When looking for the ideal 10-year plan to financial freedom, I followed Dave Ramsey's 7 Baby Steps to Financial Freedom. The first thing you should remember is that saving and investing is a “long-term” strategy even for this instant gratification society.
Follow these 7 baby steps to create a budget, pay down your debt, save for emergencies, and prepare for retirement. These are Dave Ramsey's official seven baby steps.
Dave Ramsey's 7 Baby Steps
Here are the steps to budget, save, invest, and give back.
Baby Step 1: Save $1,000 for a Starter Emergency Fund
First, you'll want to start a high-yield savings account with compound interest. Compound interest adds the interest to your balance and then, pays you interest on that balance.
You earn interest on earned interest. Your initial goal is to put aside $1,000 in your emergency fund. You can fund this all at once – or over time, such as $100 a month for 10 months.
Axos pays 20x the average interest rate on a savings account and it's FDIC insured. Click Here for Details. How much can you save and how much will have in say two years or twenty years? Click here for our compound interest calculator.
Baby Step 2: Pay Off All Non-Mortgage Debt Using Debt Consolidation
When I created my very first budget, I quickly realized that I needed to consolidate my student loan payments and my truck loan into one payment.
I had 23 student loan payments and a huge truck payment, and after I consolidated all the debt into one payment, I had a payment lower than my truck payment. I was able to quickly pay off this consolidation loan with the extra leftover each month.
I recommend consolidating your debt using Super Money. This was surprisingly fast and everything was done online so no need to risk catching COVID. Click Here to Combine Loans into One Payment.
Now, if you have too much credit card debt, you'll also want to use Payoff to reduce your high-interest payment into one low-rate monthly payment.
What I like about Payoff:
- Focused on Getting You Out of Credit Card Debt
- One Fixed Monthly Payment
- No Late Payment Fees
- Increases Your Credit Score
Click Here to Check (without affecting your credit score)
Baby Step 3: Put 3 to 6 Months Living Expenses in an Emergency Fund
Then, calculate 3-6 months of living expenses by multiplying your monthly expenses. You want to set aside this much in the emergency savings account from step one. This is in case you lose your job or have a large expense (i.e. car maintenance, air conditioning breaks, etc.).
When you're budgeting, you'll want to use the Zero Based Balance Budget to calculate your income/expenses down to the penny.
If you have to tap into this fund for any reason, remember, you'll have to startover on Step #3 to get it back to the 3 to 6 month level. Always return to this step to pad your emergency savings account.
Baby Step 4: Invest 15% of Your Income into Retirement
No matter your current age, you want to start putting money away for retirement. The sooner you start, the more your investments can grow.
You also want to make sure you optimize and diversify your 401k or your IRA management. For this, we recommend Blooom.
Blooom gives you a personal analysis of how to diversify your retirement portfolio based on where you're at financially – regardless of age or experience. They make it simple for you because they do the trading for you.
Roth IRA Contribution Limits
If you already have a Roth IRA or a Roth 401k account, you can easily connect that to Blooom. That way you don't have to setup a new account. You can contribute up to the following amounts:
- Roth IRA – $6,000 (add $1,000 if you're over 50) per year
- Roth 401K – $19,500 per year
Try to max these out each year. You can setup a new account or connect an existing account. They will research, optimize, monitor, and even trade for you. Click here to get more details about blooom.
Baby Step 5: Save for Your Children's College Fund or a House Down Payment
Now, you'll want to start a savings goal. Put aside money for your kid's college fund. You can easily do this buy opening up a daily compound interest CD.
Buy Low-Risk CD: CIT Bank offers a daily compounding interest to maximize your earnings.
Let's say you start with $1,000.
CIT Bank pays 0.75% interest rate, compounded daily.
Let's say you want to contribute $100 per month for 18 years. By the end of 18 years, when your child is ready for college, you'll have $24,289.19 to help pay for college. And that's just $100 per month. Set that up for auto-deposit and you'll never have to worry about it.
If you want to set a goal of $40,000 by the time your kid turns 18, then you'll want to start with the $1,000. Then, add $2,000 every year. By the time your kid hits 18, you'll have close to $40K for college. Click Here to Open Up Your Free Account
Baby Step 6: Pay Off the House
If you do not include your mortgage in the consolidation loan, then, step six is paying off your house. To pay off your house, I recommend combining a budget with a payoff method.
There are four types of budgets:
The Zero-Balance Budget is perfect for this because you can see what spending categories you need to cut and how much you have leftover to apply to the principal of the loan.
Then, you can calculate how long it's going to take you to pay off your house. If you have a 30 year mortgage, this is how many years it would take to payoff the mortgage.
- Extra $750 per month would pay it off in 13 years.
- Apply Extra $1,000 per month would pay it off in 11 years.
- Extra $1,500 per month would pay it off in 9 years.
Or you could do what I did. Invest that extra in stocks and watch the stocks grow faster. How do you know which stocks to trade?
Here's what we recommend:
Step 1: Open an eToro account. It's free. It cost $0 to trade.
Step 2: Get the top stock picks from Morningstar. They pre-sort the top stocks, the top mutual funds and the top ETF picks using data points. Then, they feature their top picks. Click here to try it for free for two weeks.
Baby Step 7: Build Wealth & Give Back
Once you start paying off your debts, you're going to start having some extra money at the end of each month. This is where I'm currently at in Dave Ramsey's 7 Baby Steps to financial freedom journey.
With all the extra money, you're now going to invest every month. I recommend using M1 Finance to invest. There are four main benefits to using M1 Finance.
- Every penny goes to work by investing in fractional shares, which allows you to get a piece of major companies.
- You can use it like a checking account and easily sweep extra money into investments or your investments into your checking.
- M1's algorithm determines which securities to sell based on your portfolio.
- If you ever need a loan, you can borrow at 2% with no paperwork.
Click Here for More Details on M1 Finance
Make sure you bookmark this page as I’ll be updating it as often as I can to keep you informed on Dave Ramsey's Baby Steps to Financial Freedom. Which step are you on right now? Leave a comment and let's discuss…
- Best Ways to Pay Off Student Loans
- Best Ways to Build a Budget
- Consolidate All Bills into One Payment
- How We Saved $50,000 in Last 12 Months
If you know anyone looking for this, please share this page with them.
I am seriously on baby step #1. I need to get my life together haha
I’m currently on step 1. What am I doing with my life? LOL
This is exactly what my financial advisor told me. Love seeing this in detail though.
I like the extra steps here because Dave would never recommend using credit cards or going out to eat/Starbucks. I think you can live your life and build wealth.
I have to say I like the new 7 steps that you put out because I think it will be about the side hustle and starting a business. Not just working til retirement.