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    Dave Ramsey's 7 Baby Steps Financial Guide of Getting Out of Debt and Becoming Wealthy

    Many people out there are always trying to figure out how to get out of their debt and become wealthy. They tiredly work so hard in their job but felt like they are going nowhere financially. Dave Ramsey, who is a financial mentor that wrote a book which title is "The Total Money Makeover: A Proven Plan for Financial Fitness" had inspired many on how to get out of debt and become wealthy. Before he became a financial guru, he went through the same mistakes many people go through, which is to use debt. At the age of 26, Dave Ramsey was a millionaire who used leverage (debt) to finance his real estate investment strategy. He has a real estate portfolio asset of $4 million dollars, which $3 million dollars of the asset is financed with debt. However, he lost everything two years later. He had to downgrade his financial lifestyle and felt humiliated for his downfall. It was a very tough moment for his life, which eventually changes his perspective of how he wants to live later life. He eventually worked his way out of his financial problem and became wealthy again (has a net worth of $240 million as of 2019). Now he became a multi-millionaire personal money management expert that mentors many people the problem of using debt as a tool through his talk show host and TV personality. Moreover, he has helped many people to get out debt through budgeting and invests gradually to build wealth.

    I read his book and often listen to his radio talk shows on YouTube. I had learned a lot about how many Americans are stuck in debt and have difficulty getting out of the rat race. His book preaches about the simple 7 Baby Steps technique that many can easily follow to get out of debt and build wealth. Following his technique to get out of debt and acquire wealth is not a get quick rich scheme, but discipline steps that people need to follow. People who are wealthy didn't become a millionaire overnight, but through discipline spending habits, budgeting, and of course, frequent investing. I felt his teachings in his books and radio talk shows on YouTube are excellent for people who are sick and tired of being lost financially. Anyways, I know some readers here don't want to go through the hassle to read his book. Because of that, I want to point out the 7 Baby Steps that Dave Ramsey preaches that help many people get out of debt and build wealth.

    Baby Step 1 - $1,000 to start an Emergency Fund
    Dave Ramsey calls this step as the "Baby Emergency Fund". He recommended people to save up $1,000 in their checking account before starting tacking their debts. So when you are still in the Baby Step 1 phase, just pay the minimum required for all the debt accounts you have. After having $1,000 saved, you can continue to tackle those debts later on. Some might argue that it's silly to start saving $1,000 in the bank, which could be put towards paying your debt, but this emergency fund technique has good logic behind it. People had gone through unexpected events that require them to use money as an emergency. Events such as car broke down that require repair, or sickness that requires medical fee require money from an emergency fund.

    The one thousand dollar emergency fund enables people not to use credit cards ever again. This is a first step to develop habits of paying things with cash (debit card) and not use credit cards for any purchases. In addition, a person who stays using credit cards to purchase things tends to keep using it when there is an emergency and have a difficult time not to use it. When a person pays things in cash, they have a harder time to spend on things compared to swiping bills with the credit cards since it is so much simpler and tempting. Having the habit of using the money you have (debit card) and not rely on to borrow money from credit card gives a person the discipline of budgeting in the future.

    I personally like this technique since I myself don't have a credit card but rely on my debit card (cash) to pay for things. I felt that paying things with money available in my debit card helps me know how much I should spend and limits me from overspending. Besides, a debit card has the same functionality a credit card has, except you can only use the money available in your bank account. Moreover, I don't have to go through the hassle of paying the credit card fees that might be a charge to you if I don't pay on time.

    Baby Step 2 – Pay off Your Debt Using Debt Snowball Method
    The debt avalanche, which is to have a person pay their debt according to the debt with the highest interest rate, will save money in the long run. However, using the debt snowball method can be a better choice for people. Okay, let me explain this method first. The Debt Snowball method is a debt reduction strategy in which you start paying off the smallest debt account first to the largest debt account, gaining the momentum as you tackle out each balance. In the first step, you are required to list down all the debt you owe from the smallest to the largest. You will then start paying the smallest debt balance in as much as possible while paying the minimum payment on the rest. Then again, when the smallest debt account is paid in full, you start paying on the next smallest debt balance. In theory, by the time the final debts are reached, the extra amount paid toward the larger debt will grow quickly, similar to a snowball rolling downhill gathering more snow.

