Dave Ramsey, in his Baby Steps program, has assisted countless Americans in breaking free from debt and attaining financial independence. His methodology is straightforward, yet remarkably efficient. The 7 Baby Steps offer a well-established blueprint that guides individuals on precisely where to direct their financial efforts. Given the significant number of individuals who have experienced positive outcomes by incorporating Dave’s investment principles into their financial strategies, he refers to this distinct group as “Baby Steps Millionaires”.
What is Ramsey’s investment philosophy?
Many individuals grapple with questions regarding the timing and method of investing their money. This is entirely natural, particularly considering that numerous people are unsure about where to begin. Adding to the complexity, these individuals harbour financial objectives but lack a clear path to pursue them. His famous “Baby Steps” to creating wealth include:
Baby Step 1: Set aside $1,000 as your initial emergency fund.
Establishing a strong financial base before embarking on investments is of utmost importance. This involves eliminating all debts except for mortgage-related ones and creating a well-funded emergency reserve equivalent to three to six months’ worth of expenses.
Debt can significantly erode your investment gains. High-interest debt can be a hurdle to realizing returns on your investments, and it can also hinder your ability to navigate market downturns. In situations such as job loss or financial setbacks, debt may compel you to sell investments at a loss to meet your financial obligations. On the contrary, having an emergency fund provides peace of mind and enables long-term investments. With an emergency fund in place, there’s no need to fret about liquidating investments to address unforeseen expenses.
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Baby Step 2: Clear all your debts, excluding your mortgage, using the debt snowball method.
Employ the debt snowball method to eliminate your loans, a well-regarded debt reduction strategy that expedites debt clearance and reduces interest expenses. Begin by cataloguing all your debts, excluding your mortgage, in ascending order of balance, from the smallest to the largest. Allocate minimum payments to all debts except the smallest one, for which you should direct as much money as possible. After clearing the smallest debt, transfer the payment you were making to the next-smallest debt, all while maintaining minimum payments on the others. Repeat this process until all your debts are fully paid off.
Baby Step 3: Build a fully funded emergency fund equivalent to 3-6 months of your living expenses
Once you’ve established a debt-free foundation and a well-funded emergency fund, you’re on a solid path to wealth building. Now is not the time to become complacent. Instead, redirect the funds you were using to eliminate your debt toward building a comprehensive emergency fund that can cover three to six months’ worth of your expenses. This will safeguard you against more significant life surprises, such as job loss or unexpected car repairs, without the risk of falling back into debt.
Baby Step 4: Allocate 15% of your total household income to saving for retirement.
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Once you’ve achieved a debt-free status and secured your emergency fund, you can shift your focus towards retirement investing. A general guideline is to target a 15% monthly investment of your gross income. By starting early and maintaining consistent contributions, you’ll find it much more attainable to meet your retirement objectives. To do this effectively, make informed choices regarding your investment accounts, selecting the ones that align with your income, tax bracket, and retirement aspirations.
Diversify your portfolio to spread risk. Avoid putting all your assets in one place; instead, invest in various asset classes like stocks, bonds, and real estate. This strategy serves to mitigate risk. Additionally, remember to regularly rebalance your portfolio, which involves selling some of your successful investments and acquiring more of those that underperformed to uphold your intended asset allocation.
Lastly, resist the urge to engage in panic selling. During market downturns, the temptation to offload your investments may arise, but it’s vital to remain composed, as markets eventually rebound.
Baby Step 5: Set aside funds for your children’s college education.
You’ve achieved significant milestones on your financial journey by clearing all your debts (except the house) and initiating retirement savings. With a strong financial foundation now in place, it’s time to direct your attention towards saving for your children’s future college expenses. College costs continue to escalate, underscoring the importance of commencing your savings efforts early.
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Start by setting a specific savings goal. Determine the amount required for your children’s education and craft a budget that allows for regular contributions. Subsequently, consider investments to accelerate the growth of your savings. Nonetheless, it’s essential to select investments that align with your risk tolerance and time horizon.
