How To Get Out of Debt and Stay Out of Debt

At some point, at some time, all of us have gotten into debt. For many of us, it is because we were never taught how to properly manage our money. In school, we learned math, we learned science, we learned literature, but nobody taught us how we can still visit websites like an online casino South Africa without landing ourselves into financial trouble.

business debt

Dave Ramsey’s 7 Baby Steps To the Rescue

Dave Ramsey’s 7 baby steps will show you how to save for emergencies, pay off all of your debt for good, and build wealth. These steps are simple, common-sense steps.

Baby Step 1

The first baby step is to save $1000 for an emergency fund. An emergency fund is a financial safety net for future mishaps and / or unexpected expenses.  

There are two types of emergency funds. One type covers the situation where you lose your job, but you still have enough savings to cover your expenses for 3 – 6 months while you look for another job. Dave Ramsey calls that type of Emergency Fund “Baby Step 3”.

The type of emergency that Dave Ramsey is referring to in Baby Step 1 is “your dishwasher breaks and it can’t be repaired, so you need to buy a new one.” Instead of being forced to buy the dishwasher on credit, and putting yourself into more debt, you can buy the dishwasher from this emergency fund. But the catch is that even if you are on another baby step, you immediately go back to Baby Step 1 and rebuild your emergency fund. Then double-check all of the other baby steps in order until you get back to where you were.

Baby Step 2

In Baby Step 2, you will pay off all debt (except your house) using the debt snowball. The concept is pretty simple, you make a list of all of your debts from lowest to highest. A simple excel spreadsheet can work. You pay off the lowest balance first.  

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Some people disagree with Dave Ramsey’s recommendation on this because they say that you should pay off the highest interest rate first. The reason that Dave Ramsey recommends his method is that you will get the emotional high when you completely pay off the first debt and can say, “Yes. I did it!” It may be a small victory, especially if your smallest bill is just “you own $25 to the doctor for a co-pay”.  But trust Dave Ramsey on this, and start with the smallest debts first.

Baby Step 3

In Baby Step 3, you will save 3 – 6 months of expenses for a fully-funded emergency fund.

As I said previously, this emergency fund is intended to handle the scenario of losing your job (source of income) and realistically estimating that it will take 3 – 6 months to find new employment. This fund can also cover higher expenses, like your car breaking down beyond repair and you need to buy a new (used) one.

Baby Step 4

In Baby Step 4, invest 15% of your Gross Household Income in Retirement. I will talk more about investments later on.

Baby Step 5

In Baby Step 5, you save for your children’s college fund.

I am not sure that I agree with Dave Ramsey on the order of Baby Step 4 vs. Baby Step 5. I brought children into the world. They are my responsibility, and one of those responsibilities is to make sure that they are educated enough that they earn a living to support themselves.  

I do have my limits though. I feel responsible for helping them to pay for the equivalent of two years of community college, while living at home, to cover their core college education courses and the beginner college-level courses for whatever they want to study.

After two years, they should have enough education to be able to get an entry-level professional job (paid internship or cooperative education job) where they can learn through experience in their chosen field while earning money to help pay for their upper-level college courses.

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Some colleges have the expectation that students will do paid internships or cooperative education as one of the requirements for graduation. These programs are 5 year programs instead of 4 year programs.  During the last 3 years (years 3, 4, and 5), the students rotate between college courses and paid internships or co-op work.  

Rochester Institute of Technology (RIT) in Rochester, NY USA, and Drexel University, Philadelphia, PA USA are two co-op schools (5-year program schools) that I am personally familiar with, and would personally recommend.  

But enough of the tangent of my values related to the value of cooperative education programs, and onto Baby Step 6.

Baby Step 6

In Baby Step 6, you pay off your mortgage early.  

Before we can even talk about paying off a mortgage early, let’s talk about how much house you can afford. I was taught that a person can afford 3 times their annual salary. That is assuming 20% down and a 30-year mortgage. CNN Money says that it should be 2 to 2.5 times your annual salary.

A lot would depend on if you have completed the other baby steps before buying a home.

Dave Ramsey also recommends saving in advance the 10% – 20% down payment. If you save 20%, you do not have to pay PMI (private mortgage insurance) payments.

Dave also recommends getting a 15-year mortgage. Not sure if I agree or disagree with this. My gut would say take out a 30 year mortgage, but pay it off as if it is a 15 year mortgage.  That way, if you have periods of unemployment or other financial unexpected events, you have that little extra of a safety net.

Remember to make sure that you are not going to get penalized for paying off the principal early.  

Baby Step 7

In baby step 7, you build wealth and give. Since I have never gotten to this level, I cannott give any personal comments on this.

The only thing that I can say is that the giving does not have to start at Baby Step 7.  I had a friend who had to walk through a not so nice part of town to get to work every day.  She did not feel comfortable giving money, because she felt that she did not know if the person would really spend the money for food (as they were claiming) or for cigarettes or alcohol.  Her solution was to always carry a bag of oranges or apples every day. When somebody asked for money, she would politely say, “I don’t have any money, but I do have some very delicious oranges and apples”.  Some accepted the food she offered. Others said, “God bless you.” The moral of the story is that you don’t have to wait until you reach Baby Step 7 to start giving.

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Theory of Investments

I am not sure if the following advice is from Dave Ramsey or a different source, but this is what I do.

  1. Invest 25% in very high-risk investments (class A)
  2. Invest 25% in moderate high-risk investments (class B)
  3. Invest 25% in modest risk investments (class C)
  4. Invest 25% in low-risk investments (class D)

Different people will have different recommendations on the percentages (age being a major factor), but you get the general idea that there are 4 categories you should invest in, so you will be protected from fluctuations in the market and the economy. When bonds go up, stocks go down. When stocks go up, bonds go down. Investing in an S&P 500 index portfolio has a higher risk than a CD or bond, but it is a lower risk than investing in emerging economies or emerging technologies. Investing in emerging countries or emerging technologies is a very high risk, but it also can bring very high financial rewards.

In the end, it comes down to the law of averages.


“All new beginnings are hard.”  Take it one baby step at a time, and work your way towards financial freedom.

About the author

Mark Holland

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