109: The Problem with Baby Steps

Wealth by Design

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4+ y ago 31:44

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Where do you get your financial advice? (Aside from us and the Wealth by Design podcast, of course. 😉) Your friends? Parents? Coworkers? YouTubers? “Money gurus?”

Some of the most popular money gurus out there (we won’t name names) have a process called “baby steps,” designed to get you started with your financial education. But we have a little bit of a problem with those baby steps. OK a lot of problems.

We break down every step in this method, talk about the pros and cons of each, and share our own insight — including what we think you should be doing instead.

WHAT YOU’LL LEARN

[00:41] Why we’re tackling this topic
[05:15] A disclaimer on debt and money gurus
[08:13] Why we’re so starved for financial advice
[10:28] Step One: your starter emergency fund
[12:35] Step Two: the “Debt Snowball”
[14:45] The good, the bad, and the ugly kinds of debt
[16:54] Step Three: your full emergency fund
[18:33] Step Four: invest for your retirement
[21:07] Step Five: save for a college fund (and a quick story about Ozark)
[23:15] Step Six: pay off your home early
[25:58] Step Seven: build wealth and give

The reality of money gurus and debt

Though we kick off this episode with a disclaimer, we’re gonna play it safe and put one here, too: this episode isn’t meant to badmouth money gurus out there. Nor is it meant to imply that people who listen to these money gurus are dumb. We simply think there are better sources of financial advice available, sources that are more in tune with what people need today.

Case in point: most money gurus focus on paying down debt a lot. Debt is made out to be this huge, scary, unavoidable thing. If you throw enough money at it, you’ll defeat it, and feel a lot safer. This is an attitude our generation has been taught our entire lives! But the reality is, debt is not all bad.

“Debt is relative, and debt is fluid. It’s not black-and-white,” Danielle points out. “There’s a sliding scale on debt.”

Why were we fed these scary stories about debt? Our parents’ generation grew up in a high-interest environment, Danielle explains in this episode. It was expensive to borrow money. That’s no longer the case, especially now with COVID-19 crisis, but that attitude about debt still trickled down to us. And with the soaring cost of student loan debt, it’s really easy to hang on to that attitude.

What we think of the “baby steps”

Let’s quickly go over what most financial personalities say are the “baby steps” to financial freedom:

Save $1,000 ASAP.
Pay off all debt, starting with the lowest interest first.
Save 3 to 6 months for your full emergency fund.
Invest 15% of your household income for retirement.
Save for a college fund. (because everyone has to have kids apparently)
Pay off your home early.
Build wealth and give. (mostly to the church, if you follow their steps exactly)

Do we agree with these steps?

Well, if you’re longtime listeners of our podcast, you know that we’re totally on board with having emergency funds, investing for retirement, and saving for intermediate goals like your child’s college fund.

However… why are these goals tackled one by one? Why can’t you work on them simultaneously? (Hint: that’s what the bucket strategy is all about.)

That last step, for example. If having a giving strategy is important to you, then you should work it into your plans at the start. And why is “building wealth” saved for the very end? You should plan to build your wealth from the very beginning! If you don’t, you’re losing out on the most important advantages you have: time and compounding interest.

We’re not gonna dive into each of these steps here, but in the episode we do share one thing we like about each, and what we think can be improved. Tune in to the episode to get all the details, and hopefully you’ll feel motivated to kick (outdated) advice to the curb… and find something that fits you better.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual.

RESOURCES & PEOPLE MENTIONED

Episode 60: All About Debt: The Good, The Bad & The Ugly
Episode 108: Why It’s Important to Know Your Numbers
Episode 103: How to Prioritize Saving for Now, the Future, and In-Between
Episode 102: Net Worth is King
Join our free Know Your Numbers Challenge!
Schedule a free call with us — Are we a good fit for your financial planning needs?

CONNECT WITH DANIELLE AND DUSTIN

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