What Are the Dave Ramsey’s 7 Baby Steps?
How to take control of money? Many people are eager to know how to manage finance efficiently and secure a good future that guarantees financial independence. You can come across numerous pieces of advice and suggestions from different people. Unfortunately many of them don’t bring excellent results. In fact; you may get dragged into serious complications when you follow some of the inferior methods. Maintaining an emergency fund, paying off debt and building wealth are not easy tasks. You need a good strategy to achieve your short term and long term financial goals. A comprehensive strategy is what you need to look for. What about the 7 Baby Steps by Dave Ramsey? Dave Ramsey is a well-known financial money management expert who has an excellent track record of offering no-nonsense advice for his clients. He has written many books, hosted several TV shows and conducted many seminars and live shows to make people more and more aware of financial independence and teach how to build wealth to ensure a secure financial future.
Seven simple steps to redefine your financial condition
Ramsey puts forward 7 baby steps to teach you how to take control of money and make life meaningful with financial freedom. He does not advocate the implementation of any impossible tasks. On the other hand, you can come across seven simple steps that help you redefine your financial future in many ways. The recommendations and suggestions may look simple, but you can find the most effective ways of implementing simple things to achieve the best results. If you have a keen desire to change and prepared to follow these steps, these seven steps are going to make difference in your life. No matter whether you are caught in a debt trap or struggling to save money for a retirement life; you can find the methods advocated by Ramsey highly useful and beneficial.
Make efforts and allocate $1000 for an emergency fund to deal with any difficult situation
This is the first step Dave Ramsey puts forward to control your finance. According to him, you need to say no to borrowing. In order to break the cycle of debt, it is necessary to change the borrowing habit. That is where the importance of making a budget comes in. Once you create a well thought out budget after having analyzed all your needs and objectives, you should focus on saving $1000 for your emergency fund as soon as you can. Ramsey advises people to be prepared for bad things. If you have an emergency fund of $1000, you can deal with bad things in life. It is necessary to maintain the emergency fund in a checking account. You should not blend it with your regular account. Nobody can plan for unexpected emergencies in life. However, you can keep a reserve fund to deal with an emergency situation.
Most financial advisors recommend their clients to maintain a reserve fund. If you analyze the cases of people who are caught in a debt trap, you can easily find that they don’t focus deep into maintaining an emergency issue. First of seven baby steps of Ramsey asserts the importance of saving and placing money in a different account. The simple logic behind this advice is to make you prepare for any unexpected expenses. This approach also helps you develop a habit of saving money in a responsible way. If you follow this method advocated by Ramsey, you can learn how to lead a financially disciplined life.
Focus on settling all existing debts to make your journey toward financial independence fast
When it comes to consolidating debt, you can find different types of methods. Ramsey recommends the Snowball method. This method advises to focus on more on paying off debts on the balance. As you gain momentum, the volume of repayments increases. In other words, you have to start repaying the debt with least balance first and once it is settled, you can take up the next with the least balance. The Snowball method advises maximum repayment for the smallest debt and minimum payments for the remaining at the beginning stage. When you attack the smallest first, you can manage things more efficiently during a crisis. As you keep on earning more and more, you can start focusing on large debts.
Ramsey’s baby steps advise people not to give attention to interest rates while choosing debts to start repayment. If two debts come with identical pay offs, you can select the one with higher interest rate. His method works really well because he asks you to add what exactly you have paid to settle the first debt to the second debt once the first one is settled. This approach makes repayment faster and higher as you keep on attacking subsequent debts after knocking off one by one. According to Ramsey, motivation is a critical aspect when it comes to repaying debts. Personal finance is about 80% behavior and 20% head knowledge. The seven baby steps advocated by Ramsey work because as you keep on knocking off smaller debts and experience the results, you are going to stay increasingly motivated to get rid of other debts.
Try to save 3 to 6 months of expenses in an emergency fund instead of making investments
When keep on paying off debts in gradual way, you gain the momentum and repayment becomes faster and more effective. At this juncture, Ramsey does not advise to make any investments using the extra money. His 7 baby steps plan recommends to creating a full emergency fund that is equivalent to 3 to 6 months of expenses. You cannot predict the future. There can a job loss or a serious accident which makes you incompetent to work. How are you going to survive during this period? The reserve fund advocated by 7 baby steps plan makes you equipped to deal with such a situation. Some financial experts criticize Ramsey for recommending a saving oriented approach even when a person is recovering fast from a debt crisis. They are of the opinion that exploring the options for investments is a better idea. The fact of the matter is that if you want to follow a safe path, you need to make your emergency fund strong and fat. Once it is done, you can start planning about building wealth in a safe way. This method of approach shields you from unnecessary risks.
