I read his book and
often listen to his radio talk shows on YouTube. I had learned a
lot about how many Americans are stuck in debt and have difficulty getting out
of the rat race. His book preaches about the simple 7 Baby Steps technique
that many can easily follow to get out of debt and build wealth. Following his
technique to get out of debt and acquire wealth is not a get quick rich scheme,
but discipline steps that people need to follow. People who are wealthy didn't
become a millionaire overnight, but through discipline spending habits,
budgeting, and of course, frequent investing. I felt his teachings in his books
and radio talk shows on YouTube are excellent for people who are sick and
tired of being lost financially. Anyways, I know some
readers here don't want to go through the hassle to read his book. Because of
that, I want to point out the 7 Baby Steps that Dave Ramsey preaches that help
many people get out of debt and build wealth.
Baby
Step 1 - $1,000 to start an Emergency Fund
Dave Ramsey calls
this step as the "Baby Emergency Fund". He recommended people
to save up $1,000 in their checking account before
starting tacking their debts. So when you are still in the Baby Step 1 phase,
just pay the minimum required for all the debt accounts you have. After having
$1,000 saved, you can continue to tackle those debts later on.
Some might argue that it's silly to start saving $1,000 in the bank, which
could be put towards paying your debt, but this emergency fund technique has
good logic behind it. People had gone through unexpected
events that require them to use money as an emergency.
Events such as car broke down that require repair, or sickness that requires
medical fee require money from an emergency fund.
The one thousand
dollar emergency fund enables people not to use credit cards ever again. This
is a first
step to develop habits of paying things with cash
(debit card) and not use credit cards for any purchases.
In addition, a person who stays using credit cards to purchase things tends to
keep using it when there is an emergency and have a difficult time not to use
it. When a person pays things in cash, they have a harder time to spend on
things compared to swiping bills with the credit cards since it is so much
simpler and tempting. Having the habit of using the money you have (debit card)
and not rely on to borrow money from credit card gives a person the discipline
of budgeting in the future.
I personally like
this technique since I myself don't have a credit card but rely on my debit
card (cash) to pay for things. I felt that paying things with money available
in my debit card helps me know how much I should spend and limits me from
overspending. Besides, a debit card has the same functionality a credit card
has, except you can only use the money available in your bank account.
Moreover, I don't have to go through the hassle of paying the credit card fees
that might be a charge to you if I don't pay on time.
Baby
Step 2 – Pay off Your Debt Using Debt Snowball Method
The debt avalanche,
which is to have a person pay their debt according to the debt with the highest
interest rate, will save money in the long run. However, using the debt
snowball method can be a better choice for people. Okay, let me explain this
method first. The Debt Snowball method is a debt reduction strategy in which
you start paying off the smallest debt account first to the largest debt
account, gaining the momentum as you tackle out each balance. In the first
step, you are required to list down all the debt you owe from the smallest to
the largest. You will then start paying the smallest debt balance in as much as
possible while paying the minimum payment on the rest. Then again, when the
smallest debt account is paid in full, you start paying on the next smallest
debt balance. In theory, by the time the final debts are reached, the extra
amount paid toward the larger debt will grow quickly, similar to a snowball
rolling downhill gathering more snow.
So why use this
method if the debt avalanche can save more money in the long run? The reason is
it keeps people motivated and stay in course with their journey of getting out
of debt. When you place to focus on tackling those debts step by step, it gives
you the momentum to not quit. You want to be able to walk
before you start to run. Being able to mark off those smaller
debts first motivates a person to keep going on to pay off the next debt
balance.
I personally didn't
have to go through this step of paying down my debts since my parents brought
me up teaching about the danger of using debt. When you have debts, you
are enslaved to pay the lender (master) until you finish paying it off. I'm
glad that I learned about the consequences of using debt early in my personal
life. My dad has always stayed away from debt since the beginning journey of
his career life. He always prefers to have money saved up before purchasing
things instead of using credit to finance it.
Even in the world of
business, he stays away from using debt because he felt that during market
turmoil, debt could cause financial damage to a company when sales are down.
