Financial wellness

The 7 baby steps to financial freedom

My journey to financial wellness – Part 5

Around March 2019, almost three years into my journey, I discovered a man called Dave Ramsey. I had googled financial stewardship on YouTube and one of the feeds that popped up was of this loud, offensive and brutally honest man. If you are sick and tired of debt, find him now and I guarantee you, he is going to put coals under your feet. It was from him that I borrowed the phrase performing ‘plastic surgery’ when referring to cutting up my credit cards. Dave Ramsey is one of the well-known figures in the financial education space for over 30 years and one who has been a huge motivator to my journey. He teaches on the 7 baby steps to financial freedom which I will briefly share with you. You may not agree with everything, but it does not hurt to give it a try.

Step 1: $1000 Starter emergency fund

Today, 13 September 2020, $1000 is equals to around R16 700 so I know some of you are already thinking that it is impossible, I also thought so, hang tight. Since I was already in my baby steps (remember I started this journey in 2016 but only discovered DR in 2019), I decided that my starter emergency fund would be R10 000. Perhaps you can start yours with R5 000, R2 000, or even R1 000 depending on your circumstances. But the idea is to have some money saved up should you have a small emergency whilst you are working the baby steps to avoid going into debt. This is just a start. So look through your house and sell something. This step should be completed as soon as possible; ideally no longer than two to three months. Remember, the sooner you get this out the way, the sooner you can start with the next one.

Step 2: Pay off all debt except the house – snowball method

Dave Ramsey as you will discover, has a lot of quotes. This is his number one favorite. “Borrower is slave to the lender” in this case quoting the Bible (Proverbs 22:7). Although debt is not a sin, the Bible does not speak positively about it. Bible because he teaches financial principles from a Biblical perspective. The debt-snowball method is the process of paying off debt from the smallest to the largest balance just like I said in Part 4. I became so vindicated when I saw DR teach this because I knew I was on the right track. So the idea is to start with the smallest balance and attack it with a vengeance. When that is paid up, take that instalment, add it to the instalment of the second smallest debt and attack it like you are chased by a lion. When that is done, take both instalments, add them to the instalment of the third debt and continue the onslaught. Soon (although it may not feel so), like a domino, the debts will fall. Be patient and take it one debt at a time.

Step 3: Save 3 – 6 months’ worth of expenses

Now that you have paid off all your debt except your house (if you have a house already. If not, check Steb 3-b), it is time to fully fund your emergency fund. Remember in Part 2 I told you that I would have had a hernia if I were to lose one month’s salary? This is exactly what this step is about. Everyone needs a rainy-day fund because it is going to rain. No, it is not a curse, it is life. Things like geyser bursts, illnesses, a child misplacing school shoes, car breakdowns, and losing a job or a loved one, happen whether we like it or not. All an emergency fund does is give you peace of mind should an emergency occur without having to go into debt.

Take the money you have been using to pay debt off, and start increasing your starter emergency fund into 3 to 6 months’ worth of expenses. According to a lot of financial advisers, a simple bank account or a money market account will do for ease of access.

There is also a half-step to this called, Baby Step 3-b. If you don’t have a house yet and plan to, use this step for saving towards a house if you are planning to buy it cash depending on the budget, or saving a minimum of 20% deposit if one is planning to buy a house using a home loan.

Step 4: Invest 15% of income for retirement

Investment vehicles advised by DR are obviously slightly different to what we have but the principles remain. In South Africa, vehicles such as Tax Free Savings Account, Pension Funds, Retirement Annuities or discretionary investing options are available.

Step 5: Save for your children’s education

If you don’t have children, move right onto Step 6. That’s me :).

Step 6: Pay off your home

I am now on baby step 6 and I can smell freedom. When my friend (Chantal) paid off her homeloan in 9 years, I was inspired. The idea of paying off a home in under 20 years, or under 30 years is almost unfathomable only because we thought it could not be done. Alas! I know a number of people differ on this one because generally home loans have a very low interest rate. Some argue that there is good and bad debt and that home loans are good debt that can be used to build wealth. Also, practically speaking, one would have to be very disciplined and put away money aside for years in order to buy a house cash. If you cannot, using a home loan may the best way to buy a home provided one does not buy a house they cannot afford which is a whole ‘nother conversation. Others believe it is better to rent than to buy a home. At the end of the day, each one will make a decision that works for them, but for someone like me who struggled under the weight of debt for years, this step could not come soon enough. Debt is no longer welcome in my life. Not for a house, a car, travel, clothes – whatever. I want this monster out of my life for good.

Step 7: Build wealth and be generous

Do you know what you have when you don’t have debt? MONEY! And do you know what you can do with money? Live a better life, change your family tree, become outrageously generous and make a difference in your community. Live like no one else now, so that later, you can live and give like no one else -DR. I close off with Mr Ramsey’s famous statement that he utters at the end of every show…

There is ultimately only one way to financial peace, and that is to walk daily, with the Prince of peace, Christ Jesus -Dave Ramsey.

Read more about Dave Ramsey’s baby steps here…

See you next week.

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