Some time ago, I started a series of articles about Financial Self-control by reviewing two famous books in the field of personal finance, including “The Total Money Makeover” by author Dave Ramsey. After that, I went on to write a few more articles based on Dave’s views on money, including “Financial management with a ‘zero-based’ budget” and “Give every dollar you save a purpose.”.

Since then, I have read another book by Dave Ramsey - “Complete Guide to Money”, completed an online course taught by him (Financial Peace University), and regularly listen to podcasts or watch his Youtube channel. The Dave Ramsey Show about personal financial management.

It can be said that I am a big “fan” of Dave Ramsey.

I like this author’s approach to finance because unlike other financial experts who often discuss high-level issues such as how to invest at high interest rates or how to get rich quickly, Dave only uses very common language with simple ideas and basic calculations so that any normal person can understand.

Dave teaches everyone how to take control of their finances by focusing on what they already have, reducing expenses, saving, increasing income, determining to pay off debt, and building wealth in a stable and honest way.

But not everyone likes this method because to achieve the goal, it requires people to have patience, to endure sacrifice, to be disciplined, to save and invest stably for a long time, instead of because they jumped right into the new wave of getting rich. But also because this approach targets people’s behavior and spending habits, it has the ability to change people’s lives forever. I like things like that — things that can create cognitive change, help people face themselves, and commit to positive and sustainable transformation.

The core of Dave Ramsey’s method is the 7 Steps to Financial Freedom that he calls “7 Baby Steps”. In this article, I will go into detail explaining each step, adding personal opinions about the strengths/weaknesses (if any) of each step.

Step 0: Control current spending

This is a step that is rarely mentioned but is very important for beginners, especially those who do not know how to manage finances effectively. That is to control your current spending (stay current!).

For example, if I ask you three questions right now: (1) How much money do you earn in a month? (2) How much do you spend in a month? (3) What is the total amount of your debts and what are the interest rates? Can you close your eyes and answer immediately? If not, you’re not ready to move forward. You need to know how much you earn, how much you spend, how much you owe, and more importantly, how much you have left over for saving and investing, in order to assess your current financial situation.

Many people worry and lose sleep over money, but they don’t necessarily know what their worry looks like, how big it is, and how worrying it really is.

If you don’t know where to start, read this article about budgeting and start controlling your spending today!

Step 1: Save an initial $500 – $1,000 in an Emergency Fund

Dave Ramsey says that when he first started coaching people about finances (mainly to pay off debt and avoid bankruptcy) this step 1 didn’t exist. He often advises people to start paying off debt immediately. However, some time later, he discovered that many people failed because every time they collected the money to pay off their debt, something unfortunate happened (such as illness, accident, job loss) that caused them to fail. Let them fall into even more debt. Therefore, Dave realized that everyone needs to have initial savings for emergencies. The number he gives is $500 if your family’s income is under $2,000/month OR $1,000 if your family’s income is over $2,000/month.

For you, $500 or $1,000 may be a lot or it may be very little. But with decades of experience as a financial expert, Dave says that Step 1 is often the most difficult of the 7 steps he outlines. It’s difficult because for people who don’t save or can’t find enough money every month, it’s very difficult for them to set aside a separate amount - requiring high discipline, sacrifice, and great effort. It’s also difficult for people who are good at saving because they often want more savings for safety, they don’t want to drop to $500 or $1,000 to just worry about making ends meet until they pay off all their debt. Many people also argue about this emergency money. Is it enough to take care of an emergency?

In my opinion, this $500 - $1,000 range is perfect, no matter your situation. First, it’s not so much that people in desperate economic situations feel unattainable (meaning they give up as soon as they start). Second, it is also small enough that those who are in debt do not feel comfortable or safe with this savings. Because of the uncertainty that this money brings, people in debt will have greater motivation to pay off debt, be able to save more, and feel more secure. Therefore, this amount is suitable for everyone in all financial situations to get started.

