The other day, I stumbled upon Dave Ramsey's seven baby steps to financial freedom and decided to create a post tailored to the Indian context. Below are the baby steps I drafted:
Baby Step 1: Begin by saving one month's worth of expenses as a starter emergency fund. When calculating your monthly expenses, remember to add 1/12th of your annual insurance costs, vehicle maintenance costs, and any other extras.
Baby Step 2: Pay off all your debts, including personal loans and education loans. Dave Ramsey suggests using the "debt snowball" method, paying off the smallest amount first, which can be emotionally motivating but not always rational. I recommend using the "debt avalanche" method, paying off the loan with the highest interest rate first. For instance, if you have a 50k credit card loan (30-35% interest) and a personal loan of 30k (12-13% interest), you should prioritize the loan with the highest interest rate first.
Baby Step 3: Build an emergency fund that can cover 3 to 6 months of expenses.
Baby Step 4: Invest 15% of your household income towards retirement. You should aim to contribute at least 15% of your take-home pay towards your retirement. Consider increasing your provident fund contribution using VPF and utilize PPF, NPS, and Index funs to achieve your goal.
Baby Step 5: Save for your child's college fund. If you're not planning to have children, this could be any long-term goal. Depending on the number of years left until the goal and your risk appetite, you can choose from mutual funds, fixed deposits, Sukanya Samriddhi Yojana (SSY), PPF, etc. A general rule of thumb is to switch to low-risk instruments when your goal is less than five years away.
Baby Step 6: Save for a home down payment and pay off your home loan early by increasing EMI or reducing the loan tenure. My conservative recommendation is to save 20 to 25% for a down payment and sign up for an EMI that is less than 30% of your take-home pay.
Baby Step 7: Build wealth and give.
Here's the link to Dave Ramsey's baby steps: https://www.daveramsey.com/dave-ramsey-7-baby-steps.
