Dave Ramsey and his 7 “baby steps”

Dave Ramsey is a very influential author in the United States, he has created seven "baby steps" to improve your personal finances. Here we describe them.

When it comes to books on managing one’s money, few authors in the United States hold sway like Dave Ramsey does. countless individuals listen to his radio broadcast regularly.

He is one of the many authors that I have read throughout my life because he has built a very powerful and forceful message focused on avoiding debt at all costs. Precisely in a highly consumerist country, whose population lives precisely on credit. It is relevant for us in Mexico and Latin America because that lifestyle is imitated by our middle class (which is also, today, very indebted).

As part of this, Dave Ramsey has long since developed what he calls the 7 “baby steps” to complete life transformation and control of your money. You can’t change overnight and many people start out with a very compromised financial situation, with debts that barely allow them to breathe. The only way to change our situation is to do it little by little, just like how babies learn to walk: with small steps but each one is in the right direction.

In his book “ La Transformación Total De Su Dinero ” (which I recommend reading in English since the Spanish translation has many problems: “ The Total Money Makeover ”), Dave Ramsey puts a sentence with which I completely agree: financial knowledge represents only 20% of the equation. 80% has to do with changes in our behavior and with discipline. That’s why he designs his methodology in this way. What are the 7 steps of it?

Dave Ramsey’s 7 “Baby Steps”

The process may seem simple – but it requires, as I mentioned, a complete change in our consumption habits and the way we see life financially. They are designed for people who have debt but are relevant to everyone.

Of course, there will be many critics. Dave Ramsey has certain arbitrary numbers in his methodology that might not apply to some people (such as a specific amount to start an emergency fund, which might not apply to particular needs or our age).

But it is, in essence, a methodology (it is not the only one) that is built with a very logical and correct sequence to achieve precisely that: a transformation of our financial situation and put us on a path of building wealth. It is not written in stone: one can adapt it. That is why I think it is worth discussing each step in detail and its reason for being.

Today I will only mention Dave Ramsey’s 7 “baby steps” to continue with a series of posts in which I will talk about them in detail:

7 baby steps

  • Step 1. Build a small emergency fund quickly.
  • Step 2. Pay off all debts except the mortgage.
  • Step 3. Build an emergency fund with 3-6 months of family spending.
  • Step 4. Invest 15% of your net income for your retirement.
  • Step 5. Open a college education fund for your children.
  • Step 6. Make extra payments on your mortgage to pay it off early.
  • Step 7. Build heritage and give back to society.

Just by reading these steps, we can realize some important messages that they contain. For example: in order to build wealth it is essential to pay all our debts, not to have those commitments that affect, as I have always mentioned, our future cash flow. We have less capacity to save.

He talks about some priorities: retirement savings, our children’s education, and an emergency fund. It ends with a message of giving back to society when we have built heritage.

As I mentioned, it is important to understand why the steps are in this order and what is the relevance of each of them.

What do you think about these 7 “baby steps” by Dave Ramsey? Share your opinion.

Build a small emergency fund quickly

The first of Dave Ramsey’s 7 “baby steps” is: Build a small emergency fund very quickly. Even if you are heavily in debt.

This may seem strange, but why save money for a small emergency fund, instead of using it to reduce debt? Isn’t that more important, particularly if we’re in a very compromising situation?

Not necessarily, since in such a situation, one is very vulnerable to any unforeseen event that may happen. Something as simple as a water leak in the home can be the difference between being able to continue paying – or not – our monthly commitments (debts). The idea is simply to build a little cushion to prevent that from happening.

To see it another way, if we are up to our necks in water and the tide rises a little, we can drown. This small emergency fund is like a small oxygen tank that allows us to survive. That is why it is so important.

In fact, Ramsey puts an amount on it. The original English version of the first “baby step” reads like this: Save $1,000 (dollars) to start an emergency fund. I have not wanted to translate it this way because the reality in Mexico and other Spanish-speaking countries is different, in addition to the fact that it may seem an arbitrary or large amount for many people.

How much should that little emergency fund be?

Let’s choose a number that we think would help us cope with an unforeseen event. It can be 5,000 pesos or more, depending on our socioeconomic position. One suggestion, for those who have a car, is to see how much is the material damage deductible of your insurance (it will be in percentage, but you have to translate it into pesos).

Those who have health insurance may have to consider the deductible plus an additional amount for coinsurance that they would eventually have to assume, in the event of an illness that requires hospitalization.

These are just a few suggestions, I suggest you not worry too much about this, simply choose a small amount that you think would be enough for some unforeseen situation that is not very serious and focused.

We must build it quickly

It is important to build this small emergency fund very quickly, even in a month. It may seem difficult if your cash flow is very tight. In that case, think of alternatives, such as:

  • Sell ​​some things that you do not use, for example, an exercise device that you have at home, a watch. Maybe also your old cell phone. You can organize a garage sale or use pages like Segundamano or Mercadolibre, among others.
  • Do an additional activity that allows you to earn income, from washing cars on the weekend, teaching other people how to cook, or providing some type of consulting service outside of your normal job.

Anyway, these are just a few suggestions, there are many things that you could think of if you open your mind a little.

With this small emergency fund, you will be able to overcome unforeseen events without having to incur additional debt. This will allow you to focus on the second “baby step” that is central to the Dave Ramsey methodology.

 

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