Who is Dave Ramsey?

In the world of personal finance and money, chances are, you already know who is Dave Ramsey. He is a radio personality turn author and public speaker who uses his own story of financial turmoil that followed by tremendous wealth as a way to teach others about personal finance.

The reason why he is so popular is that he understands the motivation people need to get out of debt. He breakdown the steps into 7 steps that he calls the Baby Steps:

• Step 1: RM 1,000 in an emergency fund.
• Step 2: Pay off all debts except the house by utilizing the "The Debt Snowball" method.
• Step 3: Three to six months of savings in a fully-funded emergency fund.
• Step 4: Invest 15% of your household income for retirement.
• Step 5: College Funding (e.g. SSPN-i)
• Step 6: Pay off your home early.
• Step 7: Build wealth and give.

Step 1: Save RM 1,000 in an Emergency Fund

Dave recommends starting off by focusing all your attention and energy on saving up $1,000 in an account and label it for emergencies only. By doing this he is able to get people to have a “small” win first, which will encourage them to continue the next baby step.

Step 2: Pay Off All Debt Except Your Mortgage

Baby Step 2 is all about psychology. This step is one of the most important ones that show his power of motivation by using something he calls “The Debt Snowball“ method. This method gives people quick wins from the start and keeps people motivated because the majority of people will be staying in this step for several years before they can get rid of their consumer debt altogether. The quick wins will help to keep the people motivated so they can continue to stay the course.

"The Debt Snowball" method is where you would list down all of your debts (except for your mortgage) from smallest to largest. Next, you would make minimum payments on all the debts and put every extra Ringgit towards the smallest debt until it is gone.

After the smallest debt is paid off, you would move on to the next smaller debt on your list. With this second debt, you would add what you were paying on the smallest debt plus the minimum payment you were already paying until it is paid off. Repeat this process with all the debts on the list until you are consumer debt-free.

When you start paying off the debts one by one, you will see that the snowball would start growing. It will cause the brain to release dopamine and serotonin (neurotransmitters) whenever you win something. These neurotransmitters will cause you to want to continue the process more and more.

Baby Step 3: Finish The Emergency Fund With 3 To 6 Months Of Savings

Once you are debt-free, you would have a good stash of ringgit(the money you used to pay off your debts) for other use. On Baby Step 3, this stash of Ringgit is best used to build up your emergency fund of 3 to 6 months of savings. Dave claims that by doing it this way, we're reducing the risk of having to go back into debt if we experience an emergency. If you do not do building up this emergency fund, how would you handle an emergency? Would you pull money from your children's college fund or get into debt again?

Once you have completed this step, you are now able to protect your family from major financial emergencies.

Baby Step 4: Invest 15% Of Income Into Retirement

It's natural for us to want to put our kids ahead of ourselves. But what if you end up without sufficient retirement income because you made the college funding a higher priority? You would have to depend on your kids to take care of you. Won't it be better for you to take care of yourself?

So before you begin doing anything with the excess money left over from paying off the consumer debt and building the emergency fund, Dave suggests that you invest 15% into your retirement accounts. For us Malaysia, this is in addition to our KWSP/EPF. If you are not sure where to invest in, you can look into the articles I have written on Wahed Invest here and here.

Baby Step 5: College Funding For Kids

By the time you reach this step, you should:

• have an emergency fund with 3-6 months of expenses
• be debt-free (except a mortgage)
• be investing at least 15% or more of your gross income

Now that you have your finances in order, it is time for us to put some money into our children's college education. It is a good thing that we actually have SSPN-i and SSPN-i Plus which are tax-advantaged accounts for educational expenses. How much should the amount be is up to you to decide? Tertiary education in public universities would be much cheaper compared to private colleges or universities. It is best to save more.

Baby Step 6: Pay Off Your Home Early

Dave recommends that you take any extra money coming in after you've progressed through the other Baby Steps in order, and throw it towards the mortgage. The faster you pay off that mortgage, the more interest that you would be saving once you have clear it.

Baby Step 7: Build Wealth And Give Generously

Yes, you have finally made it to Baby Step 7. You don't owe anyone anything and now it is time to really start building wealth and help others.  Dave actually wants us to reach this step and become financial independence.

Dave mentions that to build wealth, one should invest in both mutual funds and real estate but before you move in and start buying shares in every single company in Malaysia, read up on investing books or search the internet for what those who are financially independent do with their money.

Never forget about giving. The meaning here is to give to help others