What is Baby Step 1 in Financial Peace University?
Financial Peace University is a 9-week personal finance program, usually taught in small groups and often offered in churches around the country. The course is designed to help its students get on a monthly budget, pay off debt, and create a financial plan for their future.
The program is taught by Dave Ramsey, a well-known financial expert who’s had his own share of financial struggles. In his course, he goes through seven “baby steps”, starting with baby step 1: saving a starter emergency fund.
Every baby step relies on following a zero-based budget, so this financial habit is taught from the beginning.
In this post, you’ll learn all about Dave Ramsey’s baby step 1 and how a monthly budget will help you be successful.
But first, let’s go over a brief recap of Dave’s story and what each baby step covers.
Dave Ramsey’s story and the 7 Baby Steps
In the Financial Peace University course, Dave Ramsey shares his expert financial advice, as well as his own experiences with financial hardships.
He began selling real estate in his early 20s, shortly after he graduated from college and married his wife. They were broke and started off with nothing, but within a few years he owned $4 million in real estate and was making over $200,000 a year.
To get to this point he had to go into a lot of debt. When the bank demanded full payment of his loans, he was in over his head with money problems and he lost everything. Two years after the height of his success, he was broke and bankrupt.
The guy understands how debt can wreck your life, which is why he started telling others about the lessons he learned.
He took advice from older, wealthy people, and drew principles from the bible to figure out a system that worked.
He created these “Ramsey rules” to achieve success with personal finances:
- Poor financial habits aren’t solved mathematically – you must change your mindset
- You must make a 100% commitment to change, not just change-ish (“ish” is a wish!)
- You can’t just pay off debt and increase savings – you must also learn the offense and defense of wealth building
He applied the “common sense” he learned to his own situation and dug out of the debt hole he was in. He vowed to never go into debt again, and it changed the trajectory of his life.
He figured out that good financial principles, when done in order, eventually lead to success.
He calls these principles “baby steps” because that’s how you overcome financial problems – one small step at a time. (Although I agree with this, each step does require a lot of time, effort and commitment!)
The 7 step plan in the Financial Peace program includes:
- Baby step 1: build a starter emergency fund of $1,000
- Baby step 2: pay off all debt except for your mortgage using the debt snowball method
- Baby step 3: increase emergency savings to cover 3-6 months of living expenses
- Baby step 4: invest 15% of income into your retirement account
- Baby step 5: save for your kids’ college fund
- Baby step 6: focus on paying off your mortgage
- Baby step 7: continue to build wealth and give more
The principles in these Financial Peace steps have literally helped millions of people around the world take control of their finances!
Now, let’s get started with baby step 1: building a starter emergency fund.
Baby Step 1: Save a $1,000 starter emergency fund
Dave calls this the easiest and the hardest step.
Easy because it’s “only” $1,000. Hard because you may have never saved up $1,000 before.
This is the step where you need to decide if you’re all in or not.
In baby step 1, you’re saving every extra dollar you can find into your starter emergency fund. Dave says to put all your effort and focus into saving this $1,000 so you can achieve this goal as quickly as possible.
This amount is just enough to cover a small crisis so you don’t have to go into further debt for something like a broken faucet or new tires.
Obviously, $1,000 won’t cover months of living expenses. But, in baby step 3, you’ll build on this fund so you’re prepared for bigger financial emergencies
But for now, it’s only meant to give you a little bit of breathing room.
How to start an emergency fund
Baby step 1 is all about saving $1,000 quickly. Building your own starter emergency fund as fast as you can will give you focus and momentum with your new money habits.
Having this dedicated savings set aside will also give you a sense of relief that you’re prepared for those expenses that can pop up unexpectedly.
It won’t cover a major financial crisis, but it will keep you from pulling out the credit card for those smaller expenses that can catch you off guard.
Do what you can to find any extra money in your budget. Cut any extra costs that aren’t getting you closer to your goal. Adopt that “gazelle intensity” that Dave talks about, eliminating all unnecessary expenses and funneling that disposable income into your emergency fund.
To make it easier on yourself, keep your emergency savings fund in a separate, dedicated account. This will help your finances stay organized, and you won’t be tempted to spend those extra funds on non-emergencies.
Don’t focus on debts or investments
Don’t worry about debt payoff while you’re on baby step 1.
Continue to make minimum payments on your credit card debt, student loan debt, and other loans. You could also choose to delay payments on any unsecured debt, as long as it won’t negatively affect your credit score.
Focus all of your energy on saving your starter emergency fund. Once you have this emergency savings fund, you’ll start paying off your consumer debts using the debt snowball method. This popular debt payoff method will give you some quick wins and the motivation to become debt-free.
Also, don’t be concerned about saving in a retirement fund or a college savings plan. You’ll make those a priority in baby steps 4 and 5. Right now, you’re building a solid foundation that will keep you from falling deeper into debt.