    So why use this method if the debt avalanche can save more money in the long run? The reason is it keeps people motivated and stay in course with their journey of getting out of debt. When you place to focus on tackling those debts step by step, it gives you the momentum to not quit. You want to be able to walk before you start to run. Being able to mark off those smaller debts first motivates a person to keep going on to pay off the next debt balance. 

    I personally didn't have to go through this step of paying down my debts since my parents brought me up teaching about the danger of using debt. When you have debts, you are enslaved to pay the lender (master) until you finish paying it off. I'm glad that I learned about the consequences of using debt early in my personal life. My dad has always stayed away from debt since the beginning journey of his career life. He always prefers to have money saved up before purchasing things instead of using credit to finance it. 

    Even in the world of business, he stays away from using debt because he felt that during market turmoil, debt could cause financial damage to a company when sales are down. Having no debt in a business gives the ability for the entity not to have to worry about monthly interest expenses, which can help prevent a company from going bankrupt during a recession. I personally think that using the debt snowball strategy to pay off your debt is an excellent strategy for people out there who want to get out of debt. I felt that the step by step momentum encourages a person to focus on paying off their debt.

    Baby Step 3 – Additional Emergency Fund (3 to 6 Months of Household Expenses) 
    After finishing paying off your debt aside from your mortgage debt, you are ready to go with the Baby Step 3. In this step, Dave Ramsey suggested a person save additional funds to their emergency fund. You want to save up three to six months' worth of household expenses. It might seem intimidating to save that much money; however, it is not that difficult if you have followed Dave Ramsey's Baby Steps. Since you have finished Baby Step 2, which is to pay off your debts using the debt snowball method, you won't have debt expenses charging you. The only debt payment you'll have to pay should be your mortgage. You can use the money you used to pay off your debt in Baby Step 2 to accumulate additional savings to your emergency fund.

    three to six months emergency fund will keep you and your family protected if things go sour in your life, such as having layoffs or fired from your job. In addition, you will have an extra buffer against major financial emergencies giving you time to find a solution if a crisis occurs. Since you have this strong foundation of an emergency fund, you don't have to back to your old way of using your credit card to pay off the expenses. Developing this saving habit will make you into becoming a great saver. Moreover, it makes it easier for you to save for big things such as car or things expensive items you want to purchase in your lifetime. 

    I personally love Dave's strategy of having an additional fund for emergencies. I have money that I keep in my bank checking account in case anything bad occurs so that I don't have tap into my Dividend Growth Portfolio and my other Investments. I'm fortunate that I still live with my parents even though I'm considered as an adult. Living with my parents help me save living costs and expenses. Aside from saving cost, it gives me the ability to have a closer bonding with my parents, especially my dad, since I still have to learn the business traits to running his company. Most importantly, I'm able to take care of my dad and my mom when they are old and require my support the most.

    Baby Step 4 – Maximize Your Retirement Fund
    Not only you pay off your debts but also have a strong foundation of emergency funds (3 to 6 months of household expenses), you can now start investing your money towards financial freedom. Dave Ramsey suggests maxing out your retirement fund. For Americans living in the United States, you are allowed to fund a maximum of $18,500 a year for 401(k) and $5,500 a year for IRAs. Dave suggested saving up 15% or more of your monthly income to your retirement fund. For those out there who work in America is able to invest beyond your IRS limits, then you should go for it. A person whose age fifty and over are able to add more cash to their retirement accounts. So make good use of this opportunity. Maxing out your retirement investment account helps ensure your golden years will be secure. The more you save, the more money you will have during your retirement.

    I'm an Indonesian resident, so I'm unable to have these facilities, such as 401(k) and IRAs, which most Americans have excess to. However, I was fortunate enough to be able to have my own stock portfolio that has a pool of dividend growth stocks in the United States. I'm able to allocate the rental money I received every month from renting my parent's house to add additional funding to my stock portfolio. My stock portfolio in the United States is somewhat like my retirement fund for me to use when I get old. 

    I love the fact that I'm able to link my stock brokerage account to my bank checking accounts so that when I'm ready to use the dividends from my portfolio, I can easily transfer it to my bank checking account. I want to be able to go and have a good long comfortable vacation when I'm in the United States. With my portfolio, which later will help me fund my living expenses in the United States, I will be able to do that with no difficulty. My dream is to be able to purchase a two to five-year-old sports car and drive it happily in the United States (San Francisco to Los Angeles). 

