Money & Finances

Breaking Dave Ramsey’s Baby Steps

Is breaking Dave Ramsey’s baby steps a better way to financial freedom? For me, it might have been.

I think almost everyone who is interested in personal finance or paying off debt has heard of Dave Ramsey and his baby steps. He’s a financial guru who’s program has undoubtably helped a lot of people get out of debt. As far as debt programs go, it has it’s good points. It is very simple to get started and follow. It uses a straight forward approach based on phycology. And there is a lot of hype, so finding a supportive community of likeminded people might make the journey easier for you.

I won’t say that it’s not a great system. For many people I assume it has done exactly what they hoped it would. And any way of helping people become smarter with their money is wonderful in my books. But after reading a bit about Dave Ramsey’s baby steps, I realized that I had started my journey by breaking many of them. The thing is, I’m less of an emotional spender nowadays, and I make most of my decisions using math. So I am always going to choose the best route based on the numbers. I feel like the baby steps are simple to a detriment, and that debt can be reduced or savings increased faster using other methods.

I won’t accept any hate on this matter. If you love him, great, I love that you love him. If his system worked for you, I am so happy that you are succeeding in your journey. I have no intention of changing anyone’s mind. But you know that I write my own story, and it looked NOTHING like his. I encourage each of you to figure out what works best for you, what motivates you, and what tools will drive you forward.

Disclaimers over with, let’s dive in.

Step One – Emergency Fund

“Save $1,000 for your starter emergency fund.’

Back in April 2020 when I started my debt free journey, I had over $1000 in a savings account. But it wasn’t for an emergency. It was for a Disney trip. Not smart, I know, but I was determined that my kids would experience the childhood dream that I never did. Anyway, when I started paying rather large chunks on my credit card, I was determined to keep the momentum going. I liked seeing the numbers go down, and I wanted to see them move faster than my pay cheques allowed. So I transferred all of my savings over to my credit card. It felt SOOO good!

Now I wouldn’t suggest giving up your emergency fund to anyone. I took a calculated risk, but one that few would probably be comfortable with. I made the assumption that there are 4 main emergencies that one would need to dip in to their fund for. House, car, loss of work and health. As we didn’t have a car at that time, that wasn’t a concern. A housing issue seemed unlikely, unless the worst happened and we had a fire or natural disaster. Frankly $1000 would not have gone far in such a case anyway, but I saw it as very unlikely. As Canadians, I know that injury or illness could have a financial effect despite our health care system, but I banked on it being unlikely. Finally, my employer was booming during the first stage of Covid, so a layoff seemed almost impossible, but I still would have had government benefits and minimum wage customer service positions to fall back on if it came to that.

The other big consideration was that by putting money on my credit card, it was not gone. I still had access to it if I absolutely needed it. That would not be the case with other types of debt, like a car loan or student loan. And that $1000 saved me over $10/month for each month that I remained in debt, so all told it reduced my debt by $1190 when it was all said and done.

Step Two – Pay Off Debt

“Pay off all debt (except the house) using the debt snowball.”

The snowball method may be great for your motivation, but by the numbers it just doesn’t make sense. Paying off debt from the highest rate to the lowest will save you significantly in interest. I would always use the “avalanche” method over the snowball, personally. Regardless, I only had one source of debt. Just one nearly maxed credit card.

There was one thing I did, many years ago actually, that helped quite a bit with this step. At a point when I realized that I was carrying a balance, and probably would continue to for a while, I called the bank and asked for a lower rate. They switched my points card to a low interest card (12.99%) from 19.99%. I can’t fathom how much more debt I would have accrued had I not done that. It meant that a larger portion of my payments went to my principle instead of interest. No brainer for me.

Step Three – Increase Emergency Fund

“Save 3–6 months of expenses in a fully funded emergency fund.”

Well I’m not doing that. See step one. My life has changed a lot since I started this journey, and it comes with different risks now. I own a car and a home. Obviously I have insurance on both, as well as a small amount of life insurance for myself and my partner. In terms of car repairs, I am prepared to pay out of pocket for anything that comes up, including replacing her with a similar valued used car. If a costly repair came up tomorrow I would pay for it on my credit card, then prioritize paying it back quickly. I know I can do that, because it is a skill I have worked very hard to acquire, and I will not let it go. I’ve also done some research on different emergency home repair options through our local housing authority. If needed, I could qualify for a loan or grant through this organization or my bank. I feel more confident in my options than many in my position probably would. Having built up a strong credit rating will give me affordable borrowing options should the need ever arise.