Furthermore, explore alternate avenues for funding college. In addition to saving, you can explore various options such as scholarships, grants, and loans to secure your child’s educational financing. Be sure to examine all available possibilities to identify the most suitable approach for financing your child’s education.
Baby Step 6: Clear your mortgage ahead of schedule.
The thought of living mortgage-free is incredibly thrilling! It opens up possibilities to allocate more funds towards other endeavours like travel, savings, or retirement. Channelling extra funds into your mortgage can lead to substantial savings in interest over the loan’s lifespan. This is due to the fact that interest accrues based on the remaining loan balance, so reducing your principal sooner results in lower overall interest costs. Devoting extra funds to your mortgage is one of the most effective steps you can take to enhance your financial well-being. By paying off your mortgage ahead of schedule, you can amass significant savings in interest and expedite your path to financial independence.
Baby Step 7: Amass wealth and contribute to meaningful causes.
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Once you’ve achieved a debt-free status, your financial freedom opens up a world of possibilities. You can explore globe-trotting adventures, embark on entrepreneurial ventures, or simply elevate your quality of life. Your resources can also be wielded for positive impact, whether through charitable donations or support for causes dear to your heart.
And what greater legacy to leave behind than one of financial security for your children and grandchildren? By persistently accumulating wealth and embracing a spirit of boundless generosity, you can empower them to chase their aspirations and lead fulfilling lives. Legacy goes beyond financial aspects; it’s about living a life rich in meaning and contributing to a world of positive change.
Ramsey’s “Baby Steps” offers a fantastic approach to aligning your finances and reaching your financial goals. They are straightforward to grasp and implement, with a track record of success for individuals across various income brackets. With a wealth of information readily available, consider harnessing these steps to your advantage and paving the way for a financially secure future.
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Like many other Middle Eastern economies, Bahrain has been trying to move away from its dependence on fossil fuels. In 2000, oil and gas made up 44% of its GDP; now that figure is 16%.
“Economic diversification is as old as time,” Shaikh Salman bin Khalifa Al Khalifa, Bahrain’s Minister of Finance and National Economy, told CNN’s Richard Quest at Gateway Gulf, a gathering of business professionals, government officials and investors held this week in the country, under the theme “Investing in a Rapidly Transforming Region.”
“Bahrain was always a trading hub for the region, always had its pulse on what was happening around the world,” he said, adding that today the country acts as a “service center” for the Gulf region as a whole.
The event concluded with deals and announcements to the tune of $12 billion, across sectors including finance, manufacturing, real estate and tourism.
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In recent years, other members of the Gulf Cooperation Council — an economic and political union that also includes Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates — have had varying degrees of success in expanding their economies beyond fossil fuels.
“As we look around the region, what is happening rapidly in all of the economies of the GCC is an increase of the diversification, more economic activity in other sectors, and that brings along with it a lot of opportunities for investment,” Al Khalifa said.
The GCC economy as a whole is projected to grow by 3.6% and 3.7% in 2024 and 2025 respectively, according to the World Bank, which estimated that its combined GDPs could reach $6 trillion by 2050.
Finance and tourism
Bahrain has been looking to a number of sectors to help that diversification. According to the latest government data, the country’s top growing sectors in the first quarter of this year were accommodation and food services, finance and insurance, communications, and retail.
In October, the National Bank of Bahrain launched a Bitcoin investment fund, aimed at institutional investors — a first for the GCC. The country is trying to attract more tourists, and works are underway for a $427 million waterfront development project that will bring new beaches, restaurants, hotels and water-based attractions to Bahrain’s coastline. It includes a new $221 million exhibition center that’s set to be the largest in the Middle East.
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At the Gateway Gulf event, Bahrain’s Minister of Tourism announced the construction of 16 new hotels totaling over 3,000 rooms. That follows on from a $30 billion post-pandemic recovery plan launched in 2021, which included plans to build five offshore cities and infrastructure projects to further boost tourism.
According to Steffen Hertog, an associate professor in Comparative Politics at the London School of Economics and Political Science, Bahrain has made progress in diversifying its economy, but is facing stiff competition from other Gulf nations with more resources. “Dubai has taken much of the regional logistics and tourism business,” he said, adding that Dubai and Abu Dhabi had taken on the role of regional financial hubs.
