Follow the Baby Steps in order, and stick with them!
It is great when Dave Ramsey shares an exciting social media post about investing $100 a month for 40 years and having over $1,000,000 at the end. I see those posts, and they have some of the highest traffic of replies, likes, and so on, which indicates to me that many people want to follow Dave’s program and really take control of their money. Unfortunately, most people have so much debt, bills, and other expenses that when everything gets divvied out each month, there is barely enough left to buy a pack of gum, or worse! Barely staying afloat, drowning in debt, and losing sleep at night, wondering how to pay the next bill is an awful feeling; I’ve been there, and so have several of my colleagues. That is a significant reason why Whitaker-Myers Wealth Managers was started in the first place. We know what it is like to be sick and tired of being sick and tired, and we love helping people achieve their financial goals through good planning and investments, but we also want to help relieve people from the burden of being slaves to the lender. I am a firm believer and follower of Dave’s 7 Baby Steps, and if you are seeing one of those posts and wondering where you will find $100 leftover in your budget, start here and go in order.
Step 1: Save $1,000 as a Starter Emergency Fund
This is the beginning of the journey, the first test of your financial fortitude. Your goal in step one is to save $1,000 as fast as possible in a bank savings account. Why as fast as you can? This builds the foundations of being disciplined and intentional with your money which is crucial to find success in steps 2-6. It also provides a small safety net for life’s little whoopsies that will come along.
Step 2: Pay Off All Debt (Except the Mortgage)
In step two, you want to take all your debts minus the mortgage, put them in order from the smallest to the largest dollar amount, and start knocking them out one by one in that order, regardless of the interest rate. Dave calls this the Debt Snowball Method. I personally used this years ago when I found Dave, and it changed my life. Keep in mind that making minimum payments in this step will not get you to your goal. Sacrifices will be made to beat Baby Step 2. One of Dave’s favorite moments on his show is when he brings people to the stage to do their “Debt Free Scream.” He asks how much they paid off and how fast and sometimes calls them “weird people,” but it is a term of endearment. Being weird is to be hyper-focused or, like Dave says, “gazelle intense” on becoming debt free. Giving up date nights, babysitters, gourmet foods, and streaming services are just some examples of how to focus on your debt-free goal.
Step 3: Build a 3-6 Month Emergency Fund
After you have been gazelle intense on paying off your consumer debt, you now have plenty of freed-up cash to build a fully funded emergency fund with 3-6 months of living expenses. A common question asked, “Should my emergency fund be three months or six months?” The answer is … it depends. If you are a one-income family, you are self-employed, work on straight commission, or have someone in the family that requires frequent medical needs; then a 6-month emergency fund is better for you. If you are a two-income family or have had a steady job for a long time, then a 3-month emergency fund would be fine. Another important note with the emergency fund is that it should not be commingled with your other checking or savings accounts. One option is to put your emergency fund into a money market savings account where you could earn much better interest than a regular savings account at a bank. Reach out to one of our other advisors or me if you want to know more about that. The difficulty of getting to step three should also have instilled some very strong positive habits about being intentional with your money. This is precisely why you should do the steps in order and not jump around or try to do them all at once. Being financially responsible, just like anything else we excel at in our lives, requires discipline, practice, and effort.
Step 4: Save 15% of Your Income Toward Your Retirement
Welcome to step four. All those social media posts about becoming a millionaire are right in front of you. This is also where I and our other Smartvestor Pros at Whitaker-Myers come in to help through the rest of the steps. We will help you build a comprehensive financial plan and manage your investment portfolio to help you achieve your goals and keep you on track to retirement and beyond. A good rule is to save at least 15% of your GROSS household income toward your retirement. If you have a 401(k) or another employer-sponsored plan that offers a match, start there and save up to the match. That’s free money, baby. Next, you will want to set up a Roth IRA and start saving there. Roth IRAs are great because you put money in that has already been taxed, it grows tax-free, you get tax-free distributions after age 59.5, and there are no required minimum distributions at age 72. It would be wise to speak to a financial professional at Whitaker-Myers before attempting this on your own.
Step 5: Save for Your Children’s Education
This step may not apply to everyone, but if you have kids and want them to go to college without student loans, you should start saving as soon as they are born. Every state has at least one 529 plan available that offers tax-free savings on qualified education expenses. Those are pretty good, but if there is doubt, it may be wise to open a UTMA account or even a taxable brokerage account earmarked for education. Your advisor can help you determine how much you need to save and provide investment advice regarding education planning.
Step 6: Pay Off Your Mortgage
At step six, you should have this whole gazelle intensity down to a science. Making extra payments on your mortgage can potentially save you tens of thousands of dollars of interest payments. For additional motivation, use a loan amortization schedule to figure out exactly how much you will save by paying off your mortgage early.
Step 7: Build Wealth and Give
I like to say, “The best part about making money is being able to give it away.” I also appreciate Dave’s rationale that one does not reach true financial peace until they are able to give back. Giving should be an essential part of everyone’s life. Many strategies can be implemented to achieve this and continue to grow and protect the assets you have worked hard to save your whole life. We can help build and manage a portfolio to maximize your giving while minimizing your taxes.
The steps are designed to help you be intentional with your money and build good habits, but many people need a little extra push to get started, and that is where a financial coach can step in and help. At Whitaker-Myers, we have a financial coach on staff specializing in Baby Steps 1-3 to help you tackle debt, learn budgeting techniques, and help you save for your emergency funds; contact her today if you need help in these areas. If you are in Baby Steps 4-7 and looking for advice, please contact me, Kelly Kranstuber, or any of our other advisors here at Whitaker-Myers Wealth Managers.
Author: Kelly Kranstuber