Seven Steps to Financial Freedom
In previous episodes of Financial University, we’ve looked at some great strategies for achieving financial freedom. Things like getting out of debt, setting up an emergency fund, paying off your mortgage early, and saving for retirement. But you only have a finite amount of money, right? You can’t prioritise everything all at once, so where should you start? What’s the plan?
In this episode we’re going to take a look at Dave Ramsey’s Seven Baby Steps. Dave Ramsey is a personal finance expert from the U.S. and this is his time tested guide to building wealth. Let’s find out what these steps are and how you can apply them to your life.
1. Starter Emergency Fund
The first step is a starter emergency fund. This means saving up £1000 in a separate account to cover unexpected bills and expenses. Things like your car breaking down, or your employer getting your pay wrong, or a dentist bill. It might not cover every eventuality, but it will cover a good range of unexpected expenses, and it builds good habits of saving and setting money aside. And when you’re trying to pay off debt, it helps to prevent you getting derailed and sliding further into debt when expenses come up.
2. Pay off debt
The second step is to pay off all debt other than the mortgage. This includes credit cards, loans from banks, loans from friends and family, student loans, car finance, and any other debt you might have.
Dave Ramsey recommends the debt snowball approach, where you list the debts from smallest to biggest, and pay off the smallest first while keeping up on the minimum payments with all the others. Once the first debt is payed off, you take the money that was going to the first debt and use it to attack the next biggest debt. The idea of this is to build momentum, creating a change in behaviour that will see results quickly.
The key is to really attack this debt with all you’ve got. Lower your expenses, cut your spending, sell what you don’t need, until the debt is gone. Debt will rob you of your financial future, so kick it out of your life for good.
3. Full Emergency Fund
Step three is to save three to six months of your income in an emergency fund. We went in depth on this in June’s podcast episode, so take a listen to that if you want to know more.
Steps 4, 5, and 6 are a little different to the first three because they all happen at the same time.
4. Invest for Retirement
Step four is to invest 15% of your household income for retirement. Investing at this level for a significant amount of time can produce the sort of retirement fund that will enable you to live the way you want to when you stop working, rather than having to scrape by. You might want to speak to a financial adviser to help you out in this area.
5. Save for Your Children’s University
Step five is to save for your children’s university fund. Going to university is increasingly expensive, and if that’s something your children might want to do one day, it’s good to be prepared. By funding them through their studies, you can eliminate one of the biggest sources of debt in their lives — the student loan. With no student loan, they’ll be able to build their own financial future as soon as they start full time work, which could change the course of not only their lives, but of generations to come.
6. Pay Off Your Home Early
Step six is to pay off your home early. Paying down your mortgage quickly could save you tens of thousands of pounds, and it frees up your income to invest for the future. Imagine having no house payments each month and having the security of living somewhere that you truly own.
If you don’t have a house yet and that’s something you aspire to, start saving up for a deposit.
7. Build Wealth and Give
Step seven is the fun part. By this point, you’ll have no debt and low outgoings, so you’ll be able to do whatever you want with your money. Use your money to invest and you can build some significant wealth. And you can be generous like never before. When you see a need, you’ll be able to give in line with your heart’s desire, not limited by your bank balance.
You might have spent decades living like no one else to be able to get to this point, but now you can live and give like no one else.
We think Dave Ramsey’s Seven Baby Steps are a great guide to building wealth throughout your life, whatever stage you’re at.
I hope that’s been helpful. If you want advice specific to your situation, we recommend speaking to a financial advisor. If you have any questions please get in touch. You can email us at firstname.lastname@example.org. Take care.