orlando miner: dave ramsey's baby steps explained! build your emergency fund & pay off debt

Hello everyone. Welcome to my channel. My name is Orlando and today we're going to be talking about Dave Ramsey's seven baby steps. What is Dave Ramsey seven baby steps? Well, Dave Ramsey has a book that is called total money makeover. I'm going to go ahead and post the picture here, but also put the link if you're interested in the book below and what he's doing is describing how you can take seven baby steps to get you to basically a better financial place. I don't want to necessarily say it will get you to financial freedom, but it will definitely put you in a better financial position. And that is the reason why it's called seven baby steps. You're taking baby steps to get to that point to where you can have that financial freedom. If you do things like invest that we like we talk on this channel, so let's just jump right into it. Baby step number one is to invest a thousand dollars into an emergency fund now you want to do this as fast as possible as Dave says in his book and the reason why you want to do this is is because you don't want anything to basically put you in the hole right things happen. You need your car fixed, you know something happens, you know medical expenses. There's a bunch of things that happen that could basically take you and dig you deeper into a hole when it comes to debt. So you want to make sure that you at least have that thousand dollars ready to go. And like I said, you want to have it in a check-in or savings account. You want it to be liquid. But one of the things that I want to really talk about and the reason why this step is so important guys is because this step allows you to start it allows you to get things rolling. Not only does it allow you to get things to start which is one of my biggest big pet peeves is just to start just to get things going a lot of people have a lot of hard time just starting things but also to it dips your toe into the life of budgeting you have to be able to look yourself in the mirror and go. Hey, I spend $600 on fast food. I spend $500 on entertainment. You have to be able to look yourself in the mirror and to say those things because it will put you into a position to budget accurately and to have a budget. I mean most of the time that I speak to people when they say hey, I'm having financial issues how to can you always ask do you have a budget most people like which means no they don't and you know when I asked them how much they spend on XYZ. They're always kind of you know, guessing right there using guesswork to kind of figure out exactly what they spend and most of the times they're probably low ball at it when it comes to the amount anyways, and they need to be able to see it on paper and I suggest the same thing for you. You have to be able to see this stuff on paper guys, but if you don't see it on paper, you won't know what you working with and this will allow you to do that. Also, I suggest that when you do this step this big step this number one step this starting step. I need you to be able to make accessing the money be a little bit harder than it normally is for you. It should not be underneath your mattress where you should where you can be able to nibble off of it and be able to do what you want with it. I would like for you to possibly put it in a bank account that is across town or maybe put it in a online account something that maybe doesn't have a debit card that you actually have to go to the bank and withdraw and why do I say that? Well, the reason why I say that is is I want to make it a little bit tougher for you to actually access the money not so tough to where you can't use in an emergency but tough enough that you won't be able to just pull and withdraw the money out whenever you want. That's what we're trying to avoid. We want you to use things for emergencies as the fun States when you go to the emergency room that would be an emergency going to McDonald's and going to a movies. It's not an emergency. Now this is going to allow you to do some things that like it's going to allow you to start. It's going to allow you to budget. It's going to allow you to have discipline and that's the reason why this baby step is really important because if you don't do this one guys, then you won't do it at all. That mean that's just the truth of the matter. Now. I know what a lot of you guys are thinking when you thinking hey, look, I don't know how I'm going to be able to save a thousand dollars like right now. Like I just don't have that. I don't I can't do that. What I want you to do is I want you to get down a piece of paper and see what you can do to save that money. Can you get rid of some things that you're paying for that you don't need? Can you sell some things that you are that are just sitting in your closet? Can you do some side hustles that I've talked about some things that to make you some more income to get you to that thousand dollars. The chances are that you can do that. It's just about are you willing to do those things? So I want you to take a look at those and kind of figure out if all of this makes sense to you and if it does you need to pursue these things as fast as possible to get you the money that you need into the account so that we can get to this next baby step. Okay. So baby step number two, you want to pay off all of your debt other than your house. So what is that? That means your car loans. That means your credit cards and how do you want to go about this where there are two methods that Dave explains in the book. One is called the avalanche method and one is called the snowball method. The avalanche method is basically paying off things that based off of the interest rate and then the other method is paying things off by first by the smallest balance now in the book