“At the same time, Saudi Arabia has upped its game in terms of financial diversification, tourism and entertainment, much reducing the Saudi demand for such services across the causeway (in Bahrain),” Hertog added.
However Al Khalifa believes that the success of its GCC partners will ultimately prove beneficial for Bahrain. “All of us are working together to increase economic activity, increase the pie for the whole region, and this rising tide will lift all of the economies of the region.”
After years of raising interest rates to combat high inflation, the Federal Reserve recently began lowering the federal funds rate.
While this is good news for borrowers, eager savers may not be as appreciative. With savings account interest rates falling in response to a lower federal funds rate, those who’ve been enjoying high returns on their savings may be tempted to switch banks to secure the best rates they can find.
While “rate chasing” may seem like a good strategy to get the most bang for your buck, it has some disadvantages you should be aware of. Read more to find out when it’s worth switching banks.
Read more: Federal funds rate: What it is and how it affects you
Savings interest rates vary by bank and can change at any time, often in response to the federal funds rate. Rate chasing involves constantly searching for the best savings account rates, opening a new account when you find a better rate, and transferring your savings to your new account.
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Often, this pattern of opening and closing bank accounts to eke out a few more basis points isn’t worth it. While there’s a chance it’ll help you earn a few extra bucks, it takes a lot of time and effort that may be better spent elsewhere. However, there are certain situations where switching banks to chase a higher rate may be worth it.
Switching banks to earn a much higher interest rate — for example, switching from a large brick-and-mortar bank to an online bank offering a high-yield savings account — is often worth the effort.
Some major banks — like Chase, for example — tend to offer rock-bottom savings account interest rates, often around 0.01% APY. Meanwhile, it’s possible to find high-yield savings accounts offering rates of at least 4.00% APY.
If you aren’t currently using a high-yield bank account, making the switch from a national bank to a financial institution with more competitive rates can make a major difference in terms of your interest earnings.
The following table illustrates how much interest you’d earn with a $10,000 balance in a savings account earning 0.01% APY, 4.00% APY, and 4.20% APY (with interest compounding daily).
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In this case, switching banks to earn 4.00% APY would amount to a difference of more than $400 over the course of a year. But as you can see, jumping from a rate of 4.00% APY to 4.20% APY would only result in an extra $20.
In other words, if you’re already using a high-yield savings account that generally offers a competitive rate, it’s likely not worth switching banks to find a marginally better interest rate.
Plus, savings account interest rates change all the time. A bank that has historically offered a competitive rate will likely continue to do so in the future, even if it doesn’t currently offer the best rate on the market.
Finally, the administrative hassle of moving your money from bank to bank may have financial costs too. Some banks charge account closure fees of up to $50 for closing a bank account within a certain period of time, such as three or six months of account opening. Such a fee could easily eat up any gains in interest earnings.
Read more: Does closing a bank account hurt your credit score?
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Ultimately, it’s up to you to decide whether or not it’s worth switching bank accounts, but the following tips can help.
Do the math: Calculate how much money you’d earn with a new account compared to your current account. If it’s a minor difference, you may decide the administrative effort isn’t worth it.
Consider any sign-up bonuses: Sometimes, banks offer cash sign-up bonuses when you open a new account. While not necessarily a reason to open a new account, a sign-up bonus can sweeten the deal if you decide to switch for other reasons. (See a list of the best new bank account sign-up bonuses here.)
Consider fees: Some savings accounts have monthly maintenance fees and some charge early account closure fees. Consider whether an account switch would mean paying these fees, and if so, calculate how much they’d take away from earned interest. On the other hand, switching from an account with a monthly fee to a fee-free account can further boost your earnings.
Weigh account features: Sometimes, it’s worth switching accounts to get the benefits you want and need. For example, if the ability to split up savings between multiple goals is important to you, switching to an account with this perk may be worth it, even if the difference in interest rate is negligible.
Read more: How to switch banks: An easy step-by-step guide
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