    Baby Step 5 – College Funding for Your Children
    When your children grow to adulthood, you want to be able to pay for their tuition fees. As a parent, I'm pretty sure you want the best for your kids. However, remember that going to college doesn't guarantee success for your kids. Dave Ramsey goes into great detail when comparing about calculating the cost versus the benefit of college. You should understand this before you send your adult children to college. There are many ways to start a college fund, and Dave recommends saving for your children's college tuition through the following three tax-favored planed. 

    The first is called Education Saving Account (ESA) or Education IRA. An ESA allows you to save $2,000 (after tax) per year, per child. The plus point is that it grows tax-free! If you start saving $2,000 when your child is born, 18 years ahead, you will invest a total of $36,000. While the rate of growth return is based on the investment in the account, you will gain a higher return with an ESA than you would with a regular saving account since you don't have to pay taxes when you withdraw the money from the fund to pay for college tuition fee. However, one negative thing I dislike about this method is because you are only limited to contribute a maximum of $2000 per year.

    The second plan is called the 529 Plan. If you don't meet the income limit for an ESA, then a 529 Plan could be a better option for you. You should look at the funds you want to invest in through the account. Dave addresses that the 529 plan would freeze your options or automatically change your investment based on the age of your child. The right way of 529 plans will give the option to change the beneficiary to another family member. So if your firstborn child decides not to go to college, you are able to use the fund for the next kid. The reason why the 529 Plan can be favorable is because of the funding contribution you can put (varies by state, but generally, you can contribute up to $300,000). Also, you also don't have to pay the taxes on the growth of the fund.

    The third plan is called UTMA or UGMA (Uniform Transfer/Gift to Minor Act). This plan is different from ESA and 529 Plans because it's not designed for just education savings. The account is in the child's name but is controlled by us parents until the child reaches adulthood of age 21 (age 18 for UGMA). By that time, the child can decide what to do with the fund, either for their education or something else. The reason why I liked this plan is that the fund can be used not only for education but also for different opportunities such as businesses the adult child might want to start.

    Since I'm an Indonesian citizen, I don't have these facilities as many American does. I was able to study at San Francisco State University in the United States because my parents have provided a financial contribution to my college tuition. I am fortunate to able to study abroad since earning income in my country is really difficult. My dad has prepared financially for my brother and me to have the best education we can have. I do have some tips if you want to save cost for your degree. As for me, I did go to community college (City College of San Francisco) to complete general classes required before taking classes for my finance major. It takes me close to two years to complete most of my general classes when I was still in community college. The reason why I recommend people to go to a community college before entering university is because tuition fees for community colleges are much cheaper compared to universities. Furthermore, the classes you take in community college are transferable to the university you want to attend.

    As an Indonesian citizen, I don't have the savings facilities like many Americans have excess to for their children. However, that does not stop me from wanting to have my children to study abroad in the United States. In the future, I want to give my children the same educational experience that my parents gave me when I was young. Instead of using these government facilities that most American is provided, I have to do it on my own. By building a Dividend Growth Portfolio using my E-Trade Brokerage account in America enable me to save up and invest for my kids' future. I hope with my investment strategy and hard work, I can provide the best for my children if I have one. Currently, I am still single and do not have the responsibility like others who already became parents. So I still have a lot of opportunities to grow my career as well as my wealth before I am settled with the one. I want to be financially secure before I start a family of my own because I want my kids to live happily and not to worry about money.

    Baby Step 6 - Pay off Your Home Mortgage
    So you have work your way through this stage by paying off your consumer debt and have a fully-funded emergency fund. You are contributing 15% or more of your income towards retirement. In addition, you are also preparing for your children's college tuition cost so that when they reach adulthood, they are able to get the right education for their career path. So what's next? In Baby Step 6, it's time to pay off the mortgage you owe for your home. Can you imagine being mortgage-free? Imagine you don't owe anybody any more money since you've created a solid budget to be where you are right now. You are able to take extra funds, including the money that you use to pay towards your debt snowball and money towards the emergency fund and have them a place to pay towards paying your mortgage. I recommend getting it paid off as soon as possible. Put any extra money you receive, such as gifts, tax refunds, work bonuses, overtime pay to finish paying towards your mortgage loan. Please do not spend the money to buy stuff; instead, use it to get the mortgage debt gone. The less interest you pay to the bank, the more money you will end up having.

