THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.
When I first started out on my financial journey, I wasn’t really aware of Dave Ramsey. In fact, I had reached his final Baby Step 7 (Build Wealth and Give) when I became more familiar with him.
Truthfully, the only reason that I took Dave Ramsey’s Financial Peace course was to hear his input on insurance. At the time, I kept hearing so many mixed messages in regards to insurance that it made my head spin. Fortunately, after listening to Dave’s explanation, I was relieved. It was much less overwhelming and much more simple than I had thought.
Quick side note: Lucky for you, if you don’t have time or interest in listening to Dave talk about insurance, I created my own comprehensive insurance guide that addresses which insurances you actually need.
Dave Ramsey’s Seven Baby Steps
Step 1 – $1,000 to Start an Emergency Fund
Step 2 – Pay Off All Debt but the House
Step 3 – 3 to 6 Months of Expenses in Savings
Step 4 – Invest 15% of Household Income Into Retirement
Step 5 – College Funding for Children
Step 6 – Pay Off Home Early
Step 7 – Build Wealth and Give
Everyone always assumes that when you finally hit Baby Step 7, life is grand. You have already paid off your home (Baby Step 6), which in many perspectives is the pinnacle of financial achievement. At that point, you should have also completed all of the prior Baby Steps as well. So, the hard work is over then, right?
Of course, you have to make quite a few sacrifices until you reach Baby Step 7. That is why, in my opinion, you should strive to achieve Step 7 as soon as possible.
Why Baby Step 7 Isn’t Easy
The tricky part about Baby Step 7, though, is its vagueness. What is the right amount of wealth to build, and what is the right amount to give away? Both could vary greatly depending on the person.
At Step 7, it’s on you to figure out whether you will follow the Safe Withdrawal Rate or the Trinity Rule. You are left to your own devices to figure out how quickly you can reach FIRE. More importantly, you must determine how much money you can save along the way without being to extravagant or too cheap.
Admittedly, once we hit Baby Step 7, my wife and I struggled for a little bit. It took us some time to figure out exactly what our plans moving forward were.
There is some fine print associated with Baby Step 7, though. On Dave Ramsey’s website, he states that once you reach Baby Step 7, you should go back to Step 4 and increase your contributions from 15% to maxing out your 401(k) and IRA accounts to the IRS limits.
Maximizing your 401(k) and IRA Contributions
If you and your spouse work in companies that offer 401(k)s, each spouse should contribute $18,000 to his or her 401(k), and if you’re older than 50, you can contribute an additional $6,000 as a “catch-up contribution.” That means a total combined contribution of $36,000 if you’re married and both working, or $48,000 if you’re both working and both over 50.
When you factor in your IRA, whether that’s a Traditional IRA, Roth IRA, or even creating a Backdoor Roth IRA, that means that you can contribute $5,500 per person, or if you’re older than 50, an additional $1,000. That’s a total of $11,000 for a couple under 50 or $13,000 if you’re over 50.
That adds up to a grand total of $47,000 that you can invest in tax-advantaged accounts if you’re under 50 and married with both spouses working. The total is $61,000, if you’re over 50 with both spouses working.
Unless you are making over $400,000 a year, you should see a significant increase in the percentage of your income that is to be invested for retirement.
If you are single and working and under 50, the contribution limits are similar. $18,000 would max out your 401(k) and $5,500 for your IRA. That leads you to a grand total of $23,500. If you are over 50, you can contribute an additional $6,000 into your 401(k) and $1,000 into your IRA to give you a grand total of $30,500.
Spousal IRA Contribution
My wife and I have diligently maxed out our IRAs along the way. In fact, I’ve maxed out my IRA every year since 2003, when I first jumped into the workforce.
At the time, I thought I was smart because I was essentially day trading my IRA portfolio, so I put as much money in there as possible. In hindsight, that was probably not the smartest move.
Up until 2012, I had maxed out my IRA but contributed only the minimum to my 401(k) in order to get the match (5%). It wasn’t until I paid off my house that I maxed out my 401(k) contributions.
A smart thing I did do was contribute to my wife’s IRA, even while she was not working. For those that aren’t aware, a spouse that does not work outside the home is still able to contribute. As long as you have compensation or earned income of at least the amount you contribute to your IRAs, you can utilize the spousal IRA contribution.
Maxing Out and Super-Saving
For my wife and me, that means that we can contribute $29,000 to our tax-advantaged accounts. That may sound like a lot of money, but in reality, when you look at how long it takes to earn a million dollars, it would take us 17 years to achieve that figure at our current trajectory.
My wife and I have been super-saving since 2012. We save close to 65% of our take-home pay and almost 75% of our overall pay in order to reach FIRE as quickly as possible. We hope that will be in four short years.
So why do I encourage everyone to get to Baby Step 7? It’s because this is when you really determine what type of lifestyle you are going to live. You no longer have Dave to guide you. The training wheels are off your bike, and you can go as quickly or slowly as you want towards FIRE.
Baby Step 7 is the fun part.
Might my wife and I be closer to retirement if we had been a bit more tight with our finances? We did traverse around Europe for a month and go on a cruise to Alaska and another one around the Mediterranean.
But, I didn’t feel guilty about spending money on those trips. They were thoroughly enjoyable, mostly because I didn’t carry any debt. I had the money to pay for the trips and all of their expenses immediately. I was able to weigh the costs of delaying retirement by making lifelong memories with my wife.