*The Dave Ramsey 'Baby Steps' Thread*

[Bellex917]

Great questions! First, congrats on being debt free!! If I understand everything correctly, I would place you in steps 4-5-6. Here's why:

BS1: Complete. Assuming you have at least $1000 in the bank.
BS2: Complete. Assuming you have paid off all debt except for any mortgage.
BS3: Complete. Technically, the Baby Step is to have 3-6 months of household expenses saved (i.e., can you last 3 months if neither spouse was working?). Dave's recommendation is 3 months if you are a double income household with stable jobs and health. Otherwise, everyone else should generally be saving up to 6 months of expenses. So, technically, 3 months will meet the requirement, even if it is less than Dave's 6 month recommendation.
BS4: Unknown. Are you currently saving 15% gross income into (preferably) tax-advantaged retirement accounts? Technically, individuals would not invest more than 15% towards retirement at this time.
BS5: Unknown. Do you have children and are you currently saving anything towards college funds? There is no set minimum here, so anything counts.
BS6: Unknown. Do you have a mortgage and are you currently paying it down with extra principal payments? There is no set minimum here, so anything counts.

If you are not contributing to retirement, then you could be considered Baby Step 3 while you work to increase your emergency fund. However, if you have already saved a minimum 3-month emergency fund and moved on to Baby Step 4, then I would consider you to be there or higher. In that case, anything extra you save would be considered padding your existing emergency fund or going towards some other sinking fund.

Hopefully, that makes sense, but if you have any more questions, please let me know!

Thanks for the feedback!!

BS4- Yes, not 15%, but I have a stable pension for my teaching and I've run the numbers a million times. We already have a solid amount and if we contributed not another penny we'd have well over 1.5 million, plus my pension. Considering we plan to keep contributing at this rate, we will be set.

BS5- We are behind here. We started 529s for them 2 years ago. Since I was paying off debt it was minimal, but each has a few K in there. The plan is to really ramp that up.

BS 6- We do have a mortgage, but we are not paying it down additionally at this point. I do plan to start that next year with a small amount extra per year (like 3-4k sent extra) with the hope that the mortgage will be paid off around the time my H retires at that rate.

 

[ThereYouSeeHer]

Thanks for the feedback!!

BS4- Yes, not 15%, but I have a stable pension for my teaching and I've run the numbers a million times. We already have a solid amount and if we contributed not another penny we'd have well over 1.5 million, plus my pension. Considering we plan to keep contributing at this rate, we will be set.

BS5- We are behind here. We started 529s for them 2 years ago. Since I was paying off debt it was minimal, but each has a few K in there. The plan is to really ramp that up.

BS 6- We do have a mortgage, but we are not paying it down additionally at this point. I do plan to start that next year with a small amount extra per year (like 3-4k sent extra) with the hope that the mortgage will be paid off around the time my H retires at that rate.

If the pension is something you are required to contribute to, I have heard that counting half of those contributions towards your 15% has been mentioned on the show. I don't have a concrete Ramsey source for that, but it's something to consider. Dave is cautious about pensions because they are controlled by someone else, they generally underperform the stock market, and your "guaranteed" amount may not be safe if the pension is underfunded or fails. So, that's good to keep investing elsewhere, as well.

Ok, don't stress about Baby Step 5. Technically, it's the only step that can potentially be completed without any contributions! This could be for a number of reasons: sometimes grandparents or others may be funding a child's education, perhaps parents will require their children to fund their own education through work or scholarships, and maybe the cost is reasonable enough that it will be cash-flowed.

Sometimes, once individuals get past the first three Baby Steps, they start to chart their own path for the remaining steps. This can be due to different calculations regarding retirement or not wanting to buy a house or even pay down the mortgage.

Regardless of how one moves forward, it is highly advised to continue avoiding debt while saving and investing for the future. So, it sounds like you are on a good path. Way to go!!

 

[Sadeesmom]

I normally agree with everything ThereYouSeeHer says, but I have to subscribe to the "you win at what you focus on" philosophy more.

We are workin to double our eFund so we'd have a full six months

Since your goal is a 6 month emergency fund, I say you are in BS3 until you hit that goal.

Pause any extra retirement contributions, pause the 529 contributions until you get that full 6 months. It's not just an income loss or house repair fund. It might be a medical emergency for a household member, an emergency trip to visit a relative, a vehicle repair, or a number of other possible things.

Once you have that emergency fund fully funded, then you can jump fully into BS4-6.

If the pension is something you are required to contribute to, I have heard that counting half of those contributions

Yes, if you are required to contribute 8% of your income to your pension, then you count that as 4%, so you need to invest an additional 11% of your own money into a retirement vehicle.

 

[ThereYouSeeHer]

Since your goal is a 6 month emergency fund, I say you are in BS3 until you hit that goal.

Pause any extra retirement contributions, pause the 529 contributions until you get that full 6 months. It's not just an income loss or house repair fund. It might be a medical emergency for a household member, an emergency trip to visit a relative, a vehicle repair, or a number of other possible things.

Once you have that emergency fund fully funded, then you can jump fully into BS4-6.

I like this line of thinking, and feel this is a valid answer as well!

