Ep.2 Dave Ramsey's Baby Steps

[CFM COACH ASSISTANT AI ]: Hey everybody, this is Madeline from Strasbourg Coaching and you are listening to the money's not your problem podcast. I use what I love most, my LDS faith, the common sense of Dave Ramsey's baby steps and Brooke Castillo's life coaching tools to help you identify and manage the real issues behind your financial problems. Live from the headquarters of Strasbourg Coaching, it's the money Snyder problem show where debt is dumb, cash is king and the paid off home mortgage has taken the place of the BMW as the status symbol of choice. I am Madeleine Strasbourg, your host and I invite you to have a conversation about your life and your money. Of course, if you recognize the song and you recognize the words, you know Dave Ramsey. This is how he has started his radio syndicated show for the past 30 years. He offers advice on life and money, answering questions from callers to learn how to get out of debt and build wealth. He is the guy with the big scissors cutting up the credit cards and I love it. He provides tips on how to turn things around, making personal finance and money management simple. His goal is to provide a plan that everyone can work with. Today, Dave Ramsey is 60 years old and is one of America's most trusted sources for financial advice. His radio show, the Ramsey show, formerly known as the Dave Ramsey show, is among the top five talk radio shows in the United States with more than 600 stations playing. It is the number one podcast in personal finance in the United States and it's heard by over 18 million combined weekly listeners. If you know Brazil, that would be combining Sao Paulo and Rio de Janeiro, the population of those two cities, weekly listening to the Dave Ramsey show. But it did not start that way, of course. At the age of 26, Dave Ramsey, a numbers guy, he used and he figured out ways to do the no money down and leveraging debt to create his 4 million real estate portfolio. Well, he owned $3 million so that according to definition of a millionaire, he was a millionaire because 4 million minus 3 million, that gives you a million dollars. So he was a millionaire at 26 year old. Well, two years later, the bank that he had the most financing through got sold to another company, to another bank and institution. And then what happened there was that they looked at his portfolio and they like who is lending all this money to this young person? So they call out the notes and he lost everything. He didn't have the money, of course, to pay off his debt. And so the only solution that he figured out was to sell everything, all the properties, everything that he had. Well, he was unable to sell quite fast. Enough. And so for the next the following two years, he lost everything and he was evicted from his home. At that time he had a toddler and a baby and his marriage was hanging on by a thread. One time, he says the American Express called his home and talked to his wife. And after all the mean things they say because you are not paying your bills and all that, the guy from American Express asked his wife why would she stay married to a guy who had not paid his bills. Well, she called Dave and crying and she told him what happened. And then she said, and I was wondering the same thing, he got hot. Well, things were tough for Dave. At his lowest point after declaring bankruptcy, he decided to turn to God and learn what the Bible said about money. As he learned more and more, he felt a sense of hope and he started implementing these new concepts which are just common sense approach to money in his financial life. Well, today he's a living proof, living proof that anyone can turn a bad financial situation around. Nowadays he does not use any debt for anything. He has a debt free multimillion dollar business. He's extremely generous. He buys his rental properties in cash and it sticks to a boring, simple investment style. He does mutual funds and employer sponsored retirement accounts such as 401s and in Ross. That's what he invests and that's what he recommends to his followers. Also he buys all his properties, rentals with cash because when things happen he doesn't have the payment on those properties. And he talked about when they did a big study with millionaires that people would say of course you don't have any debt, you have all this money. What? Well, it's the other way around. He has all this money because he decided to use some common sense approach to how he managed his money. When Covid hit, he was able because his company is all on cash. He was able to not let go anybody from his company. He didn't have to fire anybody. During COVID time, everybody was working from home. Some people didn't have a job, but he was able to keep everybody on payroll. And that's awesome. So from that experience he created what is called the baby steps. Why baby steps? Well, because there are small steps that you take one at a time to make progress. At that time I don't think he was concerned about brain research and the power of habits. He was just trying to survive. And that's what he did. Little by little. He adjust along the way and then he created the plan. We now know the best way to accomplish significant results is by Doing small, consistent things daily. In his book Tiny Habits Research, BJ Fogg explained that tiny habits give you a sense of control. When you accomplish one thing, it may lead you to achieve and celebrate the next. It gives you hope