How Do the Baby Steps Work?

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I quickly mentioned part of Dave Ramsey’s baby steps in my post about getting out of debt to be able to stay home with our baby. Let’s dig into it a little more to see what it can do for you.

Dave Ramsey put together a very easy-to-follow program that encompasses every step of your financial journey. Budgeting and getting your finances in order can be daunting. His program helps you navigate it a lot easier.

Table of Contents

Baby Step 1: Starter emergency fund of $1,000

First thing’s first: you need to build a small emergency fund. This will hold you over while you complete the next baby step.

It can be scary to only have $1,000 sitting aside for an emergency, but part of the first three baby steps is to light a fire under you to get them done as quickly as possible. It doesn’t make it less scary, but it makes you not want to mess up to hinder your progress.

If you have to use it for any reason and have already moved onto baby step 2, you go back to this first baby step again to build back up to $1,000.

Baby Step 2: Pay off debt, except the mortgage

This is the big one, and can be incredibly challenging. It will test your strength and desire to attain financial freedom. You will struggle through this step. But know that there are thousands of others doing exactly the same thing with you.

List out all of your debts, except your mortgage, from the smallest debt to the largest.

A lot of people ask Dave Ramsey, “what about those debts with large interest rates?”. And the answer: IT DOESN’T MATTER.

The point of listing your debts smallest to largest is to gain fast momentum at the beginning. To see that it actually works. And it does.

For us, the first debt to be paid off was a small medical debt of $388.20. It had an incredibly low interest rate compared to some of my student loans. But we paid it off, and it started a semi-addiction to get those letters saying “PAID IN FULL”.

Baby Step 3: 3 to 6 months in an emergency fund

You’ll build your actual emergency fund in this step. It will equate to about 3-6 months of expenses.

Not sure which is right for you between the smaller or larger amount? Ramsey’s quick solution is to look into how secure your job is.

Are you at a stable company that you’ve been at for some time? You can likely get by with 3 months’ worth of expenses. Are you in something like construction, that can be cyclical and you have potential to be laid off? It would be safer to have closer to 6 months of expenses put away.

Baby Step 4: 15% into retirement

Typically, baby steps 4, 5, and 6 can be done simultaneously. It’s not similar to the first three baby steps, where you are grinding and putting everything you have to attain a goal.

These three steps are about saving and paying off your mortgage (but it does not have to be at the same intensity as baby step 2).

Take 15% of what you make and plug it into a retirement fund. This can be into an IRA or 401k. Just be sure you have control over where your money goes instead of chunking it toward an auto-investing program like the “retire by X year” programs.

Obviously, if your company does any sort of matching, you will want to take full advantage of that and contribute to your Roth 401k program. The percentage your company contributes does not count toward your 15% however.

Baby Step 5: Save for children’s college funds

This is another saving step. If you have kids, start a college fund as soon as possible to reap the benefits of growth over time.

You will need to look into the type of education fund you want to invest in, whether it is an ESA or a 529. There are benefits to both. I won’t go into the different options here, but these two options can take a lot of pressure off of you and your family when it comes time to pay for college.

Baby Step 6: Pay off the mortgage

As I mentioned previously, paying off the mortgage does not require the same level of intensity as baby step 2. You do not have to scale your monthly budget back to almost nothing to aggressively pay off your mortgage.

Now, while you shouldn’t be as aggressive as you once were to pay off all of your other debt, you also cannot begin to slack here. You still have a goal and should not push paying off the house to the full term of your mortgage.

Go on vacations if you’d like, feel free to buy that new couch you’ve been eyeing, but all the while budgeting for everything and putting extra money toward the house.

The average amount of time this takes people following Dave Ramsey’s plan is about 7 years.

Baby Step 7: Build wealth and live like no one else!

This is what you’ve been working toward. This is what financial freedom looks and feels like. Not owing anyone anything (except utilities and little monthly expenses, of course).

You own your house. Your cars. Your money. And it feels so good.

In this step, your only job is to enjoy life and build wealth. No one can come and take anything away from you, like your home or your cars. They’re yours.

Build your nest egg here and live like no one else!

Here’s the gist.

These baby steps can be difficult at times, especially at the beginning. Everything can feel overwhelming.

But just remember: everyone starts somewhere. Others have been in your shoes and gone on to become millionaires.

Start now to reap the benefits as soon as possible! Being financially free from debt opens so many doors for you. Just look at our family: we paid off our debt and I was able to stay home with our daughter! Combine these steps with your monthly budget, and you will succeed in your financial goals.

It’s completely doable. You’re just waiting on you now.