Can you use Dave Ramsey’s Baby Steps to reach FIRE?
Dave Ramsey is a well-known financial guru and radio host who developed a set of principles and strategies for getting out of debt and building wealth. These are known as the “baby steps,” and they have helped millions of people take control of their finances and achieve financial freedom.
The baby steps are designed to be taken in order, with each step building on the previous one. Here’s an brief overview of each of the seven baby steps:
- Save $1,000 for a starter emergency fund. This fund is for unexpected expenses like car repairs or unplanned life events. It’s important to have some money set aside for these kinds of expenses so that you don’t have to go into debt when they happen.
- Pay off all debt (except the mortgage) using the debt snowball method. The debt snowball method involves paying off your debts in order of smallest to largest, regardless of the interest rate. This helps you get quick wins and build momentum as you tackle your debts one by one.
- Save three to six months of expenses for a fully funded emergency fund. Once you’ve paid off your debts, you should build up your emergency fund to a more substantial amount. This will give you a financial cushion in case you face a major emergency like a job loss or unexpected home repair.
- Invest 15% of your income into retirement accounts. It’s never too early to start saving for retirement, and Ramsey recommends investing 15% of your income into retirement accounts like 401(k)s or IRAs.
- Save for your children’s college education. While saving for retirement is important, you should also consider saving for your children’s education. This can help ease the financial burden of paying for college and allow your children to focus on their studies.
- Pay off your home mortgage early. Once you’ve taken care of your other financial goals, Ramsey recommends focusing on paying off your mortgage early. This can save you thousands in interest and help you build equity in your home more quickly.
- Build wealth and give generously. The final baby step is to focus on building wealth and giving generously. This might involve investing in stocks or real estate, starting a side hustle, or simply living below your means and saving more of your income. Whatever you choose to do, Ramsey encourages people to give back and help others as they build wealth.
Overall, the baby steps are a simple and effective way to take control of your finances and achieve financial freedom.
Criticisms of Dave Ramsey’s baby step approach
Like any financial advice, Dave Ramsey’s baby steps have both supporters and critics. Some people find the baby steps to be a useful and effective way to take control of their finances and achieve financial freedom, while others have raised concerns or criticisms.
One criticism of the baby steps is that they may not be suitable for everyone. For example, some people may not be able to pay off their debts in the order suggested by the debt snowball method, or they may have other financial goals that take priority over saving for retirement.
Another concern is that the baby steps may not adequately address the complexities of personal finance. For example, the baby steps do not address issues like saving for long-term care or dealing with unexpected medical expenses.
Something else to bear in mind is that Dave Ramsey’s approach to investing is often criticised by financial professionals. Ramsey generally advises against investing in stocks and instead recommends investing in low-risk, fixed-income investments like mutual funds and index funds.
While these investments can be a good choice for some people, they may not provide the same potential for long-term growth as a well-diversified portfolio of stocks.
Overall, it’s important to carefully consider any financial advice, including Dave Ramsey’s baby steps, and determine what works best for your individual circumstances. It’s a good idea to consult with a financial professional and develop a personalized financial plan that meets your specific needs and goals.
How can you use Ramsey’s Baby Steps to achieve FIRE?
Financial Independence, Retire Early (FIRE) is a movement that aims to help people achieve financial independence and retire early by saving and investing a high percentage of their income.
You can play around with our FIRE calculator to get an idea of the numbers you might need to save up and what age you’ll be able to retire at.
The Dave Ramsey baby steps can be a helpful framework for achieving FIRE, as they focus on building a solid foundation for financial success and setting long-term financial goals.
Here’s how the baby steps can help you achieve FIRE:
- Saving $1,000 for a starter emergency fund: This step helps you establish a basic safety net in case of unexpected expenses. Having a small emergency fund can give you peace of mind and reduce the likelihood that you’ll have to go into debt to cover unexpected costs.
Getting together a small emergency fund is a great first step on anyone’s FIRE journey.
- Paying off all debt (except the mortgage) using the debt snowball method: Paying off debt is a crucial step in achieving financial independence, as it frees up more of your income to be saved and invested. By using the debt snowball method, you can work your way through your debts one by one and build momentum as you tackle each one.
- Saving three to six months of expenses for a fully funded emergency fund: A fully funded emergency fund is an essential part of any plan for financial independence. It provides a financial cushion in case of unexpected emergencies, such as a job loss or major home repair, and helps protect you from having to go into debt.
- Investing 15% of your income into retirement accounts: Investing in retirement accounts is a key part of building wealth and achieving financial independence, especially if you want to retire early. By investing 15% of your income, you can start building a nest egg that will provide a source of income once you retire.
If you find you’re not able to save once paying all your outgoing expenses, and you feel like you’re already being frugal and mindful with your spending, it might be that you need to look into building extra income, whether through traditional work or side projects.
- Saving for kids: If you have children it might be important for you to be able to help them with their education, this step can help with that.
- Paying off your home mortgage early: Paying off your mortgage early can save you thousands in interest and help you build equity in your home more quickly. Getting rid of your mortgage breaks down a huge barrier between you and financial freedom. This can make it easier to achieve financial independence and retire early.
- Build wealth and give generously: The final baby step assumes you’ve reached a state of financial independence where you can now focus on building wealth and giving generously.
Following Dave Ramsey’s baby steps is a good way to plan for getting out of debt and improving your finances. It may not give the perfect framework for achieving FIRE, but it can give you some simple steps to help you work towards financial stability. Getting good at managing your finances is one of the key pillars of working towards achieving FIRE and retiring early.