and leads you to continue down the path and eventually change your life. Today, the plan has been followed by so many people that they were able to collect data on it. He calls them baby steps millionaires. People who started from nothing, with no money or in debt, who follow his plans are now millionaires. On average, a person who follows his baby steps become a millionaire in 20 years. So here's Dave Ramsey seven baby steps plan in a nutshell. But before you actually saw the formal steps, there's a pre baby step planning that is creating your budget and being current with your rent, your mortgage and your utilities. So your basic bills, right? We call them the four walls. Now, once you create your budget, the be kind to yourself, it takes about three months for you to be able to follow the budget, to dial it in, to have the adequate amounts for each category. Right? Because the first time you're making, you're kind of having a guess. And then the second time you realize that there are things that you needed to change. Some numbers you have to increase, some categories you had to decrease. And it takes about three months for that. And you have to learn how to live within the budget too. So now you're ready for baby step number one. Baby step number one is to have a 1,000 started emergency fund. The goal is to have that thousand dollars saved as fast as you can. According to a recent study, 56% of Americans can cover a $1,000 emergency. So you have to have that ready. $1,000 is not a whole lot of money nowadays, but it's a great start. It will cover a tire repair or an extra medical bill that your insurance did not cover. Now I'll tell a story. When we were doing the baby steps in the beginning, we were in baby step number one. I was going to work and there was a bucket of paint in the middle of the road. I didn't see it. I hit that bucket of paint and paint got all over the side of my car. When I got to school, I was working summer school. When I got there and I looked outside the car, the paint started occurring on the side of the car. I was like, this is crazy. What is this? So then I figured, oh, that was that thing that I hit in a way, coming to work. Well, I knew I had hit the thing, but I didn't know it had Covered the side of the car with that paint. So that needed to be taken care right away. Otherwise the paint was gonna get stuck on the car like wall paint. So I called my husband, he came and got the car and then he had to take to a place to get it washed. So when he got the car wash, it was $120 the bill. And we had that thousand dollar emergency fund. So I was able to just transfer that money to his checking account and he was able to pay for that. So instead of being this big emergency, this big crisis that happened to us, it was just an inconvenience. We were. So then we rebuilt $1,000 and then we're back in business to do baby step number two to continue baby step number two at the time. So thousand dollars is not enough for a lot of people. They don't feel safe having $1,000 in emergency fund. So that might be an extra motivation for you to get that done really quick. All right, baby step number two. Baby step number two is to pay off all your debt except the house. Using the debt snowball method. You list the debts from smallest to largest, all of them. So you know everything that you own, and then you start paying the minimum payment and everything. And you add any extra money you can squeeze from the budget or a part time job into the smallest one. Once that one is paid off, you do a little micro celebration and you start putting that payment and the extras into the next one until it's all gone. So just like a snowball, it gets small and then it rolls down, it gets bigger and it picks up speed. A lot of times when people are working the baby step number two, doing the debt snowball, they feel more motivated and they start paying off the bills and paying off the bills and they go and they find extra things that they can sell. They go find a different part time job and sometimes they even get raises in their own jobs. They switch careers. All these things happen because they get motivated to do all those changes in their lives and get more money in to pay off their debt and then it's done. Starting with the little one helps them build that belief that they are able to do the plan, that they are able to pay off their debt, which is incredible. As you're moving through this process, you need that motivation. When you think that you can do it, then you will. Gonna do is also essential to decide if you want to keep borrowing money or not. Other than to purchase a modest home, of course. Something that's essential for you to decide is if you Want to keep borrowing money for the rest of your life other than to purchase a modest home, of course. In if you decide that you want to keep borrowing money, the baby steps might not be the best plan for you. And it is. Okay, it's not for everybody, but mathematically it does not make sense to pay something off if you're going to continue to borrow more money on it. It's like digging a hole while someone else is pouring dirt into it. It doesn't make sense, right? Alright, let's go to baby step number three. So now you still have that $1,000 emergency fund that started. Now we're going to build that up to a three to six months emergency fund. Now that the money is not being used to pay more debt, you'll be able to save for a full emergency fund much faster. How much