Dave suggests using the snowball method. I agree with this. So I want to explain this snowball avalanche method of paying off your debt. So what's the importance of this? The biggest thing when it comes to paying off debt is when you speak to folks and then you ask them like, you know, what is it about paying off debt that scares you and most of the time what scares people is seeing a high dollar amount that they owe and they just feel like they're just chipping at it and it's going to take forever. They don't get any satisfaction out of actually paying and seeing their debt go away because let's just face facts, right psychologically. It's always better to pay off the smallest balance first because you know, if someone sees that they're paying off a balance of let's just say you have three credit cards and one is $100 200 and then 300 if you pay off the hundred first now, you only have two credit cards and then you go down that line. If you pay off the 300 first and let's say you only had a hundred dollars to do that. You still have all three credit cards. So psychologically, it's a lot better and I always suggest to people to use the snowball method and it's called the snowball method because you kind of get going taking out each of those debt. So you want to go ahead and take out like I said everything that does not include the house, right? So if you have a mortgage on this, you don't want to take out the mortgage. You want to take out your credit cards. You want to take out your auto loans. If you got any personal loans, you want to go for all of that debt and you want to get rid of it. We're trying to erase all of this debt because you don't want all this debt to be hanging over your head if you're trying to get to financial freedom and that is the whole point of this is to get to that financial freedom and you have to get rid of the debt to do that. We want to have good debt not bad debt. And what do I consider good debt? I consider good debt mortgages, especially things that you can make money off of your investments things like credit cards auto loans personal loans. I consider that bad debt. If you haven't seen I had an old video where it's called ugly debt. It was one of my earlier videos and I explained that about how you can choose and know which debt is the best and what that is ugly and long story short. It's really that high interest and you're not making money off of it debt. That is the really bad debt. So just get rid of that debt. That's the second baby step. So baby step number three. Okay, so you've paid off all of your debt, right? You've got all of that taken care of and only thing you have left is your house. So what do you do next? Well, baby step number three is to create a three to six month emergency fund. Now, why do you want to do something like this after you just got done paying off all the debt? Well, you want to take all that money that you were giving to pay off the debt and you want to keep the ball rolling by taking that exact money and then putting it towards your emergency fund to create three to six months of expenses. So remember look at your expenses. Look at what you spend your money on. Look at your budget. Remember I did a video on budgeting and things of that nature. So look at that video too, but just think about it all of your expenses. I want you to tally it up and find out what that is and do three to six months of that. Now the purpose of this again is to make sure that if something were to happen, let's just say medical or you were to get sick or you were to lose your job or something of that nature. God forbid that would happen, but you don't want to fall back into debt because you don't have any reserves. You don't have any emergency fund or anything like that to cover your expenses your month-to-month expenses that you would normally have and most people think to themselves. Well, you know the two months will do or something like that. No, no, no, no. You really do need a three to six month emergency fund. I'd like to jump straight to six months, but sometimes people can't do that much. They can only do three months. So three to six months so that you don't fall back into debt. You want to keep this ball rolling because if you fall back into debt because of something, you know, like you lost your job or medical or something like that. It starts you all the way all the way at the beginning of this scenario of what we're talking about and we're trying to inch you closer and closer and closer to getting that financial freedom and to do that you have to create this three to six month emergency fund. So let's jump on that. So baby step number four is investing 15% of your household income into retirement. Dave is saying to basically put 15% in your 401k put it also in your Roth, especially if you're married into both you and your spouse's account and he wants to do 15% of that. Now. My thing is with that is I did a video about a month ago about free money when it comes to 401k. Now Dave is including that in here saying that you need to max out your 401k and I agree with that. You should definitely max out your 401k. I have been speaking that truth as far as telling people invest into your 401k it they match they match. It's free money guys. If someone is matching you that they're giving you free money in your hand every single time and I also explained in that video without recreating that video is that one of the things that you want to make sure is you want to make sure that when it comes to the amount of money that you're putting into there that you know all of the rules that come with putting the money into your retirement account when it comes to your job. You want to make sure you're vested you want to make sure that the employer won't take the money out. So I want you guys to also when you do something like this when you're going