Baby Steps Explained: Step-by-Step Guide & Transcript

[00:00] So, George, 30 years ago when I started teaching this stuff, I was first teaching people how to get out of debt, live on a budget, be generous, live on less than you make.

[00:16] So you have a plan, you avoid debt, you save money for emergencies and later for investing. And all of those principles work, but people kept saying, which one do I do first? And so I started laying out, well, you should do this first and that first.

[00:28] You should have an emergency fund before you start your 401k. And then I figured out it's easier to have an emergency fund if you don't have any payments. And so you need to get out of debt first.

[00:40] Because, of course, I learned my lesson the hard way going bankrupt and getting out of debt and learning how important it was to be debt-free as a part of building wealth. So all of that started to formulate after a few years of teaching in various settings

[00:57] and what became Financial Peace University. It used to be called Life After Debt. And it started becoming what we now call the Baby Steps. The interesting thing is that now the Baby Steps have gone into the Total Money Makeover book,

[01:11] which has sold almost 10 million copies, and they have become the proven plan, the shortest distance between where you are now and wealth. Where you are, if you live like no one else later,

[01:24] you can live and give like no one else? What is the shortest distance? And we need a path to run on because the way you eat an elephant, it's overwhelming.

[01:36] Do I do my 401k with the match or my kid's college? Or do I have an emergency fund? Or do I pay on this 18% credit card debt? Or, or, or, or, or,

[01:49] and nothing gets done. You get paralysis of the analysis, you get frozen. Absolutely. and this step these baby steps have worked for me they worked for millions and it really simple if you do it they work And it all starts with baby step one having this foundation saving for a starter emergency fund

[02:06] This is just a small buffer between you and life before we start tackling the debt. Exactly. And if you have $1,000 already, great. Just set that aside. That's your baby step one. Any money you have that's not retirement, anything you can sell that is not retirement, you're going to liquidate it.

[02:22] if it's not retirement, you've got some stock over here that Grandpa left you. You've got a gold bar under your bed. I don't know where it is, but you've got any money that's above $1,000. Maybe you've got $10,000 in a savings account. That's $9,000 you've got that you don't need past Baby Step 1.

[02:36] We're going to put it all on Baby Step 2. And Baby Step 2 is the famous one. That's the debt snowball where you list your debts smallest to largest. You pay minimum payments on everything but the little one, and you attack the little one with a vengeance.

[02:49] Side note, Baby Step 1 should not take you more than 30 days. Maximum. You need to work extra, sell some stuff, have a garage sale, put the kids on Craigslist, whatever you've got to do here. Let's get it done.

[03:01] And, you know, we're going to get busting into this, get $1,000 quick. Baby Step 2, you should be debt-free, but your house. Now, you may have to sell a stupid boat. You may have to take an extra job. But most people that have followed the Total Money Makeover Baby Steps in Financial Peace University

[03:17] are debt-free inside of two years. Yeah, and that's with doing it with some gazelle intensity, like you talk about in Financial Peace University. And once you pay off all that debt, now you've freed up all those payments, right? You have that income.

[03:29] Think about what it would be like to have no payments for the house payment. Wow. We're breathing easy. And then we can move on to Baby Step 3, where we save three to six months of expenses in a fully funded emergency fund.

[03:41] This is the final buffer where we say we're never going back into debt because we are the bank now. Yep. Grandma's rainy day fund. Why? It's going to rain. Dave, you need to be positive. I'm positive. It's going to rain. You need to be ready when crap happens There a pandemic coming around every corner There something coming And if you have cash in the bank three to six months of expenses whatever it is and you have no payments

[04:04] you are the third pig in the three little pigs, the one that's in the brick house when the big bad wolf comes. You're ready for life. You're ready to go. Now you're ready to build wealth. But you just now have gotten up to ground zero.

[04:17] You've just now gotten up to even. When you have that emergency fund and you're debt free, Now you're ready to build wealth, and in Baby Step 4, you put 15% of your income aside into good growth stock mutual funds in retirement plans.

[04:31] Start where there's a match. Beyond the match, always do Roth. And if you've exhausted Roth and match and still earn up to 15%, then go on to a traditional 401k or IRA.

[04:44] But do Roth before traditional, and do match before Roth. It's mathematically in your favor to do that, up to the 15%. Don't do 20%. Don't do 11%. Do 15%.

[04:56] While you are doing Baby Steps 4, you're also going to be doing 5 and 6 simultaneously. Absolutely. So Baby Step 5 is where we're saving for our children's college fund. And this is going to look different for everyone.

[05:08] There's no set number here because it really depends on your situation. Did you have the baby last week or is the baby 18? That makes a difference on how much you need for college, right? what you got to do for college. It's like, is this an oh crap moment?

[05:20] Or hey, we're going to be diligent and safe. Then we wait almost until too late. Now they have to go to college debt free. They cannot participate in this epic student loan system failure that is called America right now.

[05:33] It is horrible out there. Do not let your kids go in debt. You do not have to go to debt. Go to community college for free for two years. Go to in-state school. Work six jobs. Get scholarships.

[05:45] our student loan problem is a parenting problem mom and dad let kids sign up for crap they couldn afford bad mama bad daddy they gotta have the conversation that That where it starts And the reason you say baby step four invest for yourself and for the kids because there

[06:01] a 100% chance you're going to retire. There's a 50-50 chance, or less these days, that your kids are going to go to college. And graduate. Yeah. Yeah. There's less than a 50% chance they're going to graduate. So this is important.

[06:14] So while you're doing 15%, you do whatever you need to do for your kids' college, whatever you decide to do for your kids' college. Beyond that, if you can find any money, you do that on baby step six, and that's pay off your house. Start chunking on the house.

[06:26] Now, when you're in one through three, you are so intense, your friends are freaking out. Your grandmother thinks you need counseling. You are gazelle intense like a gazelle running from a cheetah. When you're in four through seven, you're not intense anymore.

[06:40] You are now intentional. You're just doing it on purpose. But you're no longer on beans and rice. You're on beans and rice, rice and beans. scorched earth on one through three until you get those three things done. Now, get that house paid off.

[06:52] The average person following this stuff is paying off their home in about seven or eight years. Now, that tells us that the whole program is taking about 10 years, and the average baby steps millionaire,

[07:04] the average everyday millionaire that we've studied, we're finding them become a millionaire from the time they start with intensity followed by intentionality, become a millionaire in about 10 and a half years. Yeah. 11.2 years, 10.6 years are the two numbers we keep running into.

[07:20] So this is completely possible. Yeah, and once you pay off that house, it's time to build wealth and give outrageously in Davies at 7. That's where it ends. Yeah, you will be a millionaire shortly after your home is paid for if you don't at that moment.

[07:32] And then you continue to build wealth, and you raise your generosity, and you continue to build wealth, and you raise your generosity. And you enjoy the money. That's where it gets fun. These are the only three things you can do with money, and you should do all of them at Baby Step 7.

[07:47] And that's the route you're going. That's where you are. That's who you are. That is the Baby Steps.