Dave Ramsey’s top tips are a lifesaver as are his baby steps to get debt free! Unless you have the perfect plan in place already, then paying off your debt may be causing you some trouble. You will be wondering how to get debt-free. Even if you do have a plan likelihood is it will be causing you some anxiety and sleepless nights.
I’ve been through debt myself and I count myself very lucky to have caught it early but being young and on a low-income level, I couldn’t see how I could pay it off anytime soon. It was a difficult time.
I took a number of steps to alleviate the stress this was causing me. In later years I came across Dave Ramsey’s top tips and it seems I had down some of the things he recommends, but it would have been so much easier if I’d known about all the options I had available to me.
Who is Debt Free Guru Dave Ramsey
Dave Ramsey is one of America’s foremost experts on money and business focusing on personal money-management. He is ever-popular on national radio and has seven best-selling books to his name that have sold more than 11 million copies. He really knows his stuff and they are definitely worth a read:
- Financial Peace
- More Than Enough
- The Total Money Makeover
- Dave Ramsey’s Complete Guide to Money
- The Legacy Journey
- Smart Money Smart Kids
Dave made it big quickly. By 26 he had a property portfolio of $4m USD, but then lost it all by the age of 30. He then rebuilt it all and now works towards helping others through his Financial Peace University (FPU), a program that helps master their debt and importantly get rid of it, control their money, and learn new behaviours so that they can keep it going.
Fortunately, Dave Ramsey also offers up a host of free information that is invaluable to helping you take those steps towards becoming debt-free.
One of Dave Ramsey’s top tips is called the 7 baby steps to get debt free. This is a great starting point for you to solidify what your journey to becoming debt free will look like.
Dave Ramsey’s top tips – 7 baby steps to get debt free
Baby Step 1: Save $1,000 for Your Starter Emergency Fund
Dave Ramsey’s top tips start with Emergency Funds are a foundation of debt free and financial freedom planning. Dave Ramsey is a little bit contentious here in that this step is normally number 2. I do see why he does it though. The ability to have an emergency fund will help you face life’s uncertainties, of which there are many. Having this comfort zone is key to working off the rest of your debt. For those of you well versed in Financial Independence Retire Early methods, don’t worry step 3 expands on the Emergency Fund.
Baby Step 2: Pay Off All Debt (Except the House) Using the Debt Snowball
Now, it’s the biggie. Actually, pay off the debt. Certainly not an easy task. Start by listing out all your debts from credit cards, student loans, bank loans, etc.
Dave advocates a technique known as the Debt Snowball. List out all the debt from smallest to largest and start attacking those payments with every spare penny/dime you have. The benefits are 3-fold:
- You are actively decreasing your debt. Little and often soon adds up
- You are actively reducing the interest that is accruing on your debt
- Psychologically you have made a start, you are on top of this, you have a plan. Well done you!!
Now keep at it. Once you check that first one off there will be a huge sense of relief and pride. In the next post in this series, we’ll go into some options that will help you to pay these debts off faster. Sneak preview…you need a budget! If you can’t wait that long have a look at how online surveys can help. I’ll also be posting more info on Dave Ramsey’s top tips and his baby steps to get debt free in later posts.
At this stage, it is important not to compare yourself to others. I like to quote Teddy Roosevelt here “comparison is the thief of joy”. There are so many variables at play here as to how one person can achieve something in a shorter timeframe than another. Focus on your goals and be proud of what you are achieving.
A caveat for UK readers. The Student Loan you may have is one of the best loans you will ever receive (at the time of writing). You only start paying it back after a certain threshold and this ramps up as you earn more. See the UK Gov website for up to date details. It then comes out of your earning pre-tax.
Effectively you know no difference. There are also options to repay early if you wish to. I did, but as I’ve said before I place a huge emphasis on the psychological aspects of debt repayment.
Baby Step 3: Save 3–6 Months of Expenses in a Fully Funded Emergency Fund
Look what you’ve achieved! You’ve paid off the debt. Time to relax! Absolutely not, you are now a walking talking personal finance machine and you have new goals ahead of you! Now is the time to focus on improving your personal circumstances further.
You are now in a position to take all that money that was servicing debt repayments and put it towards ensuring your Emergency Fund has you covered for some of the worst life can throw at you like illness or loss of job without you falling back into debt.
We are now going to build a fully-funded emergency fund that covers 3–6 months of your expenses.
Let’s be clear here. This is 3-6 months of EXPENSES. Not 3-6 months of income. Your expenses are what you need to live on. Eating out 5 times a week is probably something you should have cut back on previously, but just in case it’s time to whip out the budget planner again and see exactly what you would need.
