Perhaps you’ve heard of author Dave Ramsey’s 7 Baby Steps for money. When I first read his book The Total Money Makeover, these simple, concise baby steps became the framework for my own financial future.
Here’s a recap of Dave Ramsey’s 7 Baby Steps:
BABY STEP 1 – Save $1,000 for emergencies.
BABY STEP 2 – Pay off all debt using the debt snowball method.
BABY STEP 3 – Save 3 to 6 months of expenses for emergencies.
BABY STEP 4 – Invest 15% of your household income into Roth IRAs and pre-tax retirement funds.
BABY STEP 5 – Save for your children’s college fund.
BABY STEP 6 – Pay off your home early.
BABY STEP 7 – Build wealth and give.
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Over time, however, my priorities shifted. For example, I felt it was important to save money in a dedicated vacation savings account so my family and I could enjoy time together and make special memories.
I also connected with thousands of people who participated in the January Money Diet, and learned more about the common challenges and hopes many of us share about money.
With apologies to Mr. Ramsey, I’ve rearranged his list a bit and added a few more steps–including the all-important vacation account.
My 11 Steps to Financial Freedom
Step 1: Give what makes you happy.
As we explored on the very first day of the January Money Diet, there’s a beautiful, mysterious paradox between giving and receiving. The more we give, the happier we are and the more abundant our lives become.
Giving is something we can do even when money is tight. We can share what we have, do favors for others, give away things we no longer need, brighten someone’s day with an encouraging word, and so much more.
Step 2: Learn everything you can about finances, investments and the stock market, and read a great money book (or two).
Here are a couple of books that have inspired me develop better money habits:
“Your Money or Your Life” by Vicki Robin and Joe Dominguez was recommended by a former JMD participant, and it quickly became my favorite financial book. Through a series of essays and questions, the authors challenge us to delve deep into our spending habits and consider what we might be sacrificing by our lifestyle choices. Their message of money mindfulness resonates with me so much.
“The Simple Path to Wealth: Your road map to financial independence and a rich, free life” by J.L. Collins demystifies saving and investing, and will help you develop a clear plan for your financial future. This book is often cited as a path to the FIRE lifestyle; the acronym stands for Financial Independence Retire Early. As Collins writes, “Stop thinking about what your money can buy. Start thinking about what your money can earn.”
Step 3: Start an emergency fund and build the balance to $100. This will be the beginning of the end of money worries.
Step 4: Start a separate Freedom Account to accumulate money for large annual bills like HOA fees or homeowner’s insurance. Save 1/12th of the total amount needed each month. If you don’t have any large annual bills, move on to Step 5.
Step 5: Fund your emergency account with $1,200, or an amount you feel comfortable with to cover an unplanned surprise like a busted hot water heater.
Step 6: Start a separate savings account for a vacation fund.
I don’t believe in waiting until retirement to enjoy your money and family time. Vacations are important! Having money set aside for a relaxing break is the best, and will eliminate the temptation to put vacation expenses on credit cards.
Step 7: Pay off your credit cards, lines of credit, student loans and other unsecured debts.
Step 8: Build 3 to 6 months of living expenses in savings.
Steps 9, 10 and 11
The order of these steps is up to you, and will vary depending on your age, family and priorities.
9,10,11: Invest in a tax-advantaged retirement account, automatically contributing a percentage of your income that fits your future goals.
9, 10, 11: Pay down — until you pay off — the principal balance of any home equity loans and your home mortgage.
9, 10, 11: Save for your children’s future education, which doesn’t necessarily mean a four-year college. Maybe your child will want to go to trade school, or get culinary training, or learn a craft. Scholarships, grants and self-funded education are all future possibilities, too.
How About You?
Are there any steps you’d add to my list?
Which baby step are you currently working on?
Do you have any of your own tips for achieving financial stability to add to the list? Do you have any other good money books to recommend for solid financial advice? We’d love to hear your thoughts over at the Money Diet Community Facebook Group.