Taking Baby Steps to Get Out of Debt

Everybody needs a plan. The start of the New Year is always a good time to start something or to get reinvigorated and move in a different direction.

baby-stepsNationally-syndicated radio talk show host and financial expert Dave Ramsey advises clients and listeners to get out of debt first and foremost, then build wealth. His is one of the simplest, most effective budget approaches, and nearly anyone can follow it.

Who is Dave Ramsey?

Dave Ramsey is a trusted voice on money and business, a personal money-management expert and extremely popular national radio personality. His seven best-selling books –Financial Peace, More Than Enough, The Total Money Makeover, EntreLeadership, The Complete Guide to Money, Legacy Journey and Smart Money Smart Kids – have sold more than 10 million copies combined. OK, I’m listening…

Building a new future with money is a lot like building a home. You don’t add the roof until you’ve finished framing, and you don’t frame until the foundation is secure.

On his website, Ramsey explains what he calls the “7 Baby Steps” as a journey to debt control and ultimately living debt free. These steps happen in order, and include:

  • Start Emergency Fund
  • Pay off Debt
  • Build Emergency Fund
  • Invest <– Our favorite
  • Save for College (if applicable)
  • Pay off Mortgage
  • Build Wealth and Give to Charity

There is a reason Dave put these 7 steps in this order.

Your emergency fund is your backup plan. A safety net when something happens that you weren’t planning on. We all need this fund. It’s for those unexpected things that happen when you’re not looking. Dave says to start with $1,000. This way, you’re covered for the little curveballs life sometimes throws your way.

It sure is easy to say “Pay off debt”, but it’s oftentimes a huge hurdle to get yourself over. This “baby step” is near the top of Dave’s list for a reason. He suggests paying off the smallest debts first, then working toward larger ones. According to Ramsey, “When you start knocking off the easier debts, you’ll see results and stay motivated to dump your debt.” Sounds good to me.

Next comes building your emergency fund to cover you for 3-6 months or more. Ramsey says that $10,000 to $15,000 is a good target. This step is very important. Many people lose their steam and motivation after step 2, but it is important to push to a healthier emergency fund.

Investments, college fund, paying off your mortgage, and ultimately building wealth are the last items on the list.

But let’s take a look at #4 – Investments. That’s why you’re here, right? Dave says it’s important to “spread the money across four types of mutual funds: growth, aggressive growth, growth and income, and international. Even a couple hundred dollars a month invested now can make you a multi-millionaire.”

Smart strategies and a good trading foundation will help you in this step. Understanding how to trade is more important than trading. You are not just trading stock, you are building your future.

Check out all 7 steps here