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.
You have a plan, you avoid debt,
you save money for emergencies and later for investing.
All of those principles work, but people kept saying, Which one do I do first?
I started laying out, Well, you should do this first and that first.
You should have an emergency fund before you start your 401k.
Then I figured out it's easier to have
an emergency fund if you don't have any payments.
So you need to get out of debt first. Because, of course,
I learned my lesson the hard way, going bankrupt and getting out of debt.
Learning how important it was to be debt-free as a part of building wealth.
All of that started to formulate after a few years of teaching
in various settings and what became Financial Peace University.
It used to be called Life After Debt.
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,
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, you can live and give like no one else.
What is the shortest distance?
We need a path to run on because the way you eat an elephant, it's overwhelming.
Do I do my 401k with a 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, and nothing gets done.
You get paralysis of the analysis, you get frozen.
Absolutely. These baby steps have worked for me.
They've worked for millions. It's really simple.
If you do it, they work.
It It all starts with Baby Step One,
having this foundation, saving $1, 000 for a starter emergency fund.
This is just a small buffer between you
and life before we start tackling the debt.
Exactly. 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.
If it's not retirement, you got some stock over here that grandpa
left you, you got a gold bar under your bed.
I don't know what it is, but you got any money that's above $1,000.
Maybe you got $10,000 in savings account.
That's $9,000 you got that you don't need past Baby Step 1.
We're going to put it all on Baby Step 2.
Baby Step 2 is the famous one.
That's the debt snowball where you list your debt, smallest to largest.
You pay minimum payments on everything
but the little one, and you attack the little one with a vengeance.
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 got to do here.
Let's get We're going to get busted into this, get a thousand bucks quick.
Baby Step Two, 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 are debt-free inside of two years.
Yeah, and that's doing it with some
gazelle intensity like you talk about in Financial Peace University.
Once you pay off all that debt, now you've freed up all those payments.
You have that income back in your life.
Think about what it would be like to have no payments It's about a house payment.
Wow. We're breathing easy.
Then we can move on to Baby Step 3,
where we save 3-6 months of expenses in a fully-funded emergency fund.
This is the final buffer where we say
we're never going back into debt because we are the bank now.
Yep. Grandma's Raining 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's a pandemic coming around every corner.
There's something coming. If you have $20,000 cash in the bank,
3-6 months of expenses, whatever it is, and you have no payments,
you are the third pig and 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 You've gotten up to ground zero.
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.
In Baby Step 4, you put 15% of your income
aside into good growth stock mutual funds in retirement plans.
Start where there's a match.
Beyond the match, always do Roth.
If you've exhausted Roth and match
and still are not to 15%, then go on to a traditional 401k or IRA.
But do Roths before traditional and do match before Roths.
It's mathematically in your favor to do that up to the 15%.
Don't do 20%, don't do 11%, do 15%.
While you are doing Baby Steps 4,
you're also going to be doing five and six simultaneously.
Absolutely. Baby Step 5 is where we're saving for our
children's college fund, and this is going to look different for everyone.
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.
Is this an oh, crap moment or, Hey, we're going to be diligent and safe?
Did 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.
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.
Our student loan problem is a parenting problem.
Mom and dad let kids sign up for crap they couldn't afford.
Bad mama, bad daddy.
They got to have the conversations. That's where it starts.
There's a reason you say Baby Step 4, invest for yourself before for the kids,
because there's 100% chance you're going to retire.
There's a 50/50 chance or less these days that your kid is going to go to college.
And graduate. Yeah.
This is less than 50% chance they're going to graduate.
This is important.
While you're doing 15%, you do whatever you need to do for your
kid's college, whatever you decide to do for your kid's college.
Beyond that, if you can find any money,
you do that on baby step 6, and that's pay off your house.
Start chunking on the house.
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.
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 till you get those three things done.
Now, get that house paid off.
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.
The average Baby Steps Millionaire,
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.
11. 2 years, 10.
6 years are the two numbers we keep running into.
So this is completely possible. Yeah.
And once you pay off that house,
it's time to build wealth and give outrageously in Baby Step 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.
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 at that point.
That's where it gets fun. You're giving it away.
These are the only three things you can do
with money, and you should do all of them at Baby Step 7.
That's the route you're going.
That's where you are, that's who you are.
That is the Baby Steps.