    I personally don't have a mortgage to pay since I'm still living with my parents. I'm fortunate that my parents have a beautiful house I can live in. My dad has built the house from scratch with the design he really likes (classical design). I won't even call it a house since it's considered more like a mansion to most people. The place is pretty big that with me living there, there will be available room for my children. It has docks that enable my dad to park his toys (yachts) behind the house. The house has its own elevator allowing anybody to go up or down without using the staircase. 

    The house is already paid off a long time ago by my parents; however, I still dream of having my own place one day. Even though my dad's house looks beautiful, I have a different taste of design. I like a house that has minimalist modern design while my dad's house is considered a classical design. It's just a taste preference, but living with my parents, for now, helps me get closer to financial freedom as well as quality time with them. I already have spent the majority of my childhood away from my dad since I was living abroad for my education. My dad and mom are not getting any younger but older as of the year's pass. This is the reason why I still want to live with them for now. Anyways, if you finished doing Baby Step 6, you will then go to the next baby step.

    Baby Step 7 – Build Wealth and Be Generous
    Finally, Baby Step 7. This is where you want to reach since it is the best step. You don't owe money to anyone, and this gives the ability for you to create wealth. Having no debts, have a house that you own completely, you can utilize your earnings into building serious wealth. The wealth can be in many forms, such as stock portfolio, mutual funds, or it can be another real estate that you can rent out. Since you live like no one else before, now you are able to live and give like no one else. Imagine how it feels when you are able to let your loved ones or others inherit the wealth you have built. That's all possible now because you have sacrifice years of hard work, discipline, and dedication to getting out of debt and create the wealth you always wanted. The financial goal now is to put as much money as possible toward whatever you always dream of. It could be leaving an inheritance for your loved ones or the community (philanthropist), maybe it could be able to travel the world. Or it might mean building your dream home.

    I personally think that my dad is at the phase where he can enjoy the wealth he had built since young. He has his dream toys, such as his yachts and a beautiful house that is fully paid for. He is enjoying his golden years by being able to do whatever he likes doing. For example, fixing his toys, renovating his house to the style he likes. In addition, he has been generous to many and has helped the one who needed the most. Even though I'm debt-free and have already built some wealth of my own through stock investment, I personally feel that I haven't reached this goal in my life. I am able to be where I am right now because of my parents' support, which helps me to be debt-free and owning some wealth through my dividend growth portfolio in the United States as well as in Indonesia stock brokerage. My dad has built a business that generates good income for the family, and he has built his wealth from his hard work and dedication. My dad built the trees a long time ago for my brother and me to live comfortably right now. I will not be where I am today if it's without my parents. Since I'm still young and have a dream of accomplishing more in life, I want to make more income of my own that is built by myself and not because I was given from my dad. I'm happy that my dad didn't spoil me by giving me much salary for working in his company. This gives me the drive to work harder and find a solution to increase my income independently.  

    I hope from this article, you readers understand more about Dave Ramsey's 7 Baby Steps philosophy to get out of debt and guide to financial freedom. Most wealthy people who are millionaires or billionaires didn't end up the way they are overnight. Getting out of debt and creating wealth is not a short journey, but a long journey of dedication, discipline, and hard work. 

    Just follow Dave's 7 Baby Steps one step at a time, and you can reach the financial goal you always wanted. Many people had managed to get out of debt completely and build wealth by following his guide. I believe the process of getting out of debt and building an emergency fund helps people develop the foundation of not taking loans from credit cards. 

    I personally like his methods because I have seen his methods work in real life. My dad, who was once poor, had become considered successful today, had followed principles similar to Dave Ramsey's 7 Baby Steps. My dad was able to provide the finance for my brother and me to have the education and live comfortably abroad. I believe Dave Ramsey's 7 Baby Steps will work for anyone who is willing to change their financial habits in order to achieve the goal they always wanted. Some might argue that Dave Ramsey's method is time-consuming and require a long journey, but I believe the result will be rewarding in the future, and you won't regret it when you have completed all the Baby Steps that Dave Ramsey demonstrate. Remember, if you live like no one else, later you can live and give like no one else. So, I hope you readers will start doing something about your finances. 

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