In 2018, we reached an exciting milestone on our debt-free journey: we paid off all our non-student loan debt.
The more progress we make on this journey, the more questions I get about the process we have been using to destroy this debt for good.
Most people assume we’re following the Dave Ramsey baby steps. I understand why — it’s a popular plan, one we are very familiar with, so it’s a logical assumption to make.
But it’s only sort of true.
Reality is, while I agree with most of the baby step philosophy, there are a few areas where Dave and I disagree.
The Baby Steps: an introduction
Spend any amount of time looking for personal finance advice online and it won’t take you long to come across Dave Ramsey’s seven baby steps.
- Save $1,000 to start an emergency fund
- Pay off all debt using the snowball method
- Save three to six months of expenses for emergencies
- Invest 15 per cent of your household income into Roth IRAs and pre-tax retirement funds
- Save for your children’s college fund
- Pay off your home early
- Build wealth and give
More details about each step can be found here.
You don’t need to look hard to find stories about people who have completely transformed their finances by following this program step by step.
However, while these inspiring stories prove the plan works for some people, I’ve never been 100 per cent on board — and I have two very specific reasons why.
Baby-stepping to failure: the problem with Baby Step 1
The single biggest thing Dave and I disagree about should come as no surprise: I don’t believe $1K is enough for an emergency fund.
I get the logic of the $1K starter emergency fund, especially if you have absolutely nothing saved. Putting away $1K is a great place to start! Saving money, especially when you have debt, is difficult and having some savings is definitely better than no savings.
But taking the state of the economy and the job market into consideration, I don’t think $1K is going to cut it for most people — and to pretend otherwise is a recipe for disaster.
In our case, $1K pays our rent — and that’s it.
If, heaven forbid, something were to happen that resulted in a total loss of income for Jeff and I, we would only be able to pay to keep the roof over our head for one month.
There would be no money to put gas in the vehicle, to put food in the fridge, to feed the cats. If we only kept a $1K emergency fund, it would all be gone in 30 days.
That makes me feel uneasy.
How far would $1K get you in a genuine emergency? Would it be enough to keep you afloat while you navigate a challenging time?
If the answer is no, you might want to reconsider the $1K emergency fund.
Fail to plan, plan to fail: investing and debt
We started our debt-free journey with about $55K of debt.
We also have about $25K in RRSPs and contribute to pensions at work.
Although I did have a period of time where I wasn’t contributing much to my RRSP (I was saving our $5K emergency fund), I think the idea of not contributing toward retirement savings at all while paying off debt is foolish.
Much like the $1K emergency fund, I understand the logic behind not investing for retirement while paying off debt. The less money you send elsewhere, the more you have for debt repayment. This is especially relevant if the amount of interest you pay on the debt eclipses the amount you benefit from your investments. I totally understand this.
But then I read a stories like this one that make me think about the implications of not planning for retirement. And I think about situations I have encountered in my own life where I have seen this up close and personal…and I know that’s not what I want, for me or for my family.
All that said, I agree saving for retirement shouldn’t be the main focus when you’re paying off debt.
But if your employer offers a program to match RRSP contributions, I think it would be foolish to not take advantage of that.
Your future self will thank you for it.
My Modified Baby Steps
Even though Dave and I disagree about a couple of the steps, that’s not to say I think the whole thing is a bust. Here’s a look at what I see as our modified baby steps toward financial freedom:
- Save an emergency fund. Make sure it is enough to actually cover your expenses in the event your income is cut off.
- Pay off all debt using the snowball method
- Invest. While in debt: take advantage of employer RRSP matches (if offered) and/or make small contributions to personal investment accounts. Increase to 15 per cent when you’re debt-free and have savings in place.
- Boost your emergency fund. Aim for 3 to 6 months expenses on top of what you already have.
- Save for your children’s college fund (where applicable)
- Pay off your home early (where applicable)
- Build wealth and give*
* although honestly, I would recommend being generous with your money during all the steps, when possible. I wrote a little more about that here.
Dave Ramsey’s baby steps have helped countless people pay off debt and find financial freedom — and that’s awesome! The program can and does work — but it might not be for everyone.
And that’s OK. It’s called personal finance for a reason. You have to do what works for you. Our modified take on the baby steps has helped us make progress on paying off our debt and achieving financial freedom. At the end of the day, that’s the goal.
Do you follow the baby steps? Why or why not?