If you encounter an unexpected emergency while paying off debt (Step 2), don’t hesitate to tap into your savings (and be thankful you had it in the first place). After that, put Step 2 on hold and focus on replenishing your emergency fund in Step 1 before resuming debt repayment. This way, you’ll always have a cushion to fall back on in case of unexpected events.

Step 2: Pay off ALL debts (except mortgage payments, if any)

If you have debt, this is usually the most challenging step, requiring the most focus. According to Dave Ramsey’s perspective, it’s essential to pay off debt at all costs (except for mortgage payments, which typically require more time and have lower interest rates compared to other loans - refer to Step 6). Therefore, despite various financial management advice on allocating monthly income into multiple categories such as investments, savings, debt repayment, and so on, Dave believes that if you’re in debt, you should stop all investments and focus solely on debt repayment. Many people may argue that if the interest paid on debt is lower than the interest received on investments, then why not keep the debt and make money from investing? But actually, psychologically speaking, being in debt is a very scary thing (a person in debt is no different from a slave to a creditor), so if we want to be free, we must get rid of debt to be able to stand tall. head. For those who do not have this mentality and consider debt to be a normal thing, of course it is necessary to get rich, it is even more worrying. Because for these people, they may be willing to jump into big risks without thinking, without careful calculation. Maybe any of us, especially those who do business, at times have to owe money for school, money for goods, money from relatives, money from customers… but the difference is the ideology, psychology, and mindset. our view on debt; If you don’t feel afraid of debt, it will be difficult to focus on paying off debt.

The debt repayment method that Dave Ramsey advocates is Debt Snowball - The method of paying from smallest to largest amount, regardless of interest (read more about comparing Debt Snowball and Debt Avalanche methods here). With this method, you pay the minimum monthly payment (which may be mostly interest) for all your debts, but focus on paying more and paying off the smallest debt first - regardless of its interest rate. This approach targets the debtor’s psychology and behavior. That is, when you focus on paying off the smaller debt first, you’ll feel less overwhelmed and more confident that you can do it (instead of starting on the biggest debt and feeling overwhelmed). Every time you pay off a debt, you will feel more excited, more confident in yourself, and from there, focus on paying off the debt faster. This method has been proven by many studies (independent research, not from Dave Ramsey) to help many people get out of debt faster than other methods because it targets human psychology and behavior.

You may be wondering: But where is the money to pay off debt? Money first comes from your current income, money then comes from you cutting back on spending, and money also comes from working extra to increase your income. In fact, when most people make a budget to tightly manage their finances, they will discover a gap in their wasteful spending (for example, a cup of coffee every morning added up to 30 days/month is also a lot. a lot of money, a few bowls of pho eaten on the street while the house already has ready-to-eat meals adds up to a lot of money…) so having a small amount of money to pour into paying off debt is not too difficult. In addition, when you are highly focused on paying off debt, you will also have more motivation to work more to increase your income (for example, take on more work, work overtime, do more business outside…) so your income will also increase. will be more. Another important thing during this period is to avoid increasing debt (don’t use credit cards - spend first and pay later because that’s also a form of debt. You shouldn’t travel or shop when you don’t want to. If you have enough cash, you should not borrow money here to make up for it because it will only cause deeper debt).

After all, if you have determination, opportunities will open up, money will bring more money, and energy will fuel you to reach your destination. There is always hope, if we act today!

Step 3 + 3B: Save 3-6 months of monthly expenses, put in Emergency Account (full) + Deposit for house (if need to buy in installments)

After you have paid off all your debt, you will want to find safety and peace to continue moving forward toward your new financial goals. Therefore, in Step 3, Dave advises everyone to save 3-6 months of monthly consumption expenses (only counting the most basic expenses such as rent, electricity and water, food, school fees for children, etc.) . This amount of money will help you overcome sudden difficulties such as suddenly losing your job, being unable to work due to illness, a major crisis affecting family expenses… With this amount of money, you can “buy” more. Time to rest, focus on finding a job, and recovering from difficulties without being too stressed or tired.