you save is going to depend on the type of job you have. If your family runs on only one income, or if you're commission based, it needs to cover your essential bills, not your lifestyle is just survival. Having an emergency fund can bring thoughts of assurance and will help you feel prepared. And by removing those stressful feelings, you increase the chances of reducing or eliminating money fights with your spouse and your kids. While buying a home is not part of a formal baby step, if you want to purchase a home, saving a down payment would fall right here, right after baby step number three. We call a baby step 3B. You know, you purchase a much better home when you're not strapped, when you have a savings account and you have a down payment. Also, if you look at your budget and make a projection, what is the maximum amount you can afford? If you know those numbers and you have those things in place, you make a much better purchase of a property. You might be wondering how do you determine what's the maximum amount you can afford? Well, Dave recommends no more than 25% of your take home pay on a 15 year fixed interest loan. The plan is to pay off the house as soon as possible, not to drag it down or to keep refinancing and getting money out. Again. Mathematically the amount of interest you pay at the end of a 30 year mortgage is more than double the original finance price. Having a 20% down payment is ideal to avoid PMI, which is foreclosure insurance. You know, if you default on your mortgage and you don't have the money to pay for it. Well, if you didn't give a 20% down payment, then you have to pay that insurance that if you don't pay then the bank is going to get their money anyway, so you're paying for that. So PMI stands for Private Mortgage Insurance. When we were living in California back in 2008, we lived in a place that was small and we put in our minds that we have to add this backyard to this bucolic scene of playing in the backyard with the kids. I had a daughter at the time and we're like, oh, we're robbing her from this experience. We have to buy this new house with the backyard. Well, we didn't have the money for that. We had debt, we had credit card debt, we didn't have a down payment. We had all these issues, right? So we end up getting a mortgage on a house that we cannot afford with an adjustable mortgage rate, just like many other Americans did at that time, right? So what happened to us? Well, you figure, right, we didn't have the money to pay. When the adjusted rate changed to a fixed rate, we couldn't afford the house payment anymore. And at that point I was having a second child and I would have to pay daycare because I work full time. So I couldn't afford with the price of the daycare, we couldn't afford the house mortgage anymore. So we lost the house to foreclosure. We decided to let it go. And it was just very stressful to have that situation happening. And I was so stressed, I couldn't sleep at night. I was asleep and couldn't rest. And then we had more disagreements and there was problems here and problems there. All I wanted is to not have any more bills. It was just very, very stressful. Now let's compare to the time right now. A couple years ago, we decided to purchase a home here where we live in Utah. We had no more debt, we had our emergency fund in place and we had enough for a down payment. And then when we find a place, we found a place that fit in our budget that was way less than our 25% take home pay. So now we were able to make that purchase even in a crazy market as it is right now. We purchased about a year and a half ago, right before things got really crazy over here. We were able to find a place that fit in our budget and we're not strapped with no money and worry about all the time if we're going to be able to pay our bills. Right? It was such a difference from the time that we purchased the house when we were not set up for it. So make sure that you get your things done in order. It's just to save you some headaches, right? Usually people finance a lot more than their finances allow because they decide on emotion. We all do. But certain decisions will result in a lot more pain for ourselves and others. If you think you deserve something, then you will override the decision you made with your higher brain, your prefrontal cortex. And you're gonna do whatever it takes to get the thing. Think about it. What is going to be the result? Do you want that? Alright, so let's move on to Baby Step 4, 5 and 6. They happen at the same time. Baby Step 4 is investing for retirement. Baby Step 5 is saving for college. And Baby Step 6 is paying off the house. According to the 10,000 Millionaire Study, the best way to invest for most people is through employer sponsored retirement accounts like a 401k or 403b. And if that's not available to you, you can always open an IRA on your own. Baby Step 5 May or May not happen or be necessary. If you don't have any kids, you don't need that. If you haven't started to save for retirement, you got to do that first. Okay? Start that right away. While we want to help our kids to go to college, sometimes we just can't. And that's okay. It doesn't make you a bad parent if you cannot pay for your kids college. There are many options available to help pay for college that do not include student loans. And remember that not everybody needs to go to a four year university. It's true that having a college degree on average increases a person's annual