to put 15% of your income in this which I think is a fantastic idea. I just want you to dig a little bit deeper and look into the rules of when it comes to your 401k and find out when the amount would be vested when I say vested. I mean when will the employers portion that they gave you the free money that I'm talking about when will that go hard for you meaning that they can't take it back if you were to get fired if you were to leave and go somewhere else. That's what we need to figure out because if you put 15% into this and then all of a sudden you move then it will definitely deplete it. You will still have your money that you and put in there, but you will not have the money that the employer matched and that is the key to this guys. We're taking retirement serious. You have to do this no matter what age you are. You don't want to say. Oh, I'm too old. I don't want to do it. You need to start now. You don't want to say I'm too young. I got plenty of time to do it. You need to start now. You need to take advantage of your employers matching ability and the free money that they're going to give you. I promise you you will not be unhappy in the future with the money that they're going to give you and plus, you know, especially with the cycles that are going on right now at the end of the day. You probably won't even need it for the next if you're young 30 years if you're a little bit on the older probably next 15 10 years. So let that money set then you also want to do what Dave said here, which was to put money into your Roth IRA. Now. He is saying to do that to max out your Roth IRA and so you can have that money and you won't be taxed in the future. Also, it knocks down your taxability as far as your income that you can claim on your taxes not to get too difficult into that meaning that if you put in $10,000 and you make a hundred thousand then that means that your taxable income is $90,000 not the other way around. So once again, please please please drop that money into your retirement account. We have to do this to get serious about this guys. Let's go into the next step Davis suggesting a college program, which is called the 529 program. You put money into there and you won't be charged tax and all that other stuff. You can look that up and kind of get the details of that. Do I agree with this? Yeah, I do. I think that it's a good plan. It's always great to say for your kids, you know college fun rather than you know for you to take out a loan or anything like that. I really really really agree with that. But I also do have a different spend on that. I tend to do like to put money if you have it if you have it to put money into like the S&P 500 and let that kind of ride up and tell my kids get up age and kind of use that as a college fund to based off of previous history. We've seen the S&P 500 do really well. And so I don't really are index fund or something like that. So I would like to do both. I would suggest both. I would suggest that if you have the money to put into the S&P 500 then that would be great. But this is where it divides because this is baby steps and more than likely if someone is doing baby steps, they don't probably have the money. They do not have the money to invest in index funds or invest in something else. So with that being said the baby steps is the cleaner easier way when you're going down this seven steps because you can take the 529 and easily a lot of employers allow you to take that money directly out of your paycheck and put it into the fund itself. So it works out better for everyone. You get to see the money kind of not like taking out of your account and you don't have to worry about doing it yourself. And I think that is the best way to do it. Imagine how many times you have seen something come out of your paycheck and then, you know months later years later you look at and you've seen it's grown. You don't miss it once it's out of your check. So I would really suggest that this would be a really really good idea. And then later on you would do the process that I'm talking about which is the S&P 500 first for your kids college fund or whatever you're trying to do. I like doing both of them because I think they're both fantastic and for the baby steps. I think this is the best one. Okay, so baby step number six is to you got it. It's to pay off your mortgage pay off your house. So Dave is saying that basically what you want to do is is since you've done all of this work to get you in the clear the only thing standing in between you only thing standing between you and full freedom from debt is to go ahead and pay off your house. So pay off your mortgage take all of the money that you should have been paying towards debt because by this time you've already got the emergency fund set up. So you if anything was to happen you would have that to fall back on you're putting money into your 401k your Roth is probably already maxed out. So what do you have left pay off the house you continue using that extra money that you have and you lay it onto the house you pay down the debt anything that you pay over the payment that you're paying goals towards the principal and that's what he's trying to say take that money that you would normally spend on food and all this other stuff and all the debt that you previously probably already had take all of that money and throw it at the biggest debt of all which is your house get rid of all of that. And can you imagine how much money you will have once you pay off your your house? Let's just say your house was $1,500 and all of a suddenly you wipe that out. That's $1,500 extra a month that you can do a lot with so Dave is saying go ahead take all the extra funds that you were using to pay debt and everything else off and go ahead and wipe away that debt which is our mortgage which is your home and let's see