Budget to Wealth's 7 Baby Steps

Dave Ramsey is a big name in the personal finance world and he often preaches of The 7 Baby Steps to take control of your money. I thought I would take a shot at my own 7 Baby Steps.

Dave Ramsey’s 7 Baby Steps

1. Save $1,000 for your starter emergency fund.

2. Pay off all debt (except the house) using the debt snowball.

3. Save 3-6 months of expense in a fully funded emergency fund.

4. Invest 15% of your household income in retirement.

5. Save for your children’s college fund.

6. Pay off your home early.

7. Build wealth and give

Budget to Wealth’s 7 Baby Steps

1. Create and balance a budget and track your net worth.

2. Save an emergency fund ~$1000 or car repair

3. Pay off all debt (excluding the house) using the debt snowball

4. Budget saving and investing in your expenses with automated withdrawals.

5. Invest or pay off the house based on returns.

6. Invest, invest, invest some more.

7. Build enough wealth that retirement is an option, after which you have won the game of life.  

1. Creating a budget is always step 1 in building wealth. Building wealth is impossible until monthly net income is positive. Tracking your net worth will be an indicator on how accurate your budget is and if you are actually sticking to it. A budget that isn't followed is completely useless, so go as detailed as you can stay consistent with. Tracking net worth will give you insights into your budget like whether it is realistic or not or if you are saving any money at all. You can see how decisions like buying new clothes, or a new vehicle can affect your overall wealth. As Dave Ramsey says, “No one accidentally wins at anything”. If you want to win the game of life you are going to need a plan or at the very least your finger on the pulse to see how you are doing financially. Budgeting is the most basic financial skill but once mastered, the rest of the 6 baby steps will come easy. Anyone whoever struggles financially doesn't have a budget, since they would never budget themselves to get into $50,000 of credit card debt. 

2. An emergency fund is some cushion when life’s trials arise. Broken down car, funeral, loss of job etc. Debt is expensive so having a float of cash to dip into will save you the hefty interest fees. Once you have investments they will double as emergency funds. Ideally it's best not to pull money from investments, but if you lose your job it is better to withdraw from a mutual fund versus funding your life on a credit card. As your wealth builds, so should your emergency fund. Ideally in your chequing and savings accounts. First a small $1000 but eventually $10,000 or greater. 

Here is a list of options before you reach for the credit card or worst payday money marts.  

1. Your emergency fund

2. Your savings account

3. Your investments

4. Your parents or siblings

5. Your friends

6. Your church

7. Selling your things on marketplace

8. Taking a loan from a bank.

If all those fail, then use your credit card to hold you over. Credit cards are easy and asking for help is hard. People like to spare themselves the embarrassment and jump right to the end of the list. 

3. Debt has higher interest than investments, so if you want to guarantee a high return then pay off your credit cards, lines of credit and all over forms of debt (excluding house). Debt for a house is an exception because it appreciates in value. The debt snowball that Dave Ramsey talks about is a great idea. Not falling prey to extra cash flow as soon as a debt payment is gone but using debt payments to artificially lower your means using each paid off debt as an opportunity to pay off the next debt even faster. Debt is a ball and chain on your net worth unless that debt is making you money. 

4. If you need Dave Ramsey help with finance, you probably need help with saving and investing. Automating decisions away from yourself to keep yourself on budget. People don’t forget bills that are automatically withdrawn from their chequing account. Having automatic investments takes away some of the pain of saving while artificially lowering your cash flow.

5. Paying off the house early is the safer investment but doesn’t always yield the highest returns. Interest rates rise and fall making it more or less attractive to pay off the house early. Stocks historically have higher returns but risk tolerance will dictate investment strategy.  

6. Dave Ramsey suggests investing 15% but there are many strategies that suggest 20%, 25% all the way up to 60% if you follow the FIRE movement (Financial Independence, Retire Early). By not following into the trap of lifestyle creep, a high percentage of household income can be allocated towards investing as your wage increases.

7. The last and final step is the same as Dave Ramsey and building wealth takes time. Hitting your target goal of wealth so you can retire opens up a world of options. Giving to others, career change, part time work or quitting work altogether. This is the ultimate goal. It is freedom. 

Saving for your Children’s College Fund

Dave Ramsey suggests saving for your children’s college fund and while I do see the value in this I believe it can also be detrimental. Learning how to budget is a crucial life skill and saving for college in one's teenage years is the perfect time to learn. Getting a paycheck and placing a percentage in savings each month is a life skill. If a child knows their education is paid for, they won’t appreciate it and may not learn critical budgeting skills. If you are going to save for your children’s education, keeping your children in the dark will preserve their need to learn budgeting for themselves. Then you can surprise them at an appropriate time, getting the best of both worlds. Also, fun fact: those working and in school tend to get higher grades. 

The 7 Baby Steps could also be summarized in 6 basic points that I preach. 

1. Create a balanced budget.

2. Eliminate all consumer debt.

3. Limit spending to basic needs.

4. Save money wherever possible.

5. Invest as much as possible.

6. Build wealth.

Personal finance is not as intimidating or scary as it seems. Whichever baby steps you want to use is up to you. The important step is taking control of your money and beginning your financial journey with step 1.  

If you found this helpful and would like help budgeting or investing please email me at taylormckeecoaching@gmail.com