Have you ever thought “what does it mean to have financial freedom” or “how will I ever reach financial freedom?” These thoughts have been swirling around in my head for a long time. I see two vastly different approaches to financial freedom in the personal finance community. On one hand, we have the FIRE community (Financial Independence, Retire Early) where the main goal is to pay off debt and build wealth to quit your job.
This is not what I will be sharing today although it is intriguing. I will be sharing a slower approach to financial freedom with you. We have been approaching our finances based on the Dave Ramsey financial freedom plan.
The Beginning of our Journey to Financial Freedom
In 2015 after nearly 6 years of marriage and my husband being the primary breadwinner we made the drastic decision for him to leave his corporate management position. He decided to step back into an hourly role. This decision not come easily and honestly I was worried so much about our finances. We were barely scraping by as it was. The decision to go back to an hourly roll decreased our household income by about 25%.
I had used the program You Need A Budget in the past but honestly didn’t stick to it. It was a computer download at the time and we had to manually log each transaction which was time-consuming and prone to errors. It had worked for us in the past when I was diligent so I knew I needed to go back to it.
We dusted off the old YNAB and started to budget again. Luckily a few months later in December 2015, YNAB introduced their cloud-based app that will sync automatically with your bank. Talk about a game changer!
I also knew creating a budget and sticking to it wasn’t the only measure we had to take. In July 2015 when we were on the cusp of telling my husband employer his decision to leave management we had $83,427.29 in consumer debt. This number consumed us and I had no idea how we were going to make it work, but we had to figure it out quickly.
Dave Ramsey’s 7 Simple Steps to Financial Freedom
This is when we started our total money makeover. If you have never heard of The Total Money Makeover it is the best selling book by finance guru Dave Ramsey. Dave Ramsey has helped millions of people gain control of their finances, pay off debt, and live like no one else. This is the approach we decided to take with our finances and this is what I will be sharing with you today.
According to Dave Ramsey, there are 7 Steps to Financial Freedom. He refers to these as the baby steps since it is advised to take one small step at a time. If you try to run in the beginning you’ll fail. Taking baby steps really helps you lay a foundation and begin to gain financial security. When starting your Total Money Makeover be sure to stop all investing.
Dave Ramsey suggests only doing one step at a time. This will help you get through the steps as fast as possible. It’s about living as bare bones as possible to really set yourself up to win. It is drastic for most people but if you truly want to kick the debt to the curb and reach financial freedom these steps will get you there.
Step 1 to Financial Freedom: Save $1000 to start an emergency fund
The first step to gaining financial freedom is setting yourself up for the future. You need to break the cycle of using debt. Saving $1000 will help you stay one step away from disaster. Emergencies happen. It is unavoidable. You are setting yourself up to be able to pay for small emergencies in cash. Of course, this is not enough if something major happens. For the little things that come up, $1000 will suffice.
Step 2 to Financial Freedom: pay off all consumer debt using the debt snowball method
The debt snowball is paying off the smallest debt first then roll that payment into the next smallest debt. You continue to build the snowball as you work through your debts. The debt snowball is more about getting small wins along the way and helping you along the way rather than thinking purely about the math. If being debt free was just about the math we wouldn’t have consumer debt to worry about!
This is where the baby steps start to get more personal. Baby Steps 1 and 2 are purely based on setting yourself up to win and get rid of the consumer debt. Once those two steps are completed then we can really tailor the program to our wants and needs.
Step 3 to Financial Freedom: Save 3 to 6 months of expenses for emergencies
Once your debt is paid off you’ll want to revisit your emergency fund. Now, it’s time to really save some money and put a bigger barrier between you and a financial disaster. If you are a dual-income family with super-secure jobs then saving 3 months’ worth of expenses is a big enough barrier for you. If you are single and work a commission-based job you may want to be more cautious with a 6-month emergency fund.
Now that you have the first three steps done this is when we start to invest in our future and really start to change our family tree. Baby Steps 4 through 6 are done at the same time. They are long-term goals, therefore, you’ll be continually working on them.
Step 4 to Financial Freedom: Invest 15% of your household income into Roth IRAs and pre-tax retirement accounts
When you reach this step I recommend talking to an investing professional. They will help you navigate where to invest and how much you should invest.
Step 5 to Financial Freedom: Save for your children’s college fund
If you do have a child this step is based on your family values. If you would like to invest in your children’s future then this is when to start. Again, reach out to your investment professional.
Step 6 to Financial Freedom: Pay off your home early
You are consumer debt-free at this point, have an emergency fund, and are investing in your family’s future. Now, it’s time to pay off your house. I know this step is controversial because interest rates on homes are historically low in the United States. I get it. However, paying off your home will set you up to invest even more. Imagine if you didn’t have a $1200 house payment. Investing that money over the next 10 – 20 – 30 years will be huge!
Step 7 to Financial Freedom: Build wealth and give
Once you have your home paid off and you are investing in your family’s future the real fun begins. Without a payment in the world and no longer being a slave to the lender you can build your wealth and give. By building wealth you are leaving a legacy for your children and grandchildren. This step allows you to be outrageously generous and help others when the need arises. This step is when you can truly live within your family values.
Enjoy your money and financial freedom.
Financial Freedom is not a get rich quick scheme
Dave Ramsey’s plan is not about getting rich quick and building wealth fast. The baby steps will take time. If you are intense, depending on your debt load, you will most likely be debt free in 24 months or less. Then take six to twelve months to build your emergency fund. When you’re 3 years into the program you will be at a point in your journey that you are finally building wealth.
We have taken a slower approach to our debt-free journey. We are currently three years in and still, have about $36,000 to pay off. With the reduction in income, it has been hard for us to squeeze extra dollars out of the budget. Over the course of 3 years, we have averaged a principal reduction of roughly $1300. This is awesome since we live on the median family income for the United States (less than $60,000 annually).
Life happens while you are on your journey to financial freedom and that is okay. The biggest takeaway from our journey is to not give up. It is easy to get sidetracked. Knowing why you are on this journey will help you push through.
The Total Money Makeover and Dave Ramsey’s 7 Baby Steps to Financial Freedom will change your life. Do you truly believe you can be financially free? It is not an easy journey. Most people in your life will not understand what you are doing. If you stick to it long term the reward is great.