what you can do from there. Let's go on to baby step number 7 the last and final okay, so baby step number 7 if you made it to the end of this video, thank you. Thank you. And I'm telling you number 7 is the best of all you've paid off your house. You've got all everything set up with your retirement. And now what do you do with all this extra money? Well all this extra money you can invest you can give you can pretty much do what you want to do travel because you have everything already situated everything already just there ready to go if something was bad to happen and let's talk about number 7 and let's go down kind of like a little small list of what you can do with this. You can invest right you can invest in stocks. You can invest in real estate. You can invest in a new business. You can invest in whatever you want something that's going to make you money and take all of this money and invest it into it because now you don't have any debt and you can do that, right? So let's talk about the other things that you can do with the money, which is giving if you've watched my other videos, you know that I'm really my forgot the name of the video was I will say out three money skills that everyone should know I'll go ahead and post that above here, but it's giving is one of those skills where I tell people man, like, you know, some people may not like to do it. I understand that but if you can give once you have a certain amount of wealth, it feels really good to give back to people to help them get to whatever opportunities that your money are your giving would get them to faster, right? And that is one of the most important things about giving is that not only do you feel great about giving but the other person receiving it feels great by receiving it because you're helping them along the way to get to something a little bit faster and this seventh step will allow you to do that because you completed all the other six steps and then number three, you can leave inheritance for your children. I don't want to really get into this but trust you can create a trust to leave your money to your kids, you know, you want to get rid of you don't want to do probate. I mean, I haven't done a video on that yet, but nobody wants to deal with probate. So just create a trust have the money ready for when if something were to happen to you or your spouse and the money will be going, you know flow through the trust to your children and that would be great to you can do that too. It would be your choice. Whatever you want to do to get to that point, but those are the choices you have you can pretty much do anything. I just wanted to really name those kind of three categories that you can really do for the baby step number seven. So the question is is what do I really think of the entire Dave Ramsey seven baby steps and so I could have made this into a separate video, but I think it's just better just to kind of make this all linear. I just told you all seven baby steps now. I'm going to break down and tell you exactly what I think of it and I told you in the seven steps the pros of it basically. So we're just going to jump into the cons. So number one that Dave Ramsey doesn't talk about is you kind of have to start from there's like this zero type step and that step is that you must have all of your bills paid off before you even start this baby step program and Dave doesn't run necessarily say that but it's the truth you there's no way you're going to save $1,000 or put money aside or start paying on credit card bills. If you don't have your regular bills paid off. I'm talking about your electric bill your phone bill your gas sewer water. If you are behind on those things and your month a month then this process is going to be extremely hard and I mean extremely hard for you to start this process and Dave doesn't really speak about that and that's just really the truth. So let's go into the next count. So the next one is that the baby step number two is really hard. It is really hard. Not only is baby step too hard, but the pro program is very hard especially because this program is set up for someone who is a beginner who is starting almost from the you know on the side of struggling. It is for the individuals who are on the side of struggling and to understand a way and to create steps that they need to quote unquote get to that debt freedom that they're looking for. And so a lot of times when I hear people about doing this, they always ask me Orlando. I read Dave Ramsey's book and he's doing the seven baby steps. Is it hard? Is it as easy as he States out in the book and the answer to that is no it is hard. It is going to be hard and it's definitely going to be hard for someone who knows nothing about finances and has not been disciplined up until this point of starting the actual program that is going to be very very very very tough. And so you have to get your mind kind of like in shape and ready for that. But the question is is how can you get ready for something when you have never experienced the type of discipline that's going to be required in this program and that's going to be tough. So that is another con another con is that people quit people quit on this all the time because it is so hard for them to come from one side of not saving not doing this not paying off their credit cards and all that other stuff and to be debt-free. It is extremely hard and a lot of people quit. I can imagine that the rate of people quitting on this is probably more than 60% I would say that people quit and it goes hand-in-hand of what I said. The reason why this program may not be for you is that it's hard. It's not an easy thing to do. It's not an easy thing to warp your mind around trying to get your finances into debt. Now, should you do it? Should you stray away from this because it's hard. I'm not