In recent years, many people have struggled with financial difficulties, often feeling like there’s no way out. Yet, even in uncertain times, there’s hope. One financial expert is offering a practical approach to achieving financial success.
Personal finance expert Dave Ramsey recently shared a TikTok video where he outlined his “7 Baby Steps” for achieving financial freedom and giving back. According to Ramsey, these steps have helped more than 10 million people overcome their financial challenges.
Dave Ramsey’s 7 Steps to Financial Freedom and Generosity
Following Ramsey’s plan may seem overwhelming at first, but remember, life rarely goes according to a perfect script. Just taking that first step toward improving your financial situation can make the journey feel more manageable.
Step 1: Build A $1,000 Emergency Fund
Ramsey explained that he omitted this step when he first started giving financial advice. Ramsey recounted how people would complain that his methods weren’t working because they’d encounter unexpected expenses like car trouble or medical emergencies and wouldn’t have the funds to cover them, having allocated all their money to debt repayment.
In August, a salesperson from Vancouver, Canada, called “The Dave Ramsey Show” seeking urgent financial advice regarding their overwhelming debts despite having a combined annual household income of $300,000.
Ramsey’s team of experts identified the mortgage and car loans as the caller’s most significant financial burdens. Ramsey realised that people who were solely focused on debt repayment needed a safety net.
This realisation led him to incorporate an emergency fund into his financial advice, giving individuals a cushion to fall back on during unexpected situations. When life throws you a curveball, you’ll be better equipped to handle it.
As the Consumer Finance Protection Bureau points out, creating an emergency fund is the first step towards building genuine savings. This is because unexpected events, such as a car breakdown, won’t severely damage your credit, making it easier to recover financially.
Step 2: Pay Off Debt With The Debt Snowball Method
The debt snowball is a debt reduction strategy that involves paying off debts from smallest to largest, regardless of interest rates. Citizens Bank outlines a few steps to effectively implement this method. While it might seem complex, with steps within steps, this approach is the most efficient way to tackle debt.
Debt Order (Smallest to Highest Interest):
- Identify the debt with the lowest interest rate.
- Make payments that exceed the minimum to pay off this debt as quickly as possible.
- Continue making minimum payments on the remaining debts.
- Once the first debt is paid off, focus on the next debt with the lowest interest rate and repeat the process.
By following these mini-steps, you can accelerate your debt repayment process. Failure to manage debt can lead to dire consequences, as exemplified by the case of Brandon Miller, a Hamptons real estate developer who tragically committed suicide due to the financial stress caused by a $17 million debt.
Step 3: Build A Fully Funded Emergency Fund Of 3-6 Months’ Expenses
With your debts cleared, you can now redirect the money previously allocated for debt repayment towards building a fully funded emergency fund. If you haven’t used the initial $1,000, you can add it to this fund.
Instead of a small emergency fund like in step one, you now have a substantial financial safety net that can weather any storm. To ensure timely progress, create a timeline for building your fully funded emergency fund. This will keep you on track and accountable.
Step 4: Invest 15% Of Your Household Income For Retirement
Ramsey’s next step focuses on the future. With no debt and a fully funded emergency fund, you are now ready to invest in retirement. Allocating 15 percent of your household income towards retirement savings ensures you won’t have to work for the rest of your life.
Many companies offer retirement savings plans like 401(k) or 403(b) plans, often matching their employees’ contributions. However, if your employer doesn’t provide such a plan, consider a Roth IRA, which gives you more control over your retirement savings.
Step 5: Start Saving For Your Kid’s College Education
The cost of college continues to rise, so it’s prudent to start saving for your children’s higher education. Popular college savings options include 529 plans and ESAs (Education Savings Accounts).
When choosing between these options, consider their differences to determine the best fit for your needs. Of course, if you don’t have children, you can skip this step.
Step 6: Pay Off Your Mortgage
This is the most challenging step, but it’s also the most rewarding. Eliminating your mortgage would genuinely free you from debt. However, this step requires careful planning and significant effort.
Determine your desired monthly mortgage payment and calculate the time required to repay your loan. Consult a financial advisor to discuss your long-term goals, or use Ramsey’s Mortgage Payoff Calculator to find the optimal payment plan for accelerating your homeownership journey.
Step 7: Achieve Financial Freedom And Generosity
Now that you’ve reached this point, you’re truly financially free. You can decide how to use your wealth, whether to increase your financial assets further or share your generosity with others.
As mentioned earlier, this process might seem more straightforward than it actually is. The path to financial security can be challenging, as life presents various obstacles, and some people face more significant financial burdens than others.
The important thing is to start the journey towards giving yourself the life you deserve – one that’s free from debt and filled with financial prosperity.