Baby Step 4: Invest 15% of Your Household Income in Retirement
Wow, starting to get serious now. This may even be new ground for you. In the UK, according to Finder.com research, 35% of adults do not have a pension – although with more stringent rules this is improving, there are still self-employed workers to think about.
This is terrifying. We won’t even get started on the power of compound interest in this post. 43% don’t know how much they will need to retire and a further 55% believe £100k is enough to retire on.
The Balance reports that in the US 56% of workers don’t know how much they will need for retirement and that 36% of workers and current retirees only have $1,000 USD in savings.
Another stat for those who say they will just keep working is that 47% of current retirees were forced into an unplanned retirement because of layoffs, taking care of sick parents or spouses, or their own illnesses.
Scaremongering aside. It is incredibly important that you take retirement planning seriously. I’ll be doing a post soon on planning for retirement from two sides of the coin. General retirement and then the FIRE approach.
The approach in Dave Ramsey’s top tips and 7 baby steps to get debt free is to focus on taking 15% of your gross household income and invest that into your retirement through the most tax-efficient vehicle available to you e.g. UK contribution pensions, SIPP, US 401(k) plans, etc. and ensure you make the most of employer matching. Then the rest into Roth IRA or ISA’s for you and your partner (tax-saving vehicles).
Baby Step 5: Save for Your Children’s College Fund
Very much like your airline life vests, sort your fund first and then your children. Ultimately the same principle applies, if you are not in a good financial position it will impact your children. Also, you are setting a good money management example to them. This is invaluable.
The earlier you start (their age) the less you need to put in. You simply let the power of compound interest work its magic. Anything is better than nothing here and will help them. In the US you can look at 529 college savings plans or ESAs (Education Savings Accounts).
In the UK you can look at Junior ISA’s and Pensions. Apologies for the UK\US centric view. Please Google for your home countries or if you are struggling let me know in the comments and I can check for you.
Baby Step 6: Pay Off Your Home Early
Dave Ramsey’s Top Tips here will, again, be controversial to some and I suspect you can almost hear my response. Step 6 is to pay off your mortgage. No simple task at all, but there are two lines of thought here.
- God yes! Pay off the mortgage and take a huge step to financial independence
- God no! Why would I pay off my mortgage when the interest rates are so low that I would make more money, according to historical returns, if I held it in tax-sheltered stocks and share vehicles (That is country dependent)
I fall very firmly in the option 1 bracket. I paid off my mortgage of £175,000 ($210,000) within 8 years of buying the property through some investing in myself for my career and avoiding life creep.
The pros to paying it off are no longer wasting tens of thousands of pounds/dollars on interest payment and you also will then have an additional chunk of cash to hand for step 7. Also, the weight that comes off your shoulders once a mortgage is paid off is incredible. Your view on life changes and options you didn’t think available suddenly…well, they are.
For me, it is the certainty that in the worst-case scenario I will have a roof over my head (there are still basic expenses to pay of course). This gives me options in what I want to do for a job and gives me the ability to dream BIG and start thinking about the possibility of actual financial freedom or even early retirement – not likely in my scenario simply because I want to be doing things, just on my terms.
What about you? Leave me a comment.
Baby Step 7: Build Wealth and Give Back
We’ve hit the final step in Dave Ramsey’s top tips in his 7 baby steps to get debt free. As we noted in Step 6 you now have no debt including that pesky mortgage, or even if you’ve assessed your financial position and deemed it an acceptable risk to keep the mortgage, you can start looking at the next stage. The last and on-going stage. Building your wealth. Wealth.
It even sounds nice. Building wealth. I have visions of Scrooge McDuck swimming in a pool of cash…
This is where you can really start to accelerate your plans. Be they to FIRE or perhaps your goal is to build a healthy inheritance for your kids and maybe even their kids! Build up your legacy. Or now you are rolling in dough, moola, loadsa money…sorry…you might want to think about giving back through charities or with your time if you haven’t done previously.
Well, not quite. Dave Ramsey’s top tips and the 7 Baby steps to get debt free makes it sound so simple. It’s not. It is going to test you. You will have to work hard, but you can do this.
By following the steps, you can start to plan out a path that eats little by little into that debt. Gradually making progress until the goal becomes visible in the distance. Stick with it. Ultimately, a better life awaits.
In the next post, I’ll look at some options you have for helping to clear down debt. If you’ve enjoyed this post please leave a comment below and pin the image below to Pinterest!