Dave Ramsey’s Baby Steps: 7 Steps to Financial Freedom
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Dave Ramsey is one of the most popular personal finance gurus in the space. His books, courses, and programs like The Total Money Makeover and Financial Peace University have helped millions of people get out of debt. Dave Ramsey’s Baby Steps come out of this work to help people kill debt and become financially stable.
Dave Ramsey’s religious band of followers are as committed to his advice and processes as Beyonce’s ‘Beyhive’ is committed to supporting her music. I’m not exaggerating.
Odds are you’ve probably heard of Dave Ramsey’s 7 Baby Steps. These steps are basic money principles and actions you can take to get back on track financially and improve your overall financial situation.
There is a wide range of opinion regarding Dave Ramsey’s Baby Steps. Some are in full support of the process while others criticize it for being a bad idea.
Dave Ramsey’s Baby Steps
Before we go into detail, here’s a breakdown of each step of the Dave Ramsey plan:
- Baby Step 1: Save $1,000 to start an Emergency Fund
- Baby Step 2: Pay off all debt using the debt snowball
- Baby Step 3: Save 3-6 months of expenses
- Baby Step 4: Invest 15 percent of your household income into Roth IRAs and pre-tax retirement funds
- Baby Step 5: Save for your kids college needs
- Baby Step 6: Pay off your mortgage early
- Baby Step 7: Build wealth and give
The above list is a lot of work but that’s why taking it one step at a time is important. In this post, I’ll walk you through Dave Ramsey’s 7 Baby Steps and how to succeed. I’ll also provide an honest opinion of each one.
Step 1: Save $1,000 to Start an Emergency Fund
I love that this is first because the average American can’t afford a $400 emergency. Lack of savings is a big reason why people get themselves into financial trouble.
Even if you’re struggling to get by or have a lot of debt, it’s important to save some money to cover unexpected expenses. If you don’t have any savings, you’ll rely on credit cards and loans to bail you out of an emergency.
I’ve always felt like $1,000 isn’t enough but it’s better than nothing. However, I understand how important it is to focus most of your attention on paying off your debt quickly.
Many think it’s impossible to save at least $1,000. It’s not. The key is to start saving as much as you can and automate regular transfers. Pick a bank that lets you automate transfers, has a low minimum balance requirement, and pays a good rate.
CIT Bank is one good option as they pay .85 percent in their Savings Builder account. You must start with a $100 minimum balance, and deposit $100 per month to receive that rate.
If you have no money leftover at the end of the month, look for things to cut. Do you have cable? Cut the cord and go with a streaming service like Hulu Live and put the $50 towards savings.
Need to make extra money to save at least $1,000? You can deliver meals with Postmates and earn up to $20 per hour.
There are countless other ways to cut or make money to increase savings, you just need to look for the opportunity.
Step 2: Pay Off All Debt Using the Debt Snowball
This step involves paying off all your non-mortgage debt. Dave Ramsey hates debt but he is okay with people keeping their mortgage debt until later on in the process since it’s often at such a low-interest rate.
If you have student loans, car loans, personal loans, medical bills, or any other type of non-mortgage debt, you’ll pay them all off in this step. You do that using the debt snowball method.
The debt snowball method focuses on paying off the debt with the smallest balance first. You put extra money towards that debt and pay the minimum on everything else. Then, once you pay that debt off, you’ll roll your payment onto the next debt with the lowest balance. And so on and so on.
This method jump-starts the debt payoff process and allows you to start seeing faster results.
When paying off my debt, I used the avalanche method. This method focuses on paying off the debt with the highest interest rate. The avalanche method saves you money by knocking out high-interest debt first.
If the debt is high-interest, and overwhelming, consolidation is often a good choice. A lender like Fiona by Even Financial is an excellent option as they allow you to compare multiple lenders at once to find the best fit and rate.
To me, the method doesn’t really matter. If you are committed and consistent, you will get the desired end result of becoming debt free.
The key, like saving, is to start. There are many ways to pay off debt fast; you just need to start. Dave Ramsey calls for gazelle-like speed when paying off debt. By following some of the ways to pay off debt fast, you can kill debt for good faster than you think.
Step 3: Save 3-6 Months of Expenses
After paying off debt, you return to building your emergency fund. Paying off all your debt frees up money to save. In this step, though, you focus on three to six months of expenses rather than a small, $1,000 fund.
For instance, if your monthly expenses are around $3,000, that means you’ll need to save anywhere from $9,000 – $18,000.
That amount can be overwhelming but don’t let it keep you from saving. Here are 35+ ways to save money each month that can give you a head start at building your savings.
This will also help you break the paycheck-to-paycheck cycle. Dave doesn’t specify how long it will take you to complete this baby step, but it will require lots of hard work and sacrifice.
Step 4: invest 15 percent of Your Household Income Into Roth IRAs and Pre-Tax Retirement Funds
Now that you’re debt-free and have a fully funded emergency fund, this seems like a doable step . You may want to invest more, which is why I feel like this is more of a guideline.
The major critique of this step is how long it may take someone to get here. If it takes you five years to pay off debt and two years to build your three to six month emergency fund, that means losing out on seven years of investing.
I listen to Dave’s radio show a lot. Often, I hear him tell people with loads of debt to temporarily stop contributing to their 401(k) until they pay off their debt. I’m not sure that I fully agree with this.
If you’re able to start investing sooner, don’t think you need a lot of money to start. You can start investing with little money in many ways. Below are some of the brokers that allow you to open accounts with $500 or less, along with the minimum required to open an account:
- Acorns – no minimum deposit required
- Betterment – no minimum deposit required (they manage your investments for you)
- Stash Invest – $5 minimum balance required
As you can see, there are many ways to invest with limited funds when you’re just starting. It is possible to invest while simultaneously paying off debt.
Step 5: Save For Your Children’s College Fund
Some people want to pay for their child’s college education so I love that this step is included in the Dave Ramsey plan. I also agree with doing it after you start saving for retirement.
It’s important to realize that while you want to provide for your child, preparing for retirement is something you can’t miss out on.
Your kids can always borrow money to go to school or work their way through college. You can’t do the same when it’s time to retire.
The way I see it, I don’t want to be a burden on my son when I get older. Given that, I need to make sure I save for retirement before I help him out with college expenses.
Step 6: Pay Off Your Home Early
Paying off your mortgage early is the true American dream. Not having a house payment frees up so much money and gets you closer to financial independence.
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Making extra mortgage payments is not easy. However, if you follow the previous steps, you’ll set yourself up for success with this step. You can also refinance your mortgage with LendingTree to find a lower interest rate and pay it off sooner.
Dave is also a fan of only 15-year mortgages. Those come with a higher payment but allow you to pay off your mortgage faster and save significant money.
Step 7: Build Wealth and Give
This is the final step of Dave Ramsey’s 7 Baby Steps. If you reach this point, you’re in pretty good shape financially. You’ll have no debt, a solid retirement fund, a paid off home, and some college savings for your kids.
Now all you need to do it keep it up by continuing to build your wealth and giving back to others. Since you’re likely more financially well-off in this step, you”re in a better position to give to charity and support the causes you care about.
Dave Ramsey’s 7 Baby Steps: Bottom Line
Overall, I feel like Dave Ramsey’s Baby Steps are a uniform example of how to become financially stable, pay off debt, and grow wealth.
What I don’t like is how this process is often marketed as a one-size-fits-all solution that will help everyone.
The first few steps make the most sense to me. After that, though, people might have different goals or aspirations. For example, some might want to invest and build