The 7 Baby Steps are a proven plan for paying off debt and building wealth. Follow the Baby Steps in order with focus and intensity. Completing each step before moving to the next produces the best results. Here are the 7 Baby Steps.
Baby Step 1: Save $1,000 for Your Starter Emergency Fund
In this first step, your goal is to save $1,000 as fast as you can. Options include working a side job, selling items, or cutting discretionary spending. Your emergency fund will cover unexpected life events like a fender bender or an urgent care visit. With emergency savings set aside, you won't dig a deeper hole. This protects you while you work your way out of debt.
Baby Step 2: Pay Off All Debt Except the House Using the Debt Snowball
Next, it's time to pay off the cars, the credit cards, and your student loans. Start by listing all of your debts except for your mortgage. Put them in order by balance from smallest to largest, regardless of interest rate. This is called the Debt Snowball method. Use it to knock out debts one by one.
Pay minimum payments on all debts except the smallest. Put all extra money toward that smallest debt. Once it's paid off, roll that payment amount to the next debt. Repeat that process until your debts are wiped out.
Baby Step 3: Save 3–6 Months of Expenses in a Fully Funded Emergency Fund
You've paid off your debt. Take the money you were putting toward debt. Build a fully funded emergency fund covering 3 to 6 months of expenses. This protects you from major surprises like job loss or car repairs without going back into debt.
Baby Step 3b: Save for a Down Payment on a House
Complete Baby Step 3 before starting 3b. Then focus on saving for a home down payment. The more you can put toward the house, the less you finance, and the more money you save.
Baby Step 4: Invest 15% of Your Household Income in Retirement
It's time to get serious about retirement, no matter your age. Take 15% of your gross household income and begin investing it into your retirement. Start with your company's 401(k) plan if they match you. After that, invest into Roth IRAs, one for you and one for your spouse if you're married.
Baby Step 5: Save for Your Children's College Fund
By this step, you've paid off all debts except the house and started saving for retirement. Next, it's time to save for your children's college expenses. 529 college savings plans and ESAs (Education Savings Accounts) are the recommended vehicles.
Baby Step 6: Pay Off Your Home Early
Your mortgage is the only thing between you and complete freedom from debt. Eliminating your mortgage payment frees up significant monthly income. Any extra money you can put toward your mortgage could save you tens or even hundreds of thousands in interest.
Baby Step 7: Build Wealth and Give
With no debt, you have the freedom to build wealth and give generously. Continue building wealth and increase your generosity over time. Leave an inheritance for your kids and their kids. This is how you leave a lasting legacy.