre-tax retirement plans. Don’t invest more than that because the extra money will help you complete the next two steps: college savings and paying off your home early. 

Baby Step 5

College funding for children

By this point, you should have already started Baby Step 4—investing 15% of your income—before saving for college. Whether you are saving for you or your child to go to college, you need to start now.

The best way to save for college is with Education Savings Accounts (ESAs) and 529 plans. Remember, college is possible without loans!

Baby Step 6

Pay off your house early
Now it’s time to begin chucking all of your extra money toward the mortgage. You are getting closer to realizing the dream of a life with no house payments.

As you attack this last debt, you will gain momentum much like you did back in the second step of the debt snowball. Remember, having absolutely no payments is totally within your reach!

Baby Step 7

Build wealth and give!

It’s time to build wealth and give like never before. Leave an inheritance for future generations, and bless others now with your excess. It's really the only way to live!

I am still on step 1 since this economy has not been kind.  I plan to get $2,500 into the emergency fund before moving on to step 2 because my car is almost ten years old and I would rather be safe than sorry.  After that, I plan to tackle steps 2 and 3 at the same time.  All of my debt is student loan debt.  It is not practical to wait until after I have paid off all of my student loans to start building up 3-6 months in expenses. My point is that Dave Ramsey provides a solid starting point but you should take a look at your personal financial situation and tweak--not throw out--the system when necessary.