saying that at all. I'm just saying that it is not something that you just Walk into and you just say, oh, yep. I'm doing the Dave Ramsey 7 baby steps. It's not like that. So a lot of people quit guys. So you have to get ready for that thought in your head that silent talking that saying you know what this is too hard. I need to quit you have to be ready for it and get that out of your head. Another con that I have for the program is that it's this program really isn't for everyone this program doesn't fit every situation. This program doesn't fit someone like me who is on the higher spectrum of investments and income and all that other stuff, right? It doesn't really fit me but it does fit someone who maybe doesn't know anything about finances are someone who is struggling and trying to get their financial orders in progress. So this plan does not a one-size-fits-all program this program with to me when I would judge it, it wouldn't work for me. It just wouldn't work for me with my investments. I have multiple property investments and for me to pay off my mortgages and all that other stuff. It just doesn't align with my investments my tax write-offs my all of this other stuff. It just does not align. But if I was an individual who was living paycheck to paycheck are was individual who didn't have any financial literacy when it comes to figuring out how do I make sure that I could save money and that I have an emergency fund and all this other stuff then it fits individuals like that. It fits individuals who are closer to the struggling side than it does to individuals who make half a million dollars a year like that's just the gist of it. And even though some people watching this may go duh Orlando, it still needs to be said that this program is not a one-size-fits-all. Another issue that I've seen in this is the snowball effect. I did speak about the psychological effect that it really does have on you and I truly truly do agree that the psychological part really helped some folks, but I do want to let that be known that the snowball effect is expensive guys, and I know it's kind of weird because on one hand we're talking about saving money and getting rid of debt and don't spend extra money and put money into an emergency fund and we're talking about all of these things. But then on the other hand, I'm saying hey guys pay off your debt that is going to cost you more money in the end, but it's just one of those things. But I just want you to understand that I'm not saying the snowball effect is not powerful because it is you seeing you get rid of cars off of that. It can give you a boost in your back like no other but you have to realize that it is expensive. It's more expensive than the other realm, which is the avalanche, but it all depends on your discipline and how you go about things. Okay. So another con is this is that the $1,000 that you need for your savings account that you're putting for your emergency fund. I don't really think 1,000 is enough. I believe that you probably need to put a little bit more into that fund. I know he has like an emergency fund for one step and then you put more money into a savings account. I actually believe you need to have a little bit more into that thousand, but I also believe to that the thousand dollars that you put in there is a good start, but I would increase that by probably three to four times more than that, but I understand also to that individuals may not be able to afford that and $1,000 is a good starting point. But if I really really could get a person to put a little bit more into that fun. I definitely would but I totally understand it would be a stretch and then the last and final con that I have on this guys is that it really doesn't have in this plan. It really doesn't have an investment strategy for you guys. I really am big on investment strategies. How do you make more money off of the money that you're going to be putting into things? This is about getting rid of your debt and teaching you financial literacy and I understand that but it doesn't really say much about what you should do for investments. And the only thing that you're doing in investments in this realm is doing into your 401k or your Roth saving for your retirement, but it's not really telling you how to make more money off of the money that you're saving and I would love to see that in it. And I think those are the plot holes that are in this. They're also understand that it's seven baby steps not 26 baby steps. So I do understand that but in the end, this is my review is that I believe that the seven baby steps are exactly what it states which is seven baby steps and an individual who is a baby when it comes to financial literacy are being financial independent. I think this is a great plan. But once you get into adolescent it when it comes to financial or maybe a toddler, you know, then I think that this it kind of gets you run out of a lot of the steps that Dave is telling you to do and for me for me and particularly I couldn't follow these exact steps. I could take one to maybe but when you get to paying off the mortgages and stuff like that, I just don't really follow that type of plan and I'm not saying that you shouldn't I say you should if you're not invested if you're not interested in the investment portion if you're not interested in a lot of things if you are just starting off and you're struggling follow this plan to a tee because it will not hurt you to follow this plan. But if you're trying to elevate and you get past these stages of this baby steps, then you probably need to go off of the program into something a little bit more aggressive and that's just my opinion guys. So if you got valuable content out of this video, please hit that subscribe button hit that notification and like button and I will see you guys in the next one. Thanks.