Dave Ramsey was one of the first “personal finance” mentors I came across. I was introduced to him when I first heard one of his interviews on the Success Magazine CD. The 7 baby steps prescribed by Dave was one of the game changers in my personal financial planning and set me on the path to financial discipline.
Have you had a feeling that you see a huge some of money hitting your account on the first day of month – but midway through the month you have just no clue where all of that money went. I went through something similar. Reckless spending, racking up credit card bills and before I knew I was scampering at the end of the month for some bridge finance to ensure I didn’t miss my home loan emi before the next paycheck got credited.
It was a vicious cycle I was trapped in for a long time. The credit card balances and friendly loans started piling up. All of this – while I still had a decent job with a more than decent paycheck.
Zero Base Budgeting
The first lesson I learnt was called zero based budgeting – figuring out where every single rupee you earned was supposed to go. This one simple exercise makes you super purposeful and allocating the end of use of each and every rupee of your paycheck beforehand – gave you extremely great insight on how you were spending your money.
Dave Ramsey’s 7 Baby Steps
Coupled with this lesson in budgeting – I came across these 7 baby steps from Dave Ramsey. The most fun ( in hindsight I can call it fun) from me was the second step – the debt snowball method. Just this one step went a very long way in putting my finances back on track. So here are the 7 steps for your benefit
Baby Step 1: Save $1000 for your starter emergency fund (Read INR 50,000 for desi folks)
Baby Step 2: Pay off all your debt (except) your house using the Debt Snowball method
Baby Step 3: Save 3-6 months of expenses in a full funded Emergency Fund
Baby Step 4: Invest 15% of your Household income for retirement
Baby Step 5: Save for your children’s college fund
Baby Step 6: Pay off your home loan early
Baby Step 7: Build wealth and Give
Dave Ramsey’s 7 Baby Steps
Debt Snowball Method
Most of the steps above are simple and self explanatory except perhaps – Step 2 – which warrants some more detail. Dave calls this the Debt Snowball Method. You are required to list all of your debts (except the house) from smallest to largest. The sorting is not according to interest rate/ cost of debt – but rather the size of debt. This is a very important distinction as this is not a mathematical exercise but a behavioral one.
Pay minimum payments on all your debt and whatever savings are left over are used to attack the smallest debt on your list. Once you’ve closed that debt, use the additional savings and start attacking the next debt in your list working your way up from smallest to largest. As you work on paying off your smaller debts first, you will have some quick wins which are extremely important from a psychological perspective to keep your motivated. This is actually where the fun begins and it becomes more like a game and you get charged up everytime you are able to make a significant dent.
For most Indians, these debts would generally include, credit card debts, personal loans, car loans and other friendly loans. For the most part – we are lucky not to be saddled with huge educational loans. This would atleast hold good for a vast majority of Indians.
Once you are free from the shackles of these debts- you can move ahead with vigour on your investment and home loan repayment goals.
Being Debt Free ofcouse is the end game and the sooner you get there, the sooner you can breathe the fresh air of financial freedom
Conclusion
Look at where you are today on the ladder of your financial journey. Start with Zero base budgeting and get started with your emergency fund. Let me know what you think about Dave’s Baby Step plan in the comments.