Full 3 month eFund for all expenses

We are workin to double our eFund so we'd have a full six months

Are we still in BS3, bc we are working to build up our savings, or 4-5-6 bc we do have an efund and are choosing to double it almost like a house sinking fund?

Ultimately, you would have to decide if the 3-month emergency fund is large enough to cover emergencies that are 1) unexpected, 2) necessary, and 3) urgent. If not, then stay at BS3 and continue to build up the actual emergency fund. If so, then move up the steps while separately saving for a house sinking fund. Your answer may be influenced by other factors like total household income, how you define expenses, and how stable the rest of life is. These aren't things you have to answer here, just some things to consider.

If it helps, here is a call where someone completed their emergency fund and moved on, only to second guess themselves. You can hear some of Dave's reasoning about how to consider the emergency fund complete, and even what an emergency fund should cover versus having some other saving fund.

 

[ThereYouSeeHer]

Wrapping up July...

--No changes in the Baby Steps, although we made some progress on Baby Step 4. We previously decided to only contribute to Roth 401(k) or Roth IRA options moving forward, but were trying to find the right time to make the switch. Since it was an extra paycheck month, we finally went ahead and moved all our work contributions to the Roth option. It's a bummer to lose the tax break in the present, but I do believe it is the right move for the future. However, the switchover caused a glitch, and we haven't been getting the employer match since then (not to the traditional side nor the Roth side). It's being worked on, but ooh, double bummer!

--This month was so expensive. Our energy and food costs were the highest they've ever been, our 6-month umbrella policy was paid in full, our annual property tax was paid in full, and a family member had four wisdom teeth pulled. Since we were behind on saving for the spring semester, we had to take our other savings fund and repurpose it for college. This should get us back on track.

--Next month will also be expensive for back-to-school purposes, but we are expecting to restart our savings goals after taking a break this month.

August budget is set!

 

[QueenIsabella]

Just to be clear, the employer match will go in a regular 401k--just your contribution goes in the Roth 401k. This has to do with business tax laws. I just wanted to make sure you knew that--it's a tad confusing. You still should be getting whatever company match you're entitled to.

 

[ThereYouSeeHer]

Just to be clear, the employer match will go in a regular 401k--just your contribution goes in the Roth 401k. This has to do with business tax laws. I just wanted to make sure you knew that--it's a tad confusing. You still should be getting whatever company match you're entitled to.

Thank you! Yes, we were expecting the employer match to stay on the traditional 401(k) side. However, I think the new Secure 2.0 does allow for employer matches to be placed in a Roth account now. I can’t imagine that’s what caused this, though, since it doesn’t seem many companies are even participating in that new option. Unfortunately, our matches just went poof and didn’t show up anywhere, but I guess we’ll see what happens!

 

[ThereYouSeeHer]

Wrapping up August...

--No changes in the Baby Steps, except the ongoing saga of our retirement account. Our paychecks and retirement accounts have had multiple errors over the past two months. We switched our contributions back, just to forget the whole thing, but that also caused a glitch. It has been extremely frustrating, especially since making this switch took time and planning on our part. It has been mostly resolved at this point, but we are keeping an eye on it.

--We celebrated our twentieth wedding anniversary...frugally. We finally got around to using a gift card that was about seven years old (shows you how frequently we eat at sit down restaurants). Paying only $20 out of pocket for an expensive, fancy meal felt like Cinderella before midnight, haha!

--Each month seems to be in competition to outspend the previous month. Costs were sky-high this month with back-to-college, back-to-homeschool, our six-month car insurance premium, and other car and life expenses. We re-worked our budget spreadsheet to track certain spending more closely, so that's been good. We have also been using our energy provider's app to see which days have the most energy use. Apparently, it's any day that we are using the dryer! We'll have to see if we want to utilize air drying more. The heat and humidity have finally been going down, so hopefully, we'll have less AC and dehumidifier costs. No savings this month, but September should see us back to more regular spending levels.

September budget is set!

 

[Starport Seven-Five]

We'll have to see if we want to utilize air drying more.

Do you have a drying rack? You can get a ton of clothes on them in a relatively small space.

When single I lived without a dryer for a couple years using only a drying rack. I didn’t mind it but when the gf (now wife) moved in it was deemed a bridge too far haha.

 

[ThereYouSeeHer]

Do you have a drying rack? You can get a ton of clothes on them in a relatively small space.

When single I lived without a dryer for a couple years using only a drying rack. I didn’t mind it but when the gf (now wife) moved in it was deemed a bridge too far haha.

We do! I definitely need to use it more.

This month, I have been more mindful about how long we let the dryer run. I've been pulling clothes out a little early and letting them air dry the rest of the way. Some items just do better in a dryer, but for others, I'll see if I can air dry them the whole time.

 

[ThereYouSeeHer]

Wrapping up September...

--Overall, expenses finally went down a bit this month, although we still had some extra ones. We added a new cell phone line, had some birthday expenses, and a final dental bill came in a couple hundred more than what we already paid. We were able to cash in some coins at Coinstar to make it all work. Thankfully, we were also able to have a little fun this month with a couple of outings, we bought some assemble-it-yourself furniture, and saved money for college. It felt like we finally had some breathing room again and a little margin!

October budget is set (extra paycheck month...woohoo)!