If you’re thinking about buying your own home, Dave recommends you can also save for a down payment in this step – called Step 3B. Step 3B means that after you have saved 3-6 months of spending money, you will continue to save for the required amount of house deposit. Depending on where you want to buy and the value of the house, the deposit may vary, but basically, you want to save about 20% of the entire house value so you don’t have to borrow too much in installments. To know if you can afford to pay off the rest of the house in installments, Dave says you should not buy a house where the monthly rent + interest is greater than 25% of your income after taxes. This 25% number allows you to maintain the house and focus on the remaining money to completely pay off the house debt. More than 25% is too risky. If anything happens to your regular income, you will easily lose the house.

Some of you may have asked for my opinion on the debate between Renting vs. Buying a house. From my perspective, influenced by Dave Ramsey, I believe that you should not buy a house until you’re truly ready. Even if your monthly rent is higher than your potential mortgage payment, owning a house comes with many additional expenses beyond just the mortgage payment, such as maintenance, furniture, property taxes, and more. But what does it mean to be ready? Being ready means that you have (1) paid off all your debts, (2) saved 3-6 months’ worth of expenses, and (3) enough money for a 20% down payment on the house and can afford mortgage payments plus interest that don’t exceed 25% of your monthly income. For young people today, unless they inherit from their parents or receive family support, it’s very difficult to save up enough to buy a house outright. Therefore, the trend of taking out a bank loan to buy a house is becoming increasingly popular, especially in big cities. So, you may still need to take out a loan and make mortgage payments, but if you carefully calculate your financial capabilities and the costs of the house, you can still own a home after a period of diligent effort and responsible repayment.

Step 4: Invest 15% of your income into a pension savings account

Steps 4, 5, and 6 below are often carried out in parallel because they require relatively long, regular, and frequent implementation. This fourth step is to invest 15% of your monthly income for pension savings. Dave Ramsey’s advice is for employees to proactively invest money in an interest-bearing account. If we proactively invest like this for a long time when we first start working (20-30 years or more), this amount of interest will continue to grow and continue to generate more interest until we retire. becomes a stable amount, continuing to provide for life even though we no longer work.

Step 4 is especially easy to do for people who live in developed countries and work in agencies and organizations that have employee savings investment programs. For example, the programs in the US often mentioned by Dave are (Roth) 401K and (Roth) IRA, in which workers contribute a fixed monthly amount into an investment account from the time they start working until about 60 years old. Basically, depending on the employee’s choice and each agency’s program, this amount of money is often invested in stocks and bonds. Although the stock market can fluctuate up and down, if workers invest for the long term, do not withdraw money, and patiently follow the ups and downs of the market (instead of “jumping the waves” like the usual stock market practice). In the end, the amount of money received will increase steadily. To encourage this long-term investment, the government will impose very high taxes and heavy fines if investors withdraw money early before reaching the age of 60 (exactly 59 and a half years old); Thus, investors will have the motivation and patience to leave money in their account longer. Some companies have policies to encourage employees to invest in retirement by “matching” a certain percentage of the amount the employee puts into this account. For example, if you invest $50, the company will also put 50% of that amount into your account, which is $25. This is the best way to prepare for retirement while still working.

Step 5: Save money for college/study abroad for your children

If you have children, this is an extremely important step because college tuition, especially college away from home or studying abroad, is extremely expensive. If you want to bring your child to the educational level that you and your child both desire, you need to save from when your child is young so that when needed, you will have money to support your child. Many young people and their families have fallen into debt just to pay for college/study abroad, thinking that they can easily earn it back when they graduate. But with the current situation, not everyone who graduates can get a job right from the first year, and not every job earns a lot of money to cover the principal and the ever-escalating bank interest. Therefore, if you can save some money for your children early on, set aside monthly, and invest regularly every year, the financial and educational future of your children and family will be much less stressful. No parent wants to bring their child into the world with a lot of debt, right?

