What Are the Seven Financially Wise Baby Steps?

There are many people who discuss different steps to obtain wealth. I learned these seven baby steps in 2014 from Dave Ramsay (https://www.daveramsey.com/dave-ramsey-7-baby-steps) and at the time I was already doing some of these steps on my own but not really intentionally. Nowadays I’m all about intentionality! In fact, I might be intentionally annoying to my children and my clients about these baby steps. There is no guarantee that you will become wealthy in this life but I don’t feel like wealth is necessarily my goal but instead financial wisdom is. These are the steps that I have found to be wise in my personal journey.

Steps 1-3 need to be done in order, one step at a time

1. Keep a minimum $1000 emergency fund:

I personally like to keep at least $3,000 in my emergency fund because that is the minimum required in my bank account before the bank charges a fee of $10/month. I don’t gain any interest money but in my eyes, I earn $10/month instead of losing $10/month. This amount is also my personal comfort level. You can decide if you want more than $1000. I like to keep this amount of money as a safety net in case we have any “Murphy’s law” type of events that WILL occur. What is included in “Murphy’s Law?” A flat tire? A furnace repair? A small flood in the basement? Keep in mind this is just the starter emergency fund, you will fill this up more in baby step 3.

2. Pay off all debts:

All debt is bad debt because you are paying interest on borrowed money because, Guess what? If you don’t have the money to pay for something and you have to borrow money, that means that you pay a penalty for not having the money up front! As Rachel Cruze says:

“Debt is owing anything to anyone for any reason.”

Sometimes, I think we forget the definition of borrowing. It seems that due to good marketing, we have fallen for the lie that having debt is normal and expected and that we will always have payments our whole lives. This debt includes the “good” student loan debt, car payments, credit card payments etc. (this excludes mortgage debt at this point in the game although it is still debt).

Another way to look at debt is to see it from the perspective that

“Debt is built on a foundation of lies. It looks like you have money that you don’t”

(Rachel Cruze).

It’s similar to the dishonesty of identity theft of someone else’s life while having the stress of making payments on it. You are trying to imitate other people who may or may not have money. Now I’m not suggesting that we go out and ask friends and family “hey, did you save up and pay for that car, or are you making payments?” when they drive up in a new vehicle. I’m suggesting that we live transparently and honestly and if you don’t have the money for something then act like it or save up so that you do have the money for something that you want.

To pay off these debts, start with a debt snowball and list all of your debts from smallest to largest and start paying off the smallest one even if it has the lowest interest rate. Being Financially intentional is 80% behaviour and 20% math. Most people have gotten themselves into debt because of their poor behaviour and unwise decisions so we need to use the opposite behaviour and momentum to get out of debt and by gaining confidence that it is possible to live without any debt. We got this! We can do this! Pay the minimum payments all on your debts except the smallest one, then use any extra money to pay off the smallest debt first, then when you no longer have that debt HOORAY! (I knew you could do it). Then you use that amount of money that you would pay towards that smallest debt and pay it towards the next smallest debt and then keep going until you pay off your largest debt which of course is going to take you the longest amount of time. Basically, you are making concentrated payments on one focus debt (https://www.moneyunder30.com/snowball-vs-avalanche). To stay motivated, find a free debt tracker sheet off the web and put it on your fridge and fill it in every time you make a payment so that you can visually see yourself making progress. Try to achieve this process in less than 3 years so that you don’t end up experiencing Debt Fatigue.

3. Save up a 3-6 month emergency fund:

This is the mother of emergency funds. This is what you keep handy in a savings account that is somewhat easily accessible. Again this is for EMERGENCIES ONLY! Not “I wants!” Emergencies include injuries, illnesses, lay offs or the coronavirus. To save up for this step, use the money that would have gone towards all of your debt repayments to start a savings account for 3-6 months worth of your basic expenses. Not your current budget but the absolute basics of food, shelter, transportation and clothing.

Did you know that in Canada, it takes 120 days just to process the government disability paperwork and 28 days to receive EI?

Now that you are finally out of debt, we don’t want to take a giant leap backwards by going backwards into debt because of an emergency. Isn’t it nice to be progressing forwards in the green, instead of backwards into the RED? It’s like a see-saw, your net worth is now teetering in the other direction towards wealth!

