Why You Should Follow These Baby Steps with Extreme Caution!

Baby Steps – User Beware

Not going to lie, listening to Dave Ramsey helped me realize that a lot of Americans are addicted to living beyond their means. If you struggle with money, it’s likely that you need a wake-up call.

However, uncle Dave is not always right. When it comes to financial literacy, the subject matter extends far beyond getting control of your debt. Sure paying it down is an astronomical feat, building wealth is a whole other side of the curriculum. We are going to be talking about some of the things you shouldn’t listen to Ramsey about. Or at least, the elements of financial freedom that you should be aware of.

Baby Steps Centered on Consumer Debt Repayment

Credit cards are a good tool.

Although Dave’s message is synonymous with the crusade against bad debt, there are those who master the use of credit. For one, great credit card debt management helps you build a good credit score. Not only that but there are also perks. From cashback rewards, airline miles, built-in benefits, and the move to a cashless society, credit cards are essential in the modern world.

To be clear, a credit card is merely a tool like a hammer. Armed with these cards, you can either build or destroy your entire life. The average credit card user was carrying a balance of $5,474 last fall, according to TransUnion, up 13% from 2021.

If you get stuck in the endless cycle of living for the Joneses, you are likely to end up in long-term debt.

However, it’s important to recognize that the problem isn’t with the credit card. The issue is with the user. If you suck at managing your money, then you should stay away.

Lower-income cardholders are more likely to carry a balance. But even among people making $100,000 a year or more, 37% don’t pay their credit card bill in full every month.

But for those who are disciplined with their spending and diligent about paying their credit card off, there’s nothing wrong with having one. My wife and I have five credit cards and will probably pick up the Amazon card this year. We pay them off systematically. Additionally, we carry balances. Sometimes as high as $30,000. For us, it comes down to the interest paid or how we offset them with cashback, points earned, and/or other rewards.

We literally get Disney Plus, New York Times, and Audible; FREE with Amex. With all of our travel rewards, it’s hard to go back to not using travel lounges. Credit card use comes down to how you manage your wants and by proxy your money. If you can control how you approach your wants, the card is just a hammer that builds.

Don’t Buy a Home. Pay Off Your Mortgage Early.

There was a time when interest rates were at an all-time low. However, the “Baby Steps” messaging was so entrenched that people were rushing to pay off their 30-year mortgage at 3.4% with gazelle intensity. Even if you had a 15-year mortgage at 4.25%, you would have been better off matching in your employer-sponsored. No one can beat a 100% return on your investment.

Beyond that, paying off your home while skipping the stock market bull run of as much as 8%-12% on average was a bad idea. While some were focused on saving and paying down debt, or buying homes in cash, prices, and interest rates went up.

After plateauing between 2017 and 2019, house prices in the United States saw a dramatic increase in 2021 and 2022. The average sales price of a new home in 2020 was $391,900 and in 2022, it reached $543,600. Real estate is just a real-life monopoly game. You can only go around so much until you paid too much in rent and way too much in inflation.

Never leave massive profits on the table in the warped pursuit of debt freedom. There is too much profit and benefits on the wealth side. Focus on owning an affordable home sooner than later.

Pay Off Smaller Debt First But Don’t Build Wealth Last

In many cases, paying off your small debts might be the push you need to get active in your personal economy. Quick wins give you jolts of energy and confidence. However, if you have a myriad of debts or they are high-interest, you have to get a bit more creative with the order.

High-interest debt like credit cards should be attacked as soon as possible. But try to do that after you invested or allocated enough for the employer-sponsored plan match (i.e. 401k).

The next thing is to consider holding off on extra payments to your mortgage until your mid-40s. Your student loans can also hold off until your late 30s. The first threshold is typically consumer debt which includes credit cards and personal loans. List those on a piece of paper. Note their associated interest rate and minimum balance due. Finally, reorder them by interest rate.

Beyond the minimum payments, use any surplus cash you have to toss at the debt with the highest interest. The Debt Avalance Method is the most efficient way to pay off debt.

Putting Your 401k Contributions on Hold is Not the Best Idea

In my opinion, this is likely a terrible piece of financial advice. While I can’t put it directly on Dave, it’s clear that the audience receives the message differently. You really have to utilize your 401k, 403b, 457b, or TSP equivalent. It’s one of the easiest ways to secure your wealth in the long run. Always, match if and when you can.

A Fidelity Investment survey found that 17.5 million Americans leave ‘free’ retirement plan money on the table.

A matching of just $3,600 per year or $300 per month over 30 years at the historical average of 8% is worth $422,565. And that’s just the match. By year 40, that match is just short of $1 million. How short? The ending balance is $966,324. Join the 62 percent of workers who view 401k employer match as key to reaching retirement goals.

You really can’t afford to waste time. Time is the biggest factor for growth.

Try to shoot for the 2023 max contribution if you have the extra resources, 401k contributions also help you save on taxes. If cash flow gets tight, you can always decrease future 401k contributions.

Pursuing Baby Step Wealth Goals With Maximum Intensity

It’s undeniable that Dave Ramsey fires up the crowd with his message. However, it’s also important that you can’t sprint forever. At one point, ramen noodles and beans get tiring to eat. Your frugalness can carry you favor with Dave but it might hurt your chances with your spouse.

We don’t know what’s going to happen tomorrow. The pandemic taught us that life is unpredictable and that emergency costs way more than $1,000. Times change and so will your financial strategies and understanding.

It’s important to learn how to get out of debt strategically while building wealth. You can do both, all without sacrificing your happiness at the altar of Total Money Makeover. Even the most agile gazelle, learns to rest and conserve energy.

So take in the sights and sounds of life, while you work on your own financial wellness plan.

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