The 7 Baby Steps Explained - Dave Ramsey

[Music] so george 30 years ago when i started teaching this stuff i was first teaching people how to get out of debt live on a budget be generous live on less than you make so you have a plan you avoid debt you save money for emergencies and later for investing and all of those principles work but people kept saying which one do i do first and so i started laying out well you should do this first and that first you should have an emergency fund before you start your 401k and uh then i figured out

it's easier to have an emergency fund if you don't have any payments and so you need to get out of debt first because of course i learned my lesson the hard way going bankrupt and getting out of debt and learning how important it was to be debt free as a process as a part of building wealth so all of that started to formulate after a few years of teaching in various settings and what became financial peace university it used to be called life after debt and it started becoming what we now call the baby steps

the interesting thing is that now the baby steps have gone into the total money makeover book which has sold almost 10 million copies and they have become the proven plan the shortest distance between where you are now and wealth where you are if you live like no one else later you can live and give like no one else what is the shortest distance and we need a path to run on because the way you eat an elephant it's overwhelming do i do my 401k with the match or my kid's college or do i have an

emergency fund or do i pay on this 18 credit card debt or or or or or and nothing gets done you get paralysis of the analysis you get frozen absolutely and this step these baby steps have worked for me they've worked for millions and it's really simple if you do it they work and it all starts with baby step one having this foundation saving one thousand dollars for a starter emergency fund this is just a small buffer between you and life before we start tackling the debt exactly and if you have a thousand dollars already

great just set that aside that's your baby step one any money you have that's not retirement anything you can sell that is not retirement you're going to liquidate it if it's not retirement you've got some stock over here that grandpa left you you got a gold bar under your bed i don't know what it is but you got any money that's above a thousand dollars maybe you've got ten thousand dollars a savings account that's nine thousand dollars you've got that you don't need past baby step one we're going to put it all on baby step

two and baby step two is the famous one that's the debt snowball where you list your debts smallest to largest you pay minimum payments on everything but the little one and you attack the little one with a vengeance side note baby step one should not take you more than 30 days maximum you need to work extra sell some stuff have a garage sale put the kids on craigslist whatever you got to do here let's get it done and you know we're going to get busted into this get a thousand bucks quick baby step two you

should be debt free but your house now you may have to sell a stupid boat uh you may have to take an extra job but most people that have followed the total money makeover baby steps in financial peace university are debt-free inside of two years yeah and that's with doing it with some gazelle intensity like you talk about in financial peace university and once you pay off all that debt now you've freed up all those payments right you have that income about what it'd be like to have no payments but a house payment wow we're

breathing easy and then we can move on to baby step three where we save three to six months of expenses in a fully funded emergency fund this is the final buffer where we say we're never going back into debt because we are the bank now yep grandma's rainy day fund why it's gonna rain dave you need to be positive i'm positive it's gonna rain you need to be ready when crap happens there's a pandemic coming around every corner there's something coming and if you have 20 000 cash in the bank three to six months of

expenses whatever it is and you have no payments you are the third pig in the three little pigs the one that's in the brick house when the big bad wolf comes you're ready for life you're ready to go now you're ready to build wealth but that you just now have gotten up to ground zero you've just now gotten up to even when you have that emergency fund and you're debt-free now you're ready to build wealth and baby step four you put 15 of your income aside into good growth stock mutual funds in retirement plans start

where there's a match beyond the match always do roth and if you've exhausted roth and match and still are not to 15 then go on to a traditional 401k or ira but do roths before traditional and do match before roths it's mathematically in your favor to do that up to the fifteen percent don't do twenty percent don't do eleven percent do fifteen percent while you are doing baby steps four you're also gonna be doing five and six simultaneously absolutely so baby step five is where we're saving for our children's college fund and this is gonna

look different for everyone there's no set number here because it really depends on your situation did you have the baby last week or is the baby 18. that makes a difference on how much you need for college right what you got to do for college it's like is this an oh crap moment or hey we're going to be diligent and safe did we wait almost until too late now they have to go to college debt-free they cannot participate in this epic student loan system failure that is called america right now it is horrible out there

do not let your kids go in debt you do not have to go to debt go to community college for free for two years go go to in-state school work six jobs get scholarships our student loan problem is a parenting problem mom and dad let kids sign up for crap they couldn't afford bad mama bad daddy they gotta have the conversations that's where it starts and there's a reason you say baby step four invest for yourself before the kids because there's a hundred percent chance you're going to retire there's a 50 50 chance or less

these days that your kid's going to go to college and graduate yeah yeah this is this less than 50 chance they're going to graduate so uh that this is important so while you're doing 15 percent you do whatever you need to do for your kids college whatever you decide to do for your kids college beyond that if you can find any money you do that on baby step six and that's pay off your house start chunking on the house now when you're in one through three you are so intense your friends are freaking out your

grandmother thinks you need counseling you are gazelle intense like a gazelle running from a cheetah when you're in four through seven you're not intense anymore you are now intentional you're just doing it on purpose but you're no longer on beans and rice your own beans and rice rice and beans scorched earth on one through three two you get those three things done now get that house paid off the average person following this stuff is paying off their home in about seven or eight years now that tells us that the whole program is taking about 10

years and the average baby steps millionaire the average everyday millionaire that we've studied we're finding them become a millionaire from the time they start with intensity followed by intentionality become a millionaire in about 10 and a half years yeah 11.2 years 10.6 years are the two numbers we keep running into so this is completely possible yeah and once you pay off that house it's time to build wealth and give outrageously in baby step seven that's where it ends yeah you will be a millionaire shortly after your home is paid for if you don't at that

moment and and then you continue to build wealth and you you raise your generosity and you continue to build wealth and you raise your generosity and you enjoy the money that's where it gets fun the only three things you can do with money and you should do all of them at baby step seven and that's the route you're going that's where you are that's who you are that is the baby steps