Dear Dave,
A friend told me about your Baby Steps plan, and after years of living paycheck-to-paycheck and running up credit card bills, I’m ready to get control of my finances. I just have one question. Baby Step 1 is saving $1,000 for a beginner emergency fund. Do you recommend getting current on past due bills before starting Baby Step 1?
Miles
Dear Miles,
Congratulations! I’m glad to hear you’re finally sick and tired of being financially sick and tired. This is the perfect question for someone is your situation, because it gives me a chance to walk you all the way through the Baby Steps. So, let’s go!
First, make sure all your necessities are taken care of. By necessities, I’m talking about food, clothing, shelter, transportation and utilities. Then, get current on anything you owe, or make payment arrangements for past due bills. After you’ve done this, it’s time to take your very first Baby Step.
You’ve already mentioned getting $1,000 in the bank for a starter emergency fund. That’s Baby Step 1. After that comes your debt snowball, which is Baby Step 2. Here, you’ll pay off all your debts from smallest to largest—except your home. Attack the first balance on your list by paying as much as you can each month, while making minimum payments on the other debts. When you’ve paid off the first one, add what you were paying on it to the payment on your next debt and start attacking it. As the snowball continues to roll over, you’re picking up more and more money to apply to your debts.
In Baby Step 3, you’ll save money and increase your emergency fund from $1,000 to a full three to six months of expenses. You’re going to be surprised how fast you can save money when your income isn’t flying out the door to pay off debt every month.
Now, it’s time to really start looking toward the future. In Baby Step 4, start investing 15 percent of your income for retirement. College funding is next in Baby Step 5 for any kids you have, or plan on having one day. And here’s a big one. Baby Step 6 is where you pay off your home early. How great will that feel?
But Baby Step 7 is the real deal. Now, you start building wealth and giving with outrageous generosity. When you’ve completed all the other Baby Steps, and are able to do these two things, you’ve achieved the pinnacle of smart money management. Or in other words, you’ve reached the point of financial peace.
Make it happen, Miles. You can do this!
— Dave
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