Make your retirement life secure by allocating 15% of your household income
Ramsey advise you to make your retirement life secure and stable after saving 3 to 6 months of expenses in an emergency fund. You can definitely consider making investment sufficiently in your company 401(k) plan to become eligible for full employer match. The remaining amount can be invested into Roth IRAs. The 7 baby steps plan does not ask you to make more than 15% of household income. However you are not advised to go beyond the 15%. According to Ramsey, money must be distributed across four kinds of mutual funds; namely international, growth and income, aggressive growth and growth.
When it comes to choosing investment opportunities, Ramsey recommends the most consistent performer listed in the New York Stock Exchange. He relies on authentic statistics and data to recommend the right type of investment. It can be described as a sound and simple advice. A systematic method of approach can be associated with the 7 baby steps designed Ramsey. He puts forward a clear road map for you to secure a good financial future. When you make investments, you can start with stocks. Gradually, your money can be moved to safer assets such as bonds. Although stocks provide excellent returns on an average level, the risk factors involved are very high. That is why gradual shift to bonds is the best choice as you approach retirement age.
Savings toward the college fund of your children
There are people who strongly advise against allocating funds for your children’s college. They are of the opinion that people should focus more on saving for their retirement and allow the children to handle the responsibility of finding funds through educational loans. Ramsey has a different but realistic opinion on this subject. He does not recommend the practice of leaving a child with a high qualification and college-loan debt. It is necessary to consider the job opportunities while selecting a course. It can be a degree or diploma, but reality check needs to be done to find out whether the education offers a financial return in the long run. You have to save for college fund as much as you can by making use of qualified tuition plans. Some examples are 529 tax-advantaged savings plans and Educational Savings Accounts (ESAs). Ramsey discourages the utilization of pre-paid tuition, saving bonds or insurance while contributing to college funds.
Settle mortgage as soon as possible to save on interests
When you complete these steps, you feel confident and satisfied about many things. First of all, you have created a $1000 emergency fund. Then, you started paying off debts and also invested 3 to 6 months of expenses in a fully funded emergency fund. You are contributing 50% of your household income in retirement as well. There is also a clear plan to save for children’s college fund. After having focused on all these things, you should concentrate on attacking the mortgage. Ramsey advises to pay off this debt as early as possible. When you make high payments to settle housing loan fast, you are paying less interests to the lender. The money you save can be utilized for other important needs and causes. If you have a 30-year mortgage repayment plan, it should be converted to 10 or 15 years to save a lot of money.
The critics of Ramsey say that he gets engaged in the process of demonizing debt. According to them, it is a misconception and nobody can term debt as good or bad. Debt is basically a method of paying for expenses and it is necessary for many people to borrow money to meet expenses. This argument does not hold any relevance because 7 baby steps plan offers a systematic approach which tackles debt in a disciplined way. Ramsey never speaks against debt but puts forward foolproof plan to tackle it to ensure a secure financial future.
Concentrate on building wealth and give back
This is the last step of seven baby steps advocated by Dave Ramsey. When you reach this phase, you are financially stable without any debt including the mortgage. You can stick onto the zero-based budget designed by Ramsey and take maximum advantage of your Roth IRAs and 401(k). When you become rich, you can live life on your own terms. Building wealth becomes a habit and you can contribute to good causes in a generous way. Leaving an inheritance for future generations is not an easy task and not too many people can afford to do so. The 7 baby steps takes you into an elite category by teaching you how to lead a financially discipline life for a few years. You can do charity when you have managed to build wealth. Ramsey clearly shows that hoarding money is the right method to become a wealthy person. You need to know how to save for yourself and adequate plans must be there to secure the future of your family. When you keep on doing this along with paying off debts, you are on the way financial independence.
When you assess all these aspects carefully, you can arrive at the conclusion that 7 baby steps pan by Ramsey is a highly effective one. He teaches you how to deal with your finances in a step by step way and address the problems with utmost efficiency. You can develop many good habits to lead a financially disciplined life. Over a period of time, you can get rid of debt and start building wealth to lead a secure and stable retirement life. This debt management process designed by Ramsey can be described as a sound one that works best for all types of people. Everything about financial planning is discussed in a detailed way. If you are searching for quick fix solution for your financial problems, this is not the one you need to look for. In fact, there is no magical remedy available to address financial issues. Dave Ramsey offers a comprehensive plan that you need to follow for a certain period of time to get the results. If you follow this method in a disciplined and committed way, you can lead a financially secure and sound life.