In honor of Financial Literacy Month, today we are going to go over Dave Ramsey’s 7 Baby Steps and what I do differently to better fit my needs as a military service member. If you don’t already know who Dave is, a quick search will show his immense popularity in the personal finance world, featuring best-selling books, a hit podcast, and many other resources.
Below, I am listing out my military edition of the Baby Steps and why I adjust these strategies for our unique lifestyle. Let’s get to it.
Baby Step 1 – The $6,000 Military Emergency Fund
(Original: Recommends $1,000)
Being in the military, I believe emergency funds should be set up a little differently than for civilians due to our lifestyle. I chose $6,000 as my family’s base emergency fund because it takes into account traveling back home from overseas in an emergency situation. I would hate to not be prepared to go home and see family if something, God forbid, happens to them.
I included commercial tickets for my family, money that would be spent stateside, and the costs for watching over my doggos. Like in the original steps, this account is only to be used for genuine emergencies and unplanned expenses.
Pro-tip: To calculate this for yourself, add the original $1,000 to the estimated travel costs to fly home and back to your current duty station.
($1000+Travel Costs+House/Dog Sitting=Your Emergency Fund)
Baby Step 2 – Pay Off Debt Using the Debt Avalanche
(Original: Pay off debt using the Debt Snowball)
Personally, we chose the debt avalanche method over the debt snowball method. The difference between debt avalanche and snowball is the order in which you pay off your obligations. In the avalanche method, you pay off the debt that charges the HIGHEST INTEREST RATE first, whereas the debt snowball’s priority is the LOWEST BALANCE.
The main pro of the debt avalanche is how much money you save on interest, while the snowball method keeps people motivated with quick, visible results. I made the choice to be disciplined enough to stick to my goal of being debt-free, which keeps me motivated. Ultimately, I recommend the avalanche because it saves more money in the long run.
Avalanche Example:
You have a credit card with a $2,000 balance at 14% (minimum $100/month), a second credit card with a $4,000 balance at 19% (minimum $200/month), and a student loan of $15,000 at 4.7% (minimum $155/month).
Like the snowball method, you pay the minimums on everything. Then, put every extra dollar toward the $4,000 credit card because it has the highest interest rate (19%). Once paid off, roll that $200 minimum plus your extra cash into the next highest interest rate—the 14% credit card. Make sure the extra goes straight to the principal payment! Once credit cards are cleared, roll all that extra dough into the student loan until you are entirely debt-free.
Baby Step 3 – 6 Months of Expenses in Emergency Savings
(Original: 3-6 months)
Now that you are debt-free, it is time to build up that military emergency fund. We face unique circumstances in the military, so I recommend playing it safe and saving for exactly 6 months’ worth of expenses (meaning enough to maintain your current lifestyle).
Military members can get short-notice Permanent Change of Station (PCS) orders or get tasked for a deployment. When that happens, some of that money will come out of pocket before getting reimbursed. Additionally, many people are scared to separate from the service because of the guaranteed paycheck. Having 6 months saved provides the ultimate freedom to make career and life choices.
Baby Step 4 – Invest 10% of Household Income into Roth TSP
(Original: Invest 15% of household income into Roth IRAs and pre-tax retirement)
I think 10% is the sweet spot for service members. There are two rules here: invest 10% of your gross income, and put it into a pre-tax/Roth account. (Gross income is what you earn before taxes; net income is your take-home pay). Roth accounts allow you to pay taxes now, meaning the money grows tax-free, and you pay zero taxes on the gains when you withdraw at retirement.
If you joined on or after Jan 1, 2018, you are automatically in the Blended Retirement System (BRS). Under the BRS, the government matches up to 5% after two years in service. Your 10% contribution + the government’s 5% = a 15% total investment!
For those in the High-3 legacy plan, if you contributed 10% of an E-4’s base pay from age 20-25, 10% of an E-5’s base pay from 25-30, and 10% of an E-6’s base pay from 30-40 at a 7% return rate, you would have approximately $134,420. Let that grow for another 25 years, and at age 65, you would have about $730,000. Paired with your military pension, you are set.
The Combat Zone Tax Exclusion Hack:
If you deploy to a combat zone earning tax-free income, you can invest into your Roth TSP 100% tax-free! You literally pay ZERO dollars in taxes entering the account and ZERO upon withdrawal. Traditional accounts just cannot match that military perk.
Baby Step 5 – College Funding for Children
On average, college graduates carry their diploma and $35,000 in student loans home with them. Ouch! Fortunately, Active Duty members who serve 6 years and commit to 4 more can transfer their Post 9-11 GI Bill to their children, providing 36 months of benefits.
Beyond the GI Bill, you can invest in an Education Savings Account (ESA), a 529 plan, or a UTMA/UGMA account:
- ESA: Contribute up to $2,000 annually. It grows tax-free for school costs up to age 30.
- 529 Plan: Varies by state. Research fees and investment options carefully, but a good one yields a great chunk of college change.
- UTMA/UGMA: Can be used for things other than college once the child turns 21, but cannot be transferred to a different sibling.
Baby Step 6 – Pay Off Home Early (Using the VA Loan)
(Original: Buy a house with cash or a 15-year fixed mortgage)
Dave Ramsey recommends buying a home with cash. For military folks, I completely disagree.
I recommend you buy a house (or better yet, a duplex) as soon as you get approved to live off-base and collect BAH. Use your VA Loan to avoid a down payment and Private Mortgage Insurance (PMI). Since BAH is calculated to cover average local expenses, aim to buy below your BAH rate and apply the difference as an extra principal payment.
For example, my BAH was $1,150 and my mortgage was $850. I put the extra $300 toward the principal every month to build equity. When I PCS’d, I hired a property manager (10% fee) and rented the home out for $1,100/month. The tenant covers the mortgage, and the leftover cash covers maintenance. If you eventually decide to separate from the military and cannot manage it, you can sell the home and cash out the equity and appreciation.
Baby Step 7 – Build Wealth and Give
I completely agree with Dave on this one. At this point, you and your family are set up for a bright financial future. Keep looking for ways to build wealth and give back. Science backs up that giving boosts your well-being (check out this Harvard study: Money spent on others can buy happiness).
Find a charity that aligns with your values. Whether you take a front-row seat or watch the impact from behind the scenes, passing on kindness is the ultimate goal of financial freedom.
This is my take on a military edition of Dave Ramsey’s 7 Baby Steps. For my fellow service members, the time to get right with money is now! Find out where to start and don’t forget to subscribe for some of our free tools and resources.