Have you ever heard of Dave Ramsey’s Baby Steps? The theory behind it is simple – follow the baby steps to become a millionaire. All you have to do is save up an emergency fund, pay off all your debts, and then voila! You’re wealthy! So how come all of Dave’s followers aren’t millionaires? Because the psychology behind it is where things gets tricky; and where most people fall off the wagon.
These baby steps take years to complete for most people and require total dedication if you’re trying to do them as quickly as possible. This means that every last penny that isn’t going towards a bill goes towards debt repayment. Let’s break it down:
Baby Step 1: $1000 Emergency Fund
How quickly can you save $1000? Let’s say you are able to save $100 per paycheck and you get paid biweekly. That’s $200 per month. It will take you 5 months to save this emergency fund.
Baby Step 2: Pay off all Debt
Okay, this one can vary GREATLY from person to person. But just for our purposes, let’s keep it simple. You need to pay off $25,000 in debt. If you can afford to put $500 per month on your debts, you can have this paid off in 50 months. That’s just over 4 years. ($25,000 / $500 per month = 50 months = 4 years and 2 months).
Baby Step 3: 3-6 Month Emergency Fund
Let’s just say you’re in the same place you were in life on step 1. If $1000 covered you for one month, we will say that $6000 will cover you for 6 months. It took you 5 months to save $1000, but now you have no debt! So you can put the $200 per month you were doing in Step 1, PLUS the $500 you were putting towards your debts into this emergency fund. That’s $700 per month. It will take you roughly 8.5 months to save $6000. ($6000 / $700 per month = 8.5 months).
Only NOW does Dave recommend you start investing in your future. But if you were able to follow along with our rough estimates, we are now nearly 5 years and 3 months into our debt repayment journey.
If you can do this, I commend you.
But life is short. Did you get married in this timeframe? Have a honeymoon? What about all those birthday parties for your kids? What about the anniversary that you want to celebrate with your partner, because after all these years it’s a big milestone? Do you see now how debt ends up taking most people DECADES to repay?
This is where money psychology comes in. You can’t be “on” all the time. Dave’s followers refer to the debt repayment process as having “gazelle intensity”. It takes work. It takes a LOT of work to stick to something this impactful.
But I’m here to tell you: YOU CAN DO BOTH! You can stick to this (or any!) plan, be money conscious, actively contribute your extra income to your goals AND celebrate life’s milestones and make time for drinks with a friend.
What’s the secret?
Balance! Don’t go out every night. Don’t spend $300 on dinner and drinks when you could have a great time with the same company (whether that be your partner or friends) for $75! Shop at the dollar store for decorations for your child’s birthday party – decorations that you’re just going to throw away anyways! Cut some spending in other areas so that you can allocate the money to something else.
Then prioritize.
Do you really need to “treat yourself” today? Or would you rather use that $100 to help pay down your student loan? What if you use $75 to pay down your loan and $25 to get yourself a bottle of wine and instead treat yourself to a (free!) bubble bath?
Actively thinking about where your money goes will help to keep you on track. It’s so easy to hand over your debit card. It’s easy to think “eh, it’s only $15”. But $15 here and there adds up quickly. If you’ve ever received your credit card statement just to go “WHAT did I spend all that money on?!” then you know the feeling.
So the secret to paying off your debts quickly is simply to be aware of where your money is going. Figure out your budget. Decide how much you have left over at the end of the month (or paycheck, or week – whichever works best for you). Then, figure out how you will divvy it up. How much can you dump on your debts to get them paid down? What will that leave you to have fun with? Try to put your debts first and your fun second…but make sure you’re leaving room to live your life! Just know that for each amount you spend on fun, it will take you that much longer to pay off your debts.
Use this FREE tracking tool to visually map out where your money goes and help keep yourself on track!
In an upcoming post, we’ll discuss how having a partner could keep you on track (or derail you completely!), and how to best open the door for that conversation.
Picture taken from: https://www.ramseysolutions.com/dave-ramsey-7-baby-steps?snid=products.pay-off-debt-and-build-wealth.ramsey+.the-7-baby-steps