Recently updated on: September 20, 2023
Dave Ramsey's 7 Baby Steps is a great and practical guide toward better personal finance that has helped millions of people worldwide attain better financial habits.
It teaches you to save for your emergency fund, pay off debt, and build wealth while sharing it with others.
Here are Dave Ramsey's 7 Baby Steps:
- Save $1,000 for your starter emergency fund.
- Pay off all debt (except the house) using the debt snowball.
- Save 3–6 months of expenses in a fully funded emergency fund.
- Invest 15% of your household income in retirement.
- Save for your children's college fund.
- Pay off your home early.
- Build wealth and give.
However, since this guide is written by an American for Americans, it is only natural to write it in the American setting, and it can't directly be applied in the Filipino setting.
But I believe that these baby steps are an excellent guide for everyone, no matter where you live, because everyone has to deal with personal finance.
It just needs to be tweaked a little to fit the Filipino context, which I hope can be useful to fellow Filipinos without changing the message of the baby steps.
If properly implemented, this guide can save you time and money.
Table of Contents
1. Save P10,000 Starter Emergency Fund.
We can't use the $1,000 starter emergency fund of Dave Ramsey because that will be converted to P50,000, assuming a conversion rate of P50 to a US dollar.
For many Filipinos earning a minimum wage of around P12,000, the P50,000 suggested starter emergency fund is already large enough to be their 3-month emergency fund.
This will make it incredibly difficult for ordinary Filipinos to attain. It can also be intimidating to think you need that amount as your starting point.
So I chose the arbitrary number of P10,000 figure since it is close to the Philippine minimum wage.
It is also the price of entry-level Android phones. Plus, having a five-digit savings as an emergency fund can boost your confidence that you can save.
2. Pay off all debt (except the house) using the debt snowball.
If you don't have any debt, you may skip this step and start building your full emergency fund.
Generally, it is best to avoid consumer debt hindering your financial growth. Debt can also be challenging mentally because of the anxiety it can cause and can even be physically stressful.
So for those who accumulated different debts, like credit cards, car loans, and personal loans from friends, families, or loan sharks, it can be overwhelming to determine which debt should be eliminated first. Ramsey suggested using the Debt Snowball Method.
The Debt Snowball Method is a strategy for paying off debt by listing all your debts from the smallest to the largest. There is also no need to consider the interest rate of your loan.
The idea is to knock off the smallest loan balance first while only paying the minimum required payment for the rest of your loans.
Remember that this is not a Math problem, where paying off the highest-interest loan first is ideal to avoid paying more interest. This is more related to the psychology of money.
By paying off your smallest debt first, you can build confidence to pay all your debt. After paying off the first one, you can use that freed money to add to the next smallest debt. Then the next and next until you paid all your loans except for your house.
This is called the Debt Snowball Method because it allows you to start small and knock down your other bigger debts.
3. Save 6–12 months of expenses in a fully-funded emergency fund.
The 3 to 6 months' worth of expenses is the standard amount of a fully funded emergency fund. However, the pandemic and the current state of the healthcare system have shown that it may not be enough.
Instead of three to six months' expenses, increasing your emergency fund to six to twelve months of your salary would be better and placing it in liquid assets, like in a traditional or digital bank, which you can access during an emergency.
Take your time building your emergency fund, and don't hesitate to use it when you experience an emergency. Some people save for an emergency fund but don't use it even during an emergency, defeating its purpose in the first place.
4. Invest 20% of your household income in retirement.
The original Baby Steps suggested investing 15% of your household income for retirement, but I increased it to 20% because the pension most employees will get from SSS or GSIS will likely not be enough.
The 5% difference will be a big deal when compound interest kicks in.
Investing for your retirement while you're young is also important because it helps you build your portfolio early and trains your mind about the volatility of different investing products.
It is also important to note that you should only invest in something you understand, not something popular on your friends and social media.
The best long-term investments are in the stock market, especially dividend stocks, PAG-IBIG MP2, real estate, and other high-return investments.
5. Save for your children’s college fund.
There is a growing trend of couples deciding not to have children, even in the Philippines, called the DINK or Double Income, No Kids.
However, if you decide to have a kid, it is crucial to start saving for your child's college fund early, but only after you have completed the initial steps.
Though the future of formal college education is changing and may not be the same 15 years in the future, it is still important to prepare for this expense if your child decides to pursue an expensive college degree, like medicine.
For example, you can start investing in long-term investments through dividend stock investing and continuously add to it until they reach college.
The good thing about this investment is that it will continuously grow after your child finishes college.
6. Pay off your home early.
Though the price of houses is ever-increasing and may seem like an improbable goal for many millennials and Gen Zs, it will not stop young Filipinos from buying a home through long-term, sometimes high-interest housing loans.
Remember that in Step 2, we didn't include your mortgage in the debt snowball. So, the money you initially allotted to your other consumer debt can be used to pay your home loan earlier.
Paying for your house early opens up more financial opportunities for you and your family to build wealth and extend that blessing to others.
Related Reading: Big-Ticket Items: What should you consider?
7. Build wealth and give.
Once you get rid of all your debts and your money starts working for you, you can allocate more to building your wealth and hopefully give it back to the community.
Aside from tithing, you can also be generous, give more to the less fortunate, and be a blessing to others.
I believe wealth building should be a way to help others more, not just for self-preservation and inheritance to your descendants.
Final Thought
The 7 Baby Steps is a great financial guide that has helped millions of families worldwide. However, it is also crucial to contextualize it when using it in other locations because there can be cultural differences.
It is essential to know that these steps are still subject to your financial journey, but following them is a good starting point.
Finally, always remember to trust in God's plans for your life.
A man’s heart plans his way, but the Lord directs his steps.
Proverbs 16:9 NKJV