Today, we’re looking at the 2nd section on Page 6 in Chapter 1 of Dave Ramsey’s Complete Guide to Money. And here’s my lesson for the day:
Dave Ramsey’s Baby Steps work because of focus.
Chapter 1, titled Super Saving: Common Sense for Your Dollars and Cents, continues on Page 6 with Dave’s iconic Baby Steps.
Now, if you’ve been watching, reading, or listening to Dave for any amount of time, then chances are you won’t have escaped him talking about the 7 Baby Steps.
Well, turns out that’s what the 2nd section on Page 6 talks about. The section started out by introducing the Baby Steps as a series of steps for becoming debt-free and build wealth.
In the section, Dave sets up the Baby Steps as a financial foundation you can use to build on. Once you’ve got a solid foundation as your base, then it’s easier to start focusing on tactics and techniques here and there to build on that solid base.
Same idea with this book: once you’ve gotten familiar with the seven Baby Steps, this book helps you build on those steps with practical techniques you can use for savings, investing, real estate, and all that fun stuff.
Without further ado, here are Dave’s seven Baby Steps:
- Baby Step 1: Put $1,000 in a beginner emergency fund ($500 if your income is under $20,000 per year)
- Baby Step 2: Pay off all debt using the debt snowball
- Baby Step 3: Put three to six months of expenses into savings as a full emergency fund
- Baby Step 4: Invest 15 percent of your household income into Roth IRAs and pretax retirement plans
- Baby Step 5: Begin college funding for your kids
- Baby Step 6: Pay off your home early
- Baby Step 7: Build wealth and give
Here’s what the Baby Steps does: it helps you break down your journey to financial freedom into steps that are easy to follow, one step at a time.
For example, you might have a goal to retire at age 40 with a million dollars in net worth, but if that’s the only financial goal you have, then you’re very likely to fail.
Because it’s such a brave goal, but too vague and not specific.
And while your goal sounds great on paper, it’s too bland and doesn’t account for your specific present financial and life situations.
It doesn’t take into account how you will be able to pull that off.
But by having a real step-by-step plan to guide you towards that big goal, you can have your own blueprint (customized for you) to guide you on your way to financial freedom.
And it’s totally possible that how I use the Baby Steps will be different from how you use it. The most important thing is to understand the core idea behind the Baby Steps.
That way, you can adjust the steps to fit the stage you’re at in your financial journey and customize accordingly.
For example, I typically don’t do budgets. I simply pay for only the essentials and transfer the rest to a separate savings accounts where the money isn’t touched.
Which means I might be doing Baby Step 1 (Put $1,000 in a beginner emergency fund ($500 if your income is under $20,000 per year) and Baby Step 3 (Put three to six months of expenses into savings as a full emergency fund) at fairly the same time.
But that’s fine: once I realize that the main goal of the first 3 steps is basically to set myself free from financial chains.
What does that mean?
The two biggest financial chains holding people back from investing (Baby Step 4) are:
- Emergencies, without money to pay for them, and
Once you can discipline yourself and cut back to have both short-term and medium-term emergency funds; and then get out of debt…
… that truly frees you up to double down on investing and truly building wealth.
In other words, you’ve plugged all the holes in your financial basket (so money is no longer draining away), and then you can start filling in the basket (without worrying about the money dropping away).
For me, I’m now working towards paying off all debt.
If you’d love a more detailed breakdown of the Baby Steps, be sure to pick up a copy of Dave’s book: The Total Money Makeover here. It takes you through all seven steps of the process, step-by-step.
In fact, each time I watch Dave host his YouTube show, The Dave Ramsey Show, I always hear him use the Baby Steps as the template for answering a lot of questions from the callers.
So I know Dave believes in the Baby Steps a ton, but why?
Well, for one, the process works for him, and also, for a lot of people he has recommended it to.
But here’s the deal:
The real reason Dave swears by the Baby Steps and why they work is because: the Baby Steps lets you focus and get rid of the overwhelm around personal finance.
As you can probably tell, it could sometimes get very overwhelming and draining to think about your bills, expenses, emergency funds, student debts, loans, investing plans, college funds, retirement…
It truly is A LOT to think about.
And here’s what ends up happening for a lot of people: They think about all of these, start getting stressed, and conclude that the best way to avoid the stress is to stop thinking about it altogether…
… which is a wrong solution to the problem.
The fact that you stop thinking about your personal finance situation… doesn’t automatically make it go away.
Rather, here’s what you do: start doing.
Stop thinking and worrying… and start doing.
To start doing, go through Dave’s seven Baby Steps, and see what step you need to work on today… now.
I should tell you: It’d take years to navigate through all the Baby Steps…
… but if you’ll just take things one step at a time with unwavering focus, you’ll be surprised by how far you’d go… making actual and real progress towards building wealth and financial freedom for you and your family.
You can’t let your personal finance situation overwhelm you… you need to take charge and be focused on one small step at a time.
And one of the best ways to do that is to stay focused, while you apply Dave’s seven Baby Steps to your specific situation.
You know why? Because:
Dave Ramsey’s Baby Steps work because of focus.
That’s all for today, my friend. We’ll be continuing with the next section on Page 8 of the book tomorrow.
See you then.