What Are The 7 Steps Of Dave Ramsey's Financial Freedom? - FAQ

7 Steps Of Dave Ramsey’s Financial Freedom.

Also know as:

The Seven Baby Steps Of Financial Freedom:

Calling these steps “baby steps” might be seen as a simplification of the process toward your financial freedom, but they are just small steps that can be applied to your life for large changes.

The goal is to focus on each step and not proceed till you complete that step—one step at a time.

Baby Step 1: Save $1,000 For Your Starter Emergency Fund.

Avoiding unplanned debt is a priority in financial independence. At least $1,000 in your starter emergency fund can cover most emergencies.

Building a small emergency fund can help you deal with the initial steps toward working toward financial independence. Evaluating your monthly bills, totaling all your income sources, and budgeting out money so you live on less than what it costs to live and save the rest.

These small money exercises are the foundation for controlling money rather than controlling you.

Step 1 is about having enough fast cash put aside for those small emergencies that require immediate attention.

Baby Step 2: Pay off all debt, except your house mortgage, using the Debt Snowball method.

Revolving debt often goes hand-in-hand with the lower and middle classes; I know this from personal experience.

I often ask myself whether I use revolving debt(credit cards, consolidation loans, signature loans, etc.) because I was lower class, or did they keep me lower class?

I learned I was using the easy fix of using a credit card to fill income/expense gaps rather than making the tough choices about budgeting and saving for both planned and unplanned events.

Credit card use was hurting my chance at financial freedom. And I needed someone to spell that out to me.

Baby Step 3: Save 3 to 6 Months’ expenses in your fully funded Emergency Fund.

Life happens, set up a safety net, an emergency fund.

Often, setting up a fully funded emergency fund sounds impossible to many. Still, once you get to this step, you have mastered much about controlling money instead of letting it control you.

Earlier steps trained you to create a cash surplus by controlling your spending. Later, grow that surplus into managing your debt services by eliminating non-mortgage debt.

Now, you will turn those successes into more considerable achievements as you go, and at this step, you will build some real financial security, a fully funded emergency fund.

At my job, I needed help understanding that everyone is replaceable. I thought that even being the boss of your own company would protect you. If you feel the same, read the life of Steve Jobs, and those in high places can be pushed over as well.

So, be prepared for loss of income by building your 3-6 month emergency fund.

If you are highly marketable, having three months of expenses saved away is a plan. If your job is so specialized, being out of work for six months before your next job is possible; six months of expenses should be your goal.

Regardless of your situation, it would be best if you were building your full emergency fund.

I’ve completed this step; my problem is now: where do I keep it, but that is a later problem. Work on this step; once complete, you will feel much weight lifted off your shoulders. It feels good.

Baby Step 4: Invest 15% of your total household income into retirement.

Investing money and having money work for you.

My early memories might be flawed, but there was one that really affected me as a child and later as an adult. You must save for retirement.

I remember listening to the teacher explain a recent white house press event in grade school. Through my foggy memories of youth, I remember you must save for retirement, outside of Social Security, at least 10% of your lifelong income, or you were in trouble.

That was a strong paraphrase of my teacher’s discussion; the government admitted relying on Social Security was a poor plan. The working class people were promised their taxes would be used correctly, but it appears Social Security retirement benefits were a giant Ponzi scheme.

Since my grade school days, I learned from reading books, pre-web days, about the importance of saving at least 10% for men and 15% of income for women(since they live longer) throughout your life.

I must admit I grew up poor, and saving money was impossible since that suggested we had a cash surplus.

So, for the first several years of my adulthood, I saved almost nothing for retirement.

The point of this step is now that you eliminated your non-mortgage debt and secured your 3-6 month emergency fund, you are safer in your financial life to invest the minimum towards your retirement.

Regardless of whether you plan to retire, it can happen at a worse time. I can share stories of healthy nurses who never planned on retiring, never saving for it, and were forced into retirement because of a work-related event and forced to live on the government’s false promises.

Save for retirement.

Baby Step 5: Save for Your Children’s College Fund.

When kids find that college savings account.

For reasons I will later discuss, I prefer to avoid creating a locked-in college savings plan.

Often, kids don’t go to college, and more importantly, I am raising self-sufficient kids who will pay their own way, debt-free.

I will talk about what I’ve done later, but for now, I did create an education-only savings account(Coverdell IRA and 529) early on, so I did this step before doing the financial baby steps.

Yes, before I got my finances under control. I was out of order.

Baby Step 6: Pay Off Your Home Mortgage Early.

I have a small house, but soon a debt free house.

This step is the financial baby step I am at ‘officially.’

After some refinancing and extra principal payments, I am paying off my mortgage early, but I am also straddling the next financial baby step.

But let’s focus here first. I know people say you will lose your mortgage interest tax deduction by paying off the mortgage early.

Well, two things: I want to be debt-free, and holding on to a mortgage is debt, regardless of how you view it; good debt or bad debt, it’s debt. So, the mortgage must be paid off. Second, if my financial plan is to save pennies in taxes while willingly giving dollars to a lender, I must seek professional help.

How people view saving 10 cents and giving away a dollar makes sense. I would instead use my extra income after paying off my mortgage, paying pennies on taxes on the money I keep from my additional investments.

Baby Step 7: Build Personal Wealth and Give Generously.

Building Personal Wealth, Making it Rain Money.

As I’ve been doing baby step #6, Pay Off Your Home Mortgage Early, I’ve also been playing in the final step, building wealth and give generously.

Now, only part of baby step #7. I am still charitable, but I have yet to reach Generously!

So, to reiterate, my mortgage is being paid off early. I turned a 30-year mortgage into a 23-year version and am at year 21. I can make this faster, but it’s only two more years, and the interest on the remainder of the loan is almost nothing.

So, instead of speeding up these last two years, I am using extra money to create additional passive income, making Passive Income Generators (PIGs)

The whole point of this blog(About: My Passive Income Generators Blog).

One thing I’ve learned, and often a hang-up for others, is you need money to create passive income, and to get that money, I converted my time into money. Afterward, I managed that money to complete the earlier Baby Steps, Baby Step #6 in progress, and direct that extra income into my Passive Income Generators.

Soon, I will be fully in the last step, and if you aren’t, you can too. Great teachers like Dave Ramsey and his team are fantastic at focusing your goals on getting out of debt but could be better at teaching generating income means.

The truth is that making money can be ambiguous. Getting out of debt is less so.

Everyone can generate income differently, and I hope sharing my lessons will help you find your income streams.

Thanks for reading along.

As always with this blog, this is my understanding of the information shared or learned by me while on my road to financial independence.

For more information, check out the Dave Ramsey Financial Peace University webpage: https://www.ramseysolutions.com/ramseyplus/financial-peace/

Tom, Growing His Passive Income Generators.

What Are The 7 Steps Of Dave Ramsey’s Financial Freedom? – FAQ