welcome back to whiteboard finance my name is Marco and I'm here to help you master your money and build your wealth in this video I'm going to explain to you why Dave Ramsey's baby steps work and we're going to break down each of the seven baby steps so you can better understand how to better your personal financial future these are actually taken straight out of Dave Ramsey's book Total Money Makeover and the link will be down in the description below if you haven't read that book already it is an absolute personal finance life changer and
I highly recommend it so let's start with baby step number one okay so the first baby step is to save $1,000 for an emergency fund okay the reason Dave says to save $1,000 an emergency fund is because life happens okay when you're going to start your financial journey there's going to be a flat tire that you know busts a tire there's going to be a medical illness there's going to be a little bill or an expense that you didn't expect would come up so that's why dave recommends that everyone starts with $1,000 to actually fund
an emergency fund and you need to do this as fast as possible okay so if you already have $1,000 laying around boom put that in a separate account that's your $1,000 emergency fund step number two is pay off all debt other than your mortgage okay so this counts is everything this is credit cards this is you know your Uncle Joe that you owe $1,000 to this is the bank that you took out for a car loan this is pretty much everything and if you're coming from my debt snowball vs. debt avalanche video dave recommends using
the debt snowball and if you haven't watched that video i explain why the debt snowball psychologically works better than a debt avalanche so i highly recommend that you guys take this seriously because this is actually the first step to your financial future in my opinion so baby step 3 is pay into an emergency fund it's three to six months of living expenses okay so this is typically and when I say pay into the reason I say it that way is because Dave wants you to have an emergency fund of three to six months of living
expenses so if you know that you and your family or yourself or you and your partner whatever if you know that your monthly expenses are $2,000 you know that you need to save up six to twelve thousand dollars heaven forbid one of you becomes ill or you lose your job or you have a medical issue and you don't have that income coming in this allows you to live three to six months carefree while you're actually trying to establish yourself with a new income or get better if you have an illness whatever the case may be
so paying into an emergency fund to get back to that phrasing this is my personal opinion you need to pay into an account that is very liquid so this should be a savings or a checking account a money market account somewhere where you can easily access that cash quickly in times of an emergency okay so step number four is actually where I'm at and where I've been at for a while now because I don't have any children and you'll see why in the next step but this is essentially where you want to invest 15% of
your household income into some sort of pre-tax or tax advantage that count so what I've been doing since twenty-one years old pretty much is maxing out my Roth IRA and I also contribute up to my employers match in my 401k okay so I'm still employed I still worked you know w2 nine to five job Monday through Friday but I've also taken all of my after-tax dollars and maxed out my Roth IRA for the longest time it was $5,500 in 2019 it's now $6,000 and with 401k your maximum contribution can be $19,000 for 2019 so there
are some income limits when it comes to a Roth IRA but that'll be a subject for another video so the reason I said I'm stuck on number five and voluntarily stuck at number five knock on wood this will change soon here with my wife and I but Step five is actually college funding for your kids okay and if you don't plan on having kids why not fund you know your nieces or nephews or whoever's college this could actually be used to change someone's life so if you don't plan on having children of your own you
can definitely still plan for step number five so typically the college fund is actually it could be something that's tax advantage like a 529 plan there's multiple you know educational funds out there that could get you some financial advantages but what I stick to is a 529 and again I do not have one but I will in the future once not kind of would the birth of my child actually happens here so very quickly step number six pay off your home early okay so I know a lot of people that follow my work they would
say to themselves well hey you know my home right now it's the mortgage is a very low rate I can get you know better investments and better returns out in the market or with etf's index funds commercial real estate investing private lending whatever however you make your money is fine and if mathematically it does make sense to not pay your home off early if you are indeed earning a higher return on your investments than what the rate of your mortgage actually is however from a peace of mind standpoint you guys I'm definitely on board with
Dave on this one you know I don't agree with Dave necessarily on a lot of his investing tactics just because he says you know buy real estate with cash and you know all that stuff there's good leverage and bad leverage out there but in my opinion when it comes to paying off your primary Moore residence where you're actually living and raising a family this gives you an enormous peace of mind that a rate of return simply cannot compete with in my opinion and then number seven this is my favorite baby step is giving okay so
this is when your wealth has already increased to a level of self sustenance so this is where you build wealth and then you give it all away so when I say give it all away this really empowers you to be a better member of the world or society or civilization whatever word you want to use but this is where you can give to charity you can fund someone's college you can still give back to your religious organization if you have one you can give to your park system I joke around with my wife all the
time here in Northeast Ohio we have an enormous I'd say it's world-class park system that's well taken care of called the metro parks it spans all throughout Northeast Ohio down to southern Ohio and ultimately I want to be able to give to the Metro parks to where we even have like a chair or like a bench dedicated to us in our name I know that sounds super corny but it's I use the Metro parks so much and all the time that it's something that would mean a lot to me so that's just one small example
you can obviously have your own so a quick recap is saving a thousand bucks in an emergency fund number two is paying off all your consumer debt or all debt in general except your mortgage step three is paying into an emergency fund so when life happens you do have a three to six-month cushion of not having to worry about money step number four is investing 15% of your household income step 5 is saving up for college whether it's your kids or someone else's step 6 is paying off your home early and step 7 is then
building wealth and giving so the whole crux or the whole point of this video is why does this work why do Dave Ramsey's baby steps work well it's in the name they're baby steps okay if you remember my analogy of you know paying off your debt using the debt snowball the debt snowball is just listing your smallest debts - your largest debts and you're building confidence it's almost like a workout plan okay so instead of trying to pay off your house and go straight to baby step 6 okay that's not possible and to do all
these before then I mean it is you can do any of these in order but there's a reason why this works when you do them and so think about it if you have $1,000 emergency fund and you get a flat tire there goes 250 bucks that's okay you just save $250 you build that emergency fund up back to a thousand and now this is when you can really get to the races by paying off all your consumer debt you know the borrower really is slave to the lender and when you don't owe anybody anything and
not only clears your mind and your conscious it allows you to actually create a plan moving forward so when you finally do knock this out this actually becomes easy because you have no debt you can then take all the money that you're putting towards your debt and actually build up a nest egg or an emergency fund at that point you can then start to focus on investing your money into retirement so you don't have to worry about retirement later on in life you don't have to be eating dog food if you do I prefer Alpo
number five the college fund think about changing someone's life whether it's your own child's and building your family tree I know my parents they're immigrants they're Eastern European immigrants my dad never went to college he's one of the smartest men I know but at the end of the day he just wasn't given that opportunity so this is how you expand and better your family tree and then number six paying off that home early which allows you to then be mortgage free and debt free and that's when you just start building enormous wealth so this one
was a little bit long-winded and I appreciate it if you stuck with me until this point but if you haven't already please get the link or get the book and the link below it will change your personal financial life if you do follow it I'm a big fan of Dave Ramsey because he's practical he's funny and he has very deep rooted beliefs some people may not like him some people consider him a swearword in their home I know my wife sometimes considers them a swearword in our home but I'll tell you if you follow these
seven steps you will live a fulfilling and a prosperous life thank you so much everybody if you if this video was valuable to you please share it with one friend who needs to see this and as always have a prosperous day [Music] [Music]
