THE 7 BABY STEPS TO A DEBT-FREE LIFE
There is something oddly comforting about the word baby steps. It is because if we break everything down to the baby-level, it has to be easy!
Dave Ramsey, the author of The Total Money Makeover, businessman and a radio show host, is successful today, but 25 years ago, he fought his way through bankruptcy and debt. He devised seven steps that helped him, and many others, recover from troubled times.
Here are the 7-baby steps to lead a debt-free and stress-free life by Dave Ramsey!
- BABY STEP 1: Save up to one-month of your expenses for a starter emergency fund
- BABY STEP 2: Pay off your debts using Debt Snowball Technique (Except the biggest debt)
- BABY STEP 3: Build your emergency fund further (Equivalent to 3-6 months salary)
- BABY STEP 4: Invest 15% of your income for your retirement
- BABY STEP 5: Save for your future or family
- BABY STEP 6: Pay off your biggest loan
- BABY STEP 7: Build wealth and be kind
Let’s elaborate to get a better understanding!
Baby Step 1: Build a Starter Emergency Fund
The first thing you have to do is quickly save up to one month of your expenses as your starter emergency fund. This will be your back-up for when life throws you off-track with unexpected events. It is better to prepare ourselves rather than being victims of such situations.
Baby Step 2: The Debt Snowball Technique
The next thing you will have to do is start paying off your debts, such as credit cards, EMI’s, car loans, etc. Begin by writing down all your debts, starting from the smallest to the largest, regardless of interest. Knock off one debt after the other on the list, clearing the smaller ones first. This is called the debt snowball method.
Why do we do this?
Most of us, with many debts, can generally be very overwhelmed. By knocking off the small loans first, we generate momentum that will later help us to clear other debts. The debt snowball method is more of a behavior modification technique.
But do not be bothered much by your most significant debt yet. It could be a home loan or student loan, depending on the stage of life. We can clear this in a later step.
Baby Step 3: Complete your Emergency Fund
Once you finish paying off your debts, direct the money towards your emergency fund. Add money to your emergency fund until it grows equal to 3- 6 months of your expenses. This way, you will be prepared for the bigger surprises that may come your way, such as job loss, car breakdown, etc. This fully-funded emergency fund will stop you from spiraling back into debt!
Baby Step 4: Invest 15% of your Income for your Retirement
The next step is to take 15% of your monthly income and invest. You could use any investment method such as a Public Provident Fund, National Savings Certificate, Recurring deposits, etc. The idea is that you save up or double your savings for your future self. It ideally must be kept aside for the time of your retirement!
Baby Step 5: Save for your Future and Family
Now that all your debts are cleared, except for the biggest one, you can focus on saving up for your future, and family ( if you have one, or intend to have one). It means putting money aside for your children or your parents, siblings, or anyone you care about!
Baby Step 6: Pay off your Biggest Loan yet
The next step is to clear the biggest loan you have at the moment. It could be a home loan or student loan, but try and make timely payments to be completely free of debt! Once you pay this off, you will be completely free to save, spend, and invest as you please!
Baby Step 7: Build Wealth and Be Kind
Now that you have the freedom you worked for, you can focus on building your wealth. You can start taking more risks with your wealth, such as starting a new business, or investing in aggressive mutual funds, etc. But always remember not to get greedy. As you grow, try and be giving and kind whenever you can! It could be any form – charity, donations, or even saving up for your near and dear! But remember to be helpful, and you will be surprised by the kind of happiness it will bring you in return!