Walking through the Baby Steps
Babies often go through a progression before they can walk. It starts with a simple roll on the floor, going back and forth. Eventually, they learn how to crawl. And then one day, they just decide to start walking. One step leads to another and pretty soon, you can slow them down! I know–my young daughter was there not too long ago.
Well the same can be said for how we handle our finances. When we don’t have any money to our names, all we can do is roll around…but we never get anywhere. One day, we get a job and are able to actually crawl somewhere. It’s a slow process and we get tired easily, but at least we’re moving.
Finally, we find a sense of direction, strength and motivation. And all of the sudden, we know we can do more with our money. We know we can go farther and faster than ever before. We know there’s a world that awaits us and the quicker we learn how to put one foot in front of the other, the sooner we’ll see it firsthand.
Here at Freedom Financial Coaching, we teach a process called the Baby Steps. It’s a pattern created by Dave Ramsey that helps you take small steps one at a time to get your finances in order. And by the end of the process, you’re running…not just walking…as hard and as fast as you can to building wealth and living a prosperous life.
Baby Step 1 is a $1,000 starter emergency fund. This is to protect you against the what-if’s, oh-no’s, and are-you-kidding-me’s of life! This fund protects you from the unexpected emergencies that can pop up every now and then that are more than our monthly paycheck will fix. The funny thing is, as soon as you get this fund, bad things seem to stop happening…that’s why it’s important to get that $1,000 saved as fast as possible.
Baby Step 2 is paying off all debt, except your mortgage, using the debt snowball. It’s a simple process that takes a lot of determination. All you do is name your debts from smallest to largest, individually. Then you make minimum payments on every debt except the smallest. With every extra dollar you can get your hands on, you pay extra on the smallest debt until it’s gone. Then you take that debt payment, combined with any extra money you can grab and pay towards your 2nd debt, attacking it with everything you have! You keep this process up until every debt is paid off!
Baby Step 3 is to save your fully-funded emergency fund. You already have that $1,000 sitting in your savings account. Now it’s time to beef it up to 3-6 months worth of living expenses. This should only take a few months, especially since you’re debt free except a mortgage. And once you have this fund in place, you never, ever, ever touch it unless…an emergency comes up. But just like the starter emergency fund…this seldom seems to happen once you have your fund in place. We look at the emergency fund as a form of risk protection. It doesn’t earn much interest, but it saves you from going bankrupt when life throws you a $10,000 curveball.
Baby Step 4 is saving 15% of your income towards retirement. No more, no less. Invest 15% of your household income into good growth-stock mutual funds through your 401K, Roth IRA and any other pre-tax or tax deferred retirement options you have available. This is when life starts to get fun because you’re no longer worried about the present. Instead, you’re focused on the future.
Baby Step 5 is saving towards kid’s college. The fact is, college isn’t cheap. And if you expect your kids to graduate debt free, it’s going to take a lot of scholarship money, part-time jobs, and even some help from mom & dad. If you’re late to the game, it’s tempting to do this step before investing. But remember…you have to take care of your own future first and worry about your kids 2nd. Like retirement, there are preferred saving plans that we suggest.
Baby Step 6 is paying off your home early. Say what?! That’s right…you don’t need to keep that mortgage around forever. In fact, paying that house off early will be one of the biggest contributing factors to you building wealth.
Technically, Baby Steps 4, 5 and 6 are doing simultaneously, in order. So mark your 15% for retirement, allocate some money to your kid’s college, and anything extra you can grab goes to the mortgage. Bonuses, side hustle income and checking account interest payments…make every dollar work for you and pay off that home as fast as you can.
Guess what, Baby Step 7 is super fun. Now that you are completely debt free, it’s time to save like crazy for retirement and plan for the life you’ve always dreamed off. In Baby Step 7, max out your retirement contributions and watch the wealth build. Seriously…you’ll be amazed at how fast it grows. But it’s not just about saving. This step includes generous giving as well. And the funny thing is, the more you give, the more you’re gonna save. Yeah-hard to understand but it’s true. Give it a try 🙂
Now if you’ve made it this far, you obviously have a thirst for gaining control of your finances and changing your family tree when it comes to money. If you’re not sure where to get started or just need help taking these Baby Steps one-by-one, I can help. Visit RamseyCoach.com and schedule your free consultation today.