salary, but it's not for everybody. We need various services or careers which might be achieved through a different training program, a certificate or an apprenticeship. Help your kid decide the best path to get where they want to be. Show them options and accept they might not follow your advice. If you can help them financially, that's great. You can use a 529 account which is a great choice. Most 529 accounts offer great mutual fund choices for you. And if for some reason that kid decides not to go to college or get some money in scholarships or other grants, then you can use that money for another family member. You have to remember that investing for retirement is essential. If you don't plan and you take action as soon as possible, you're choosing to work for the rest of your life or until your body cannot take it anymore. Are your kids your retirement plan? Are you expecting them to take care of you? And retirement is something that with a little planning you can set and forget. You need the Time so your money can grow. So that's why I'm telling you that you need to set this up as soon as possible. So once you set it up, you just put an automatic pilot, do automatic debit and let it grow. In my course Financial Confidence Life, I show you how I picked my mutual funds in real time according to Dave's recommendation. He recommends four types of mutual funds. Growth, Growth and Income, Aggressive Growth and International. I use the same investments and proportions for our Girls529 accounts as well. My husband and I do not share the same opinion about investment strategies. He trusts our financial advisor who is more of a street smart person and tolerates more risk. I have a low tolerance for risk. So our investments as a family are diversified, each accepting how the other see things. How about single stocks? You might ask cryptocurrency NFTs or rentals? Rentals for me are cash only. Remember the story I told you about the house I purchased that we didn't have enough money for it? We purchased the home without first selling the other one that we used to live. That was insane for me. I kept thinking about all the horrible things are going to happen because we can sell the other house. We're going to have two house payments every month. And I just spun all day about the situation. It made me think so much about the worst case scenario that caused me so much stress that the idea of having two house payments, just the idea makes my head hurt. I do want to point out that it's not the house that did not sell that is the problem, but how I kept thinking and spinning about all the thoughts that created the stress for me. Of course I created that circumstance by accepting to purchase a home without selling the other first. And that triggered the thoughts in my head. Other investment options are good when you have the extra money to invest. So if you lose a little bit, it's not the bulk of your retirement that will suffer. Baby Step 6 is paying off the house early. The sooner you pay off the mortgage, the less interest you gonna pay and the more money you free up to invest and build wealth and that is awesome interest going in the right direction and that's what we want. Well, we now get to baby step number seven. Baby step number seven is build wealth and give. Why do we need money? We need money to care for ourselves and our families and bless others. The more money we have, the more good we can do. Being good stewards of our financial resources is a responsibility. I choose to think that God provides everything I have and that I can manage to do good. We can offer others our time and sometimes that's all we got. But financial resources are most needed. We can do a lot of good if we have money to help others. So there you have it. A summary of the Baby Steps. Dave's Total Money Makeover book is the best resource if you want to dive into the Baby steps. The stories and testimonials are powerful. They help you believe that you can do it too. If those people can, I can do it too. But watching a few debt free Scream segments might light a fire under you if you are more of a YouTube learner. Either way, this is fueled by our thoughts and feelings about your capacity to do it or change. In his new book, Baby Steps Millionaires, he shows the importance of our mindsets by relating the finds of the most extensive millionaire study done in American 2, now with over 10,000 participants formed by both Dave Ramsey's followers and not otherwise you'll be biased, right? 97% of the millionaires in the study believe they ultimately control their own destiny, compared to only 69% of the general public. Belief does matter. It will shape how all your brain power, knowledge, passion and energy converge and cause you to act. How you feel will lead you to do what you need to get the desired result. Success is possible for everybody. What do you believe is possible? And this question inspired Brooke Castillo to develop her aim in life and vision for her school, which is to be an example what is possible? So next week we'll talk about Brooke the model and how she is making that happen and most importantly, how that can help you in your journey to financial success. So that puts this episode of the Money's not your problem podcast in the books. I'll be back with you before you know it. In the meantime, remember, there is ultimately only one way to financial peace and that's to walk daily with the Prince of Peace, Christ Jesus Hate Brevi yo Brigada.