Having no debt in a business gives the ability for the entity not to have to
worry about monthly interest expenses, which can help prevent a company from
going bankrupt during a recession. I personally think that using the debt
snowball strategy to pay off your debt is an excellent strategy for people out
there who want to get out of debt. I felt that the step by step momentum
encourages a person to focus on paying off their debt.
Baby
Step 3 – Additional Emergency Fund (3 to 6 Months of Household Expenses)
After finishing
paying off your debt aside from your mortgage debt, you are ready to go with
the Baby Step 3. In this step, Dave Ramsey suggested a person save additional
funds to their emergency fund. You want to save up three to six months' worth
of household expenses. It might seem intimidating to save that much money;
however, it is not that difficult if you have followed Dave Ramsey's Baby
Steps. Since you have finished Baby Step 2, which is to pay off your debts using
the debt snowball method, you won't have debt expenses charging you. The only
debt payment you'll have to pay should be your mortgage. You can use the money
you used to pay off your debt in Baby Step 2 to accumulate additional savings
to your emergency fund.
A three to six
months emergency fund will keep you and your family protected
if things go sour in your life, such as having layoffs or fired from your job.
In addition, you will have an extra buffer against major financial emergencies
giving you time to find a solution if a crisis occurs. Since you have this
strong foundation of an emergency fund, you don't have to back to your old way
of using your credit card to pay off the expenses. Developing this saving habit
will make you into becoming a great saver. Moreover, it makes it easier for you
to save for big things such as car or things expensive items you want to
purchase in your lifetime.
I personally love
Dave's strategy of having an additional fund for emergencies. I have money that
I keep in my bank checking account in case anything bad occurs so that I don't
have tap into my Dividend Growth Portfolio and my other
Investments. I'm fortunate that I still live with my parents even though I'm
considered as an adult. Living with my parents help me save living costs and
expenses. Aside from saving cost, it gives me the ability to have a closer
bonding with my parents, especially my dad, since I still have to learn the
business traits to running his company. Most importantly, I'm able to take care
of my dad and my mom when they are old and require my support the most.
Baby
Step 4 – Maximize Your Retirement Fund
Not only you pay off
your debts but also have a strong foundation of emergency funds (3 to 6 months
of household expenses), you can now start investing your money towards
financial freedom. Dave Ramsey suggests maxing out your retirement fund. For
Americans living in the United States, you are allowed to fund a maximum
of $18,500
a year for 401(k) and $5,500 a year for IRAs.
Dave suggested saving up 15% or more of your monthly income to your
retirement fund. For those out there who work in America is able to invest
beyond your IRS limits, then you should go for it. A person whose age fifty and
over are able to add more cash to their retirement accounts. So make good use
of this opportunity. Maxing out your retirement investment account helps
ensure your golden years will
be secure. The more you save, the more money you will have during your
retirement.
I'm an Indonesian
resident, so I'm unable to have these facilities, such as 401(k) and IRAs,
which most Americans have excess to. However, I was fortunate enough to be able
to have my own stock portfolio that has a pool of dividend growth stocks in the United
States. I'm able to allocate the rental money I received every month from
renting my parent's house to add additional funding to my stock
portfolio. My stock portfolio in the United States is somewhat like my retirement fund for me to use when I get
old.
I love the fact that
I'm able to link my stock brokerage account to my bank checking accounts so
that when I'm ready to use the dividends from my portfolio, I can easily
transfer it to my bank checking account. I want to be able to go and have a
good long comfortable vacation when I'm in the United States. With my
portfolio, which later will help me fund my living expenses in the United
States, I will be able to do that with no difficulty. My dream is to be able to
purchase a two to five-year-old sports car and drive it happily in the United
States (San Francisco to Los Angeles).
Baby
Step 5 – College Funding for Your Children
When your children
grow to adulthood, you want to be able to pay for their tuition fees. As a
parent, I'm pretty sure you want the best for your kids. However, remember that
going to college doesn't guarantee success for your kids. Dave Ramsey goes into
great detail when comparing about calculating the cost versus the benefit of
college. You should understand this before you send your adult children to
college. There are many ways to start a college fund, and Dave recommends
saving for your children's college tuition through the following three
tax-favored planed.
