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One of the more popular recent posts I have had was courtesy of a guest post submission by Justin Haber of Ascend Finance who wrote, “5 Reasons I Disagree With Dave Ramsey.”
In fact that article generated a lot of buzz/pageviews as it got picked up by Doximity and sent out to its tens of thousands of subscribers as one of its featured posts.
I thought, however, that instead of just pointing out flaws of someone else’s financial philosophy, it would be of greater interest/benefit to my readers to see what Justin actually implemented as his own personal financial plan.
Justin graciously agreed and submitted the following guest post on how he has incorporated his own variant of Dave Ramsey’s famous Baby Steps plan.
[Disclaimer: Justin and I have no financial relationship.]
You may be just learning about or have a detailed knowledge of Dave Ramsey’s Baby Steps.
I covered in a previous article the different ways that I disagree with Dave Ramsey.
Today, I will cover what my 7 Baby Steps Would be If I were Dave Ramsey.
Some steps are similar (why reinvent the wheel if it works?) but in a different order than Dave Ramsey’s plans.
Let’s jump right in.
Original Dave Ramsey Baby Step #1: Save $1000 for your starter emergency fund.
New Baby Step #1: Create a budget.
It is hard to build up an emergency fund if you don’t track your expenses.
If you are not aware of the money that is coming and going from your accounts, you will have a lot of issues filling up your safety fund.
Although it is not mentioned in any of the Baby Steps, I do feel that building the perfect budget is necessary for long-term financial success.
Yes, it’s true that Dave Ramsey does mention budgeting in his gazelle intensity article, but I would promote this concept to the very top of the Baby Steps.
Original Dave Ramsey Baby Step #2: Pay off all debt (except the house) using the debt snowball method.
New Baby Step #2: Build an Emergency Fund Based On Percentage Of A Month’s Income.
Why would I update something that has been around for so long?
- In reality, you are more likely to have more expenses if you have a larger income, so having an emergency fund built on a percentage of income is more practical.
- There’s inflation, so $1,000 is not worth the same as it was 20 years ago, which means that you may have to put money back towards your credit card if your dishwasher breaks and you have to buy a new one.
I’d like to add a qualifier of building an emergency fund“up to a certain amount,” but I think it makes things a little more complex as it varies with each individual circumstance.
My personal plan is to build an emergency fund of 50% of my gross income.
Original Dave Ramsey Baby Step #3: Save 3-6 months in a fully funded emergency fund.
New Baby Step #3: Eliminate Your Debt with Debt Avalanche Method or Debt Savvy Method.
Dave Ramsey’s Baby Step #2 is targeted to use a debt payoff method that will have the psychological benefit of eliminating your smallest debts first with the Debt Snowball Method.
I would completely change that.
Let’s start with a review of the various debt payoff methods:
- The Avalanche Debt Payoff Method.
- Hones in on directing your additional monthly payment to the debt with the highest interest rates.
- The Avalanche method does not look at debt amounts.
- The Savvy Debt Payoff Method.
- This is a newer debt payoff method that utilizes both the snowball and avalanche methods.
- If you have smaller debts, you would prioritize those first then move to avalanche for the interest savings.
- The Snowball Debt Payoff Method.
- Hones in on directing your additional monthly payment towards your smallest debt balance first which would then snowball into your larger debt balances once it is paid off.
- The Snowball method does not look at interest rates.
- Dave Ramsey favors this method because of the psychological benefit of seeing these smaller debt amounts paid off quicker.
- However why would you need this psychological benefit if you are “gazelle intense” already?
What I would do here is to find a debt payoff planner that matches your preferences and focus on either the Avalanche or the Savvy method.
Original Dave Ramsey Baby Step #4: Invest 15% of your household income in retirement.
New Baby Step 4: Save 3–6 Months of Expenses in a Longer-Term Emergency Fund.
Although there are parts of Dave Ramsey’s Baby Steps that I disagree with, I do find that some of the points he makes are good to follow.
On Baby Step #3, Dave focuses on taking the money that was originally being put towards your debt and now allocating it towards building a safety fund.
I found that an emergency fund can be very beneficial in case of unexpected expenses, especially in the case of coronavirus where there may not be as many employment opportunities as there were before.
Original Dave Ramsey Baby Step #5: Save for your children’s college fund.
New Baby Step 5: Invest 15% of Your Household Income in Retirement.
I don’t mind this Baby Step.
I do believe that it’s important to invest your money into retirement.
I am not sure whether 15% is the right number because all incomes and expenses are different, so I may adjust that step, but I do believe it’s good to save for retirement.
Original Dave Ramsey Baby Step #6: Pay off your home early.
New Baby Step 6: Save for Your Children’s College Fund.
I find saving for your children’s college fund is a noble and worthwhile step.
How much you put into that college fund is up to you.
Do you want your child to have some “skin in the game” and take on some of the financial responsibility?
I personally found that having partial responsibility for paying for college helped me take my college education more seriously.
Original Dave Ramsey Baby Step #7: Build wealth and give.
New Baby Step 7: Invest Money Where You Get Higher Returns.
Dave Ramsey is all about “Payoff Your Mortgage Early”.
It may be the best yield on your investment, but that is not always the case.
For instance, if you are seeing an impressive return on your investment, should you always pay off your mortgage early?
I would argue that every investment decision should be compared with different scenarios.
You have a $50,000 balance on your mortgage at a set rate of 3.2% fixed.
Now say you gain an inheritance of $10,000.
Dave Ramsey would say that you should use that money to pay off your mortgage if you in this baby step.
Let’s also say that it’s possible to get a long term (almost guaranteed return) rate of 9.3%. [I personally am unaware of any “almost guaranteed 9.3%” returns so I take this with a grain of salt as the number to use for “interest arbitrage.”]
Personally, I would put as much cash in the higher return asset and a minimum to your mortgage payment because you are making a margin from the investment.
Finally, I would eliminate “Build Wealth and Give” altogether.
Why? There are two main reasons:
- The New Baby Step #7 would be building your wealth.
- Sure, you may not get out of your mortgage today, but you will still be building wealth.
- I don’t think that you should wait until Baby Step #7 to give.
- I remember from my childhood that “it is better to give than to receive”, and I cannot stress this enough.
- Why do you have to become wealthy before you start giving?
Justin Haber is the digital marketing manager for Ascend Finance with the goal to make debt freedom easier, cheaper, and faster.
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