Steps 4-6 can be done simultaneously

4. Save up for Retirement:

An ideal amount is 15%. You decide whether this is 15% of your take home pay or gross pay. This percentage might be less than 15% if you already have a pension plan that automatically deducts a portion of your paycheck towards your retirement. And for goodness sake, if you have an employee matching RRSP, take advantage of this. It is FREE money and you are missing out on INCOME, if you don’t sign up for this. Retirement comes before your child’s education because there is no guarantee that they will go to post secondary school but you WILL retire barring any significant death or illness. Don’t rely on the government to take care of you with just CPP, OAS and GIS because these payments only add up to living in line with the poverty line. I want you to be able to enjoy retirement, you earned it! You worked hard your whole life. And while you are working towards retirement, please live a healthy lifestyle. I see people in my work as a nurse in Homecare and the Emergency department, who are paying up to $300/month for medications and this is their portion of the cost (25%). If we all ate healthier and exercised more then we wouldn’t be giving our hard earned money in retirement to big pharm! And that $300/month could be used towards something fun, not the side effects of 24 different medications!! I kidd not!

It doesn’t matter what you invest in, just the behaviour alone of setting aside money for the future in diversified investments is what matters most. I listened to a podcast about investing (https://www.artofmanliness.com/articles/finances-advice-pandemic/) and Ramit Sethi said:

“there are about 10 days in 10 years in which you will make a lot of money but you never know which of those 10 days are the right ones,”

so if anyone ever says they know how to time the market then they are wrong. It’s all about the behaviour of consistently saving, investing and over the long term making money through compound interest. You decide your risk tolerance whether it is low, medium or high and go from there, pooling it in mutual funds to hopefully earn more than inflation. This window of investing time could be anywhere from 1-45 years depending on when you start investing. It's never too late to start, but the sooner the better. It’s interesting to calculate that if you started investing $500/month at age 20 until age 30 (10 years)and then never again added to your investments and just let it grow via compound interest, then by age 60 you could potentially earn a similar amount of interest compared to someone else who started investing $500/month at age 30 until age 60 (30 years). Due to the magic of compound interest!

5. Save up for your children’s post secondary education:

Again, you decide how much you can afford to set aside each month consistently for your children. Your children won’t suffer if you are not able to set aside any money for them, but they WILL have to work harder and look for more scholarships. The idea of saving for your children’s RESPs is similar to saving for retirement. The earlier you start the better, because it gives your investments time to grow. However, usually this is a smaller window of time, like 18 years or less. Please have a discussion with your children early on about whether or not there is educational money set aside for them. Please don’t just spring it on them in their 2nd semester of grade 12,

“oh yeah, we don’t have money for you to go to school... so yeah, you’re going to have to apply for student loans.”

Warn them ahead of time and then come up with a game plan together, compromised of applying for scholarships and working at jobs and saving up money, so they don’t have to foolishly enter the cycle of debt starting with student loans.

6. Pay off your mortgage early:

This is such a novel idea! I certainly never thought this was possible until it was mentioned to me. Then I considered the cost. Do I want to pay an extra $30,000 or more of my hard earned money towards interest payments on my mortgage? I found in my experience, bank customers who put extra money onto their mortgage must be rare because when I would go to the bank to complete this transaction, the teller barely knew how to enter it into the computer. The tellers would have to ask each other the code to enter into the computer because it was so uncommon. However, they soon got to know me at the bank and actually started cheering for me as my principal rapidly decreased.

Don’t just assume that you are automatically locked into paying a mortgage for the next 20-40 years of your life. You can FREE yourself sooner! You can double your initial payments! You can add any bonus money you receive and put it onto your principal mortgage amount. Even $50/month onto the principal, can shorten your mortgage. It's interesting to note how much just a 0.5% increase in an interest rate on a $250,000 mortgage over 20 years can add up to $5000 in extra interest paid, per five year term. So shop around for a good interest rate or be strategic when renewing your next mortgage term.

7. Give generously!

Saved the best for last! You can and should be generous throughout the baby steps. Starting to give throughout the process, changes your heart and reminds you that the world doesn’t revolve around you, and that others need your help as well. You always have something to offer this world with your different gifts and talents. However, think about how with the freedom of no payments and no debts, how you can realistically bless those around you who are needing help. Listen to God’s voice as he directs you towards those that you can help.

Now Go and Be Intentional!