The first is
called Education
Saving Account (ESA) or Education IRA. An
ESA allows you to save $2,000 (after tax) per year, per child. The
plus point is that it grows tax-free! If you start saving $2,000 when your
child is born, 18 years ahead, you will invest a total of $36,000.
While the rate of growth return is based on the investment in the account, you
will gain a higher return with an ESA than you would with a regular saving
account since you don't have to pay taxes when you withdraw the money from the
fund to pay for college tuition fee. However, one negative thing I dislike
about this method is because you are only limited to contribute a maximum
of $2000 per
year.
The second plan is
called the 529 Plan. If you don't meet the income limit for
an ESA, then a 529 Plan could be a better option for you. You should look at the
funds you want to invest in through the account. Dave addresses that the 529
plan would freeze your options or automatically change your investment based on
the age of your child. The right way of 529 plans will give the option to
change the beneficiary to another family member. So if your firstborn child
decides not to go to college, you are able to use the fund for the next kid.
The reason why the 529 Plan can be favorable is because of the funding
contribution you can put (varies by state, but generally, you can contribute up
to $300,000). Also, you also don't have to pay the taxes on the growth of the
fund.
The third plan is
called UTMA or UGMA (Uniform
Transfer/Gift to Minor Act). This plan is different from ESA
and 529 Plans because it's not designed for just education savings. The account
is in the child's name but is controlled by us parents until the child reaches
adulthood of age 21 (age 18 for UGMA). By that time, the child can decide what
to do with the fund, either for their education or something else. The reason
why I liked this plan is that the fund can be used not only for education but
also for different opportunities such as businesses the adult child might want
to start.
Since I'm an
Indonesian citizen, I don't have these facilities as many American does. I was
able to study at San Francisco State University in the United States because my
parents have provided a financial contribution to my college tuition. I am
fortunate to able to study abroad since earning income in my country is really
difficult.
My dad has prepared
financially for my brother and me to have the best education we can have. I do
have some tips if you want to save cost for your degree. As for me, I did go to
community college (City College of San Francisco) to complete general classes
required before taking classes for my finance major. It takes me close to two
years to complete most of my general classes when I was still in community
college. The reason why I recommend people to go to a community college before
entering university is because tuition fees for community colleges are much
cheaper compared to universities. Furthermore, the classes you take in
community college are transferable to the university you want to attend.
As an Indonesian
citizen, I don't have the savings facilities like many Americans have excess to
for their children. However, that does not stop me from wanting to have my
children to study abroad in the United States. In the future, I want to give my
children the same educational experience that my parents gave me when I was
young. Instead of using these government facilities that most American is
provided, I have to do it on my own. By building a Dividend Growth Portfolio using my E-Trade Brokerage account in America enable me to
save up and invest for my kids' future. I hope with my investment strategy and
hard work, I can provide the best for my children if I have one. Currently, I
am still single and do not have the responsibility like others who already
became parents. So I still have a lot of opportunities to grow my career as
well as my wealth before I am settled with the one. I want to be financially
secure before I start a family of my own because I want my kids to live happily
and not to worry about money.
Baby
Step 6 - Pay off Your Home Mortgage
So you have work
your way through this stage by paying off your consumer debt and have a
fully-funded emergency fund. You are contributing 15% or
more of your income towards retirement. In addition, you are also preparing for
your children's college tuition cost so that when they reach adulthood, they
are able to get the right education for their career path. So what's next? In
Baby Step 6, it's time to pay off the mortgage you owe for your home. Can you
imagine being mortgage-free? Imagine you don't owe anybody any more money since
you've created a solid budget to be where you are right now. You are able to
take extra funds, including the money that you use to pay towards your debt
snowball and money towards the emergency fund and have them a place to pay
towards paying your mortgage. I recommend getting it paid off as soon as
possible. Put any extra money you receive, such as gifts, tax refunds, work
bonuses, overtime pay to finish paying towards your mortgage loan. Please do
not spend the money to buy stuff; instead, use it to get the mortgage debt
gone. The less interest you pay to the bank, the more money you will end up
having.
I personally don't
have a mortgage to pay since I'm still living with my parents. I'm fortunate
that my parents have a beautiful house I can live in. My dad has built the
house from scratch with the design he really likes (classical design). I won't
even call it a house since it's considered more like a mansion to most people.