However, for many families, setting aside a fund for their children’s education is very challenging because raising a child today requires many small expenses such as food, tuition, extracurricular activities, clothing, and more. But in my opinion, if we teach our children the value of saving, being content with their current life, and not competing to keep up with others, we can cut back on these small expenses and invest in their future. This not only benefits their future but also teaches them to view life with a broader perspective. The small amounts of money spent on unnecessary items like clothes, shoes, toys, and more can add up over time and create a significant fund for their future. Even I, looking back on my childhood, remember how my parents spoiled me with luxurious items and allowed me to indulge in beauty treatments like hair dye and nail polish; sometimes I wish that money had been saved for my future instead. If we have a clear goal in mind, our parenting and saving will be more purposeful; not only will parents contribute, but children can also contribute spiritually and financially to the bigger goal ahead.

Step 6: Pay off your mortgage payment — fully own your home

If you’re buying a house through a mortgage (see Step 3B above), this is the step where you pay off the entire mortgage and own the house outright. If you already own a house, you can skip this step. Regarding the mortgage repayment plan, Dave Ramsey recommends setting a goal to pay off the mortgage within 15 years. Research shows that people who plan to pay off their mortgage over a longer period (such as 20 or 30 years) often lose motivation, leading to longer repayment periods; whereas those who set a 15-year goal tend to pay off their mortgage earlier than expected. Moreover, over a long period of decades, many things can happen to an individual or family; therefore, the shorter the repayment period, the more focused and less prone to distractions, errors, and uncertainties in our plan. The method of paying off the mortgage is similar to the debt repayment method in Step 2.

Step 7: Build a strong financial foundation and help others

After completing the above 6 steps, you have achieved complete “financial independence” - you’ve paid off all debts, saved enough for emergencies, invested in retirement plans, invested in your children’s education, and owned your own home. The final step is to build wealth and help others. Building wealth here means that, in addition to stable investments for the future, if you have excess funds, you will continue to invest in higher-risk but potentially higher-return areas such as business, real estate, new stocks, etc. Unlike other books on wealth-building, Dave Ramsey’s approach prioritizes financial stability and self-sufficiency first (steps 1-6), and then focuses on building wealth (step 7). With this approach, you can build a solid financial foundation, so that if you encounter losses or failures, you won’t be pushed to the edge. At the same time, you can also provide a good financial foundation for your family and children, while continuing to build wealth and develop your own career.

Dave Ramsey also emphasizes the importance of helping others financially, through charitable giving, donations, and supporting organizations and individuals in need. Dave believes that one of the biggest mistakes people make is thinking that the more they hoard their money, the richer they will become. However, in reality, the more generous and open-handed people are with their money, the more they will be freed from the grip of money, become more confident, attract more positive relationships, and ultimately become wealthier. Therefore, in addition to earning and saving money, we must also give it away. This is not only a good thing to do, but a necessary thing to do, according to Dave’s perspective, in order to achieve financial prosperity. As a Christian, Dave advises people to give 10% of their monthly income to their church to help those in need. However, each person has the right to find their own way to share their financial resources, whether it’s a friend in need, a charitable organization, or a struggling individual who requires a helping hand.

This 7th step will not only help us become rich, but will make our lives more prosperous, meaningful, and happier with the money we earn.

I hope this article on the 7 steps to financial freedom has introduced readers to the perspective of financial expert Dave Ramsey - through my own lens. After reading many books and materials on personal finance management, I still find myself coming back to these 7 steps because they seem to be the clearest, most understandable (although not necessarily easy) and proven path to success, helping many people achieve their goals. It also inspires those who are struggling financially that you don’t need to have extensive knowledge of finance, nor do you need to be a math whiz - simple rules of money management, combined with basic arithmetic operations and a strong spirit and discipline, can bring anyone to success.