And I continue to not be worried about losing my income. I still feel like a valued member of my company, but more than that, I know what back up options there are for me. Employment insurance would cover me while I looked for another opportunity, and there are a few sectors I can work in that always need people.

But honestly the most important part for me is that we continue to live below our means. Because roughly $1000/month remains after all bills and expenses are covered, I have a comfortable level of flexibility to pay unexpected expenses and weather storms.

Step Four – Retirement

“Invest 15% of your household income in retirement.”

This is my favourite step so far. I fully support doing this. Because I’m late to the game, I actually want to aim for closer to 30% until I max out my TSFA, and then explore other options. Even with pretty aggressive saving and investing, without a big income increase I’m looking at a pretty modest retirement. But retiring at all is not something I thought I would be able to do a few years ago. This is my main driver now. I would love to see early retirement in a tropical location. I don’t know how realistic that is right now, but all I can do is squirrel away what I can and hope it will be enough by then. I’m pretty new to my investing journey, but I’m learning as I go and seeing results already.

Step Five – Kids Education

“Save for your children’s college fund.”

I’m also not mad at this step. I agree with it, and I agree with its place on the list. If my retirement is on track before my kids are college age, I want to help them in any way I can. The least I can do is teach them how to prepare themselves when they start working their first jobs. I can help them save and invest and teach them how to be frugal during their college years. The best place to start is probably these lessons that will last a lifetime and get them started on the right foot financially. I think people value things they have worked hard for more than things they are handed and I want them to go to college only if they are serious about putting in the hard work.

If I can afford to help financially there are two things I’d like to do. Saving for their tuition would certainly help them cover those expenses. But I also have a fantasy of buying a condo or townhouse that they could live in with roommates to cover the expenses. They could essentially live rent free until they graduate at which point a myriad of options would be available. It could be sold, to them or someone else, I could rent it to someone, live there myself and rent or sell my primary residence. I could potentially invest my own savings or use a HELOC for the down payment, as long as doing so would not interfere with my retirement.

RESPs have always been the popular choice for education savings in Canada, but at this point in time I am not sure if they are the clear winner. I’ll revisit this later, when it becomes more relevant to my situation.

Step Six – Mortgage

“Pay off your home early.”

This is the advise I not only hear the most, but also that I HATE the most. I am sure there are circumstances in which this would be the best idea. If interest rates are 1980’s high, absolutely. If you can’t put aside the difference and grow it, you might as well put it towards your mortgage. And if you are close to retirement, paying the last of it before you retire is certainly a good plan. But those are not my current reality, and with those considerations I look to the numbers.

First, I don’t consider my mortgage to be debt. It is leverage. And that is because the interest I spend each month is earning me more money than it is costing me, for several reasons. First, my home value will go up over the years that I own it. Second, investing the same amount as I am paying will yield more long term in the market than the interest saved by paying early. And third, with inflation, my dollars today are worth more than they will be in the future, so this is the time to grow them, because my future payments will actually be of a lesser value.

I know this isn’t the conventional information that is often talked about but I am sticking firmly to it. As long as you invest the difference, the long term financial benefit outweighs the savings had by paying off a mortgage early.

Now, that’s my story right now, because my interest rate is remarkably low. I expect rates to continue increasing, and when I renew in 4 years I will be paying more. I have been keeping an eye on trends and forecasts, and I am prepared for two options at that time. If I can renew at a rate lower than the returns I’ve seen on my investments by that time, I will eat the additional cost because I will still be leveraged to earn more. If rates exceed my returns, I will likely cash out my investments and make a lump sum payment to reduce my principle. I’ll probably spend all of 2024 weighing my options before coming to a decision. I don’t want to touch my investments, but if it makes the most sense by the numbers, then I am prepared for that option.

Step Seven – Happily Ever After

“Build wealth and give.”

I’m not sure if this is really a step, or just the purpose of the steps in the first place. Either way, building wealth to see me through my old age, and teaching my children lessons to start them off on a better foot are the purpose of my financial journey.

Maybe I’m just a rebel, but breaking the rules sure worked in my favour. While it’s probably not the best path for everyone, I wouldn’t change a thing!

With Love

Melissa

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