The place is pretty big that with me living there, there will be available room
for my children. It has docks that enable my dad to park his toys (yachts)
behind the house. The house has its own elevator allowing anybody to go up or
down without using the staircase.
The house is already
paid off a long time ago by my parents; however, I still dream of having my own
place one day. Even though my dad's house looks beautiful, I have a different
taste of design. I like a house that has minimalist modern design while my
dad's house is considered a classical design. It's just a taste preference, but
living with my parents, for now, helps me get closer to financial freedom as
well as quality time with them. I already have spent the majority of my
childhood away from my dad since I was living abroad for my education. My dad
and mom are not getting any younger but older as of the year's pass. This is
the reason why I still want to live with them for now. Anyways, if you finished
doing Baby Step 6, you will then go to the next baby step.
Baby
Step 7 – Build Wealth and Be Generous
Finally, Baby Step
7. This is where you want to reach since it is the best step. You don't owe
money to anyone, and this gives the ability for you to create wealth. Having no
debts, have a house that you own completely, you can utilize your earnings into
building serious wealth. The wealth can be in many forms, such as stock
portfolio, mutual funds, or it can be another real estate that you can rent
out. Since you live like no one else before, now you
are able to live and give like no one else. Imagine how it feels when you are
able to let your loved ones or others inherit the wealth you have built. That's
all possible now because you have sacrifice years of hard work, discipline, and
dedication to getting out of debt and create the wealth you always wanted. The
financial goal now is to put as much money as possible toward whatever you
always dream of. It could be leaving an inheritance for your loved ones or the
community (philanthropist), maybe it could be able to travel the world. Or it
might mean building your dream home.
I personally think
that my dad is at the phase where he can enjoy the wealth he had built since
young. He has his dream toys, such as his yachts and a beautiful house that is
fully paid for. He is enjoying his golden years by being able
to do whatever he likes doing. For example, fixing his toys, renovating his
house to the style he likes. In addition, he has been generous to many and has
helped the one who needed the most. Even though I'm debt-free and have already
built some wealth of my own through stock investment, I personally feel
that I haven't
reached this goal in my life. I am able to be where I am
right now because of my parents' support, which helps me to be debt-free and
owning some wealth through my dividend growth portfolio in the United
States as well as in Indonesia stock brokerage. My dad has built a business
that generates good income for the family, and he has built his wealth from his
hard work and dedication. My dad built the trees a long time ago for my brother
and me to live comfortably right now. I will not be where I am today if it's
without my parents. Since I'm still young and have a dream of accomplishing
more in life, I want to make more income of my own that is built by myself and
not because I was given from my dad. I'm happy that my dad didn't spoil me by
giving me much salary for working in his company. This gives me the drive to
work harder and find a solution to increase my income
independently.
Conclusion
I hope from this
article, you readers understand more about Dave Ramsey's 7 Baby Steps
philosophy to get out of debt and guide to financial freedom. Most wealthy
people who are millionaires or billionaires didn't end up the way they are
overnight. Getting out of debt and creating wealth is not a short journey, but
a long journey of dedication, discipline, and hard work. Just follow Dave's 7
Baby Steps one step at a time, and you can reach the financial goal you always
wanted. Many people had managed to get out of debt completely and build wealth
by following his guide. I believe the process of getting out of debt and building
an emergency fund helps people develop the foundation of not taking loans from
credit cards. I personally like his methods because I have seen his methods
work in real life. My dad, who was once poor, had become considered successful
today, had followed principles similar to Dave Ramsey's 7 Baby Steps. My dad
was able to provide the finance for my brother and me to have the education and
live comfortably abroad. I believe Dave Ramsey's 7 Baby Steps will work for
anyone who is willing to change their financial habits in order to achieve the
goal they always wanted. Some might argue that Dave Ramsey's method is
time-consuming and require a long journey, but I believe the result will be
rewarding in the future, and you won't regret it when you have completed all
the Baby Steps that Dave Ramsey demonstrate. Remember, if you live
like no one else, later you can live and give like no one else.
So, I hope you readers will start doing something about your finances.
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