Why is Baby Step 1 important?
According to a 2022 telephone poll conducted by Bankrate, over half of Americans are not able to cover a $1,000 emergency expense with savings. This is a discouraging sign of how many people are close to the edge of a major financial catastrophe.
An emergency fund is important because it prepares you for the unexpected. This savings gives you a comfortable margin in your finances so you have the money to cover emergency costs.
All of the baby steps require a degree of sacrifice, and baby step 1 is no exception. However, as your savings grow, your financial stability and security will strengthen. Let that peace of mind keep you inspired and motivated to stay the course.
In order to save $1,000 quickly, you’ll need to have a good handle on your spending. According to Dave Ramsey, the best way to control where your money is going is with a budget.
How to budget your money
Getting on a budget is highly emphasized in the Financial Peace University program. Specifically, Dave Ramsey promotes the zero-based budget method so you can account for every dollar, decrease your monthly expenses, and maximize your monthly income.
The zero-based budget is a budgeting method that ensures you are using every dollar of your income purposefully. And, “zero” doesn’t mean you end up with zero dollars in your account! It just means that your incoming dollars minus your outgoing dollars should equal zero. When this happens, every dollar is working for you, and you’re not wasting any of your household income.
If you’ve never been on a budget before, you will probably need a few months to find your budgeting rhythm. It takes time to learn how to accurately predict your monthly expenses and stay within the spending limits you place on yourself. You’ll discover those areas where you tend to overspend, and what unnecessary expenses drain your account quickly.
So, don’t expect things to go perfectly.
You’ll make mistakes with how much you budget for each category, you’ll go over your budget, and you will inevitably feel frustration and resistance to this new way of managing money.
That is all totally normal – just stick with it and eventually, everything will click.
In time,you’ll realize that a budget doesn’t restrict your spending – instead, it allows you to spend responsibly!
It creates healthy boundaries that don’t leave you feeling guilty, but instead gives you a sense of freedom and security with your money.
Here are some additional budget rules and guidelines that Dave Ramsey lays out in the course:
- Rule 1: you must create a budget every month before the month actually begins
- Rule 2: it must be a zero-based budget, where every single dollar is put into a category
- Guideline 1: begin your budget with giving, then saving and debt reduction, then spending
- Guideline 2: fund all budget categories with 5-15% of your net monthly income, except for your mortgage (25%)
- Guideline 3: use cash and the envelope method for your daily spending so you “feel” it
If you want to be successful with building an emergency fund and achieving your money goals, you must commit to creating and following a budget every month.
The importance of mindset
My husband and I didn’t follow a budget for most of our marriage. That kept us in a paycheck to paycheck cycle that was stressful and unpredictable.
As much as I wanted to be more responsible with our money, I think I had some fear about sticking to a budget, and committing to spending limits.
I was afraid I would fail, and that I wouldn’t be able to hold up my end of the commitment. After all, I had gotten very used to not being held accountable for what I spent money on.
Yes, I was conscious of how my spending affected our bank balance, but my husband had never challenged me on how I spend our money.
To ask him to follow a budget meant I would have to follow one, too. To ask him to change his spending habits meant I would have to change mine as well.
In Dave’s words, wise money management isn’t about solving a mathematical problem. Figuring out all the numbers and creating spreadsheets is the easy part.
The difficulty lies in committing to a shift in mindset.
Changing the way we think. Letting go of what’s comfortable, and turning towards the uncomfortable.
So, write down all the numbers and monthly expenses and categories and create a budget.
But, then, ask yourself the big question:
Have I decided that I am not going to live like this anymore, and will I do whatever it takes to reach financial freedom?
If you can honestly and wholeheartedly say *yes*, then you’re ready to change the trajectory of your financial future.
In summary: Starting Baby Step 1
When you decide to start baby step 1, you’ve taken that first step to being intentional with pursuing financial freedom.
Yes, you will likely experience some setbacks and failures along the way. But through them, you’ll learn to do better.
It’s time to say “I’m not living like this anymore.“
I encourage you to take Dave’s financial advice and start living like no one else, so later you can live like no one else.
Other posts you may be interested in:
- How To Save $5000 In A Year
- 11 Effective Ways To Stay Motivated With Your Goals
- The Purpose Of A Budget: 17 Powerful Benefits
- 3 Smart Reasons To Put Savings Before Debt
- How To Live On Last Month’s Income (and Why You Should)
- 14 (Mostly Free) Online Money Management Tools
- How To Live Within Your Means (and Still Be Content)
- Financial Health Checkup: 7 Steps To Boost Your Fiscal Well-being
- How To Escape Debt With A DIY Debt Management Plan
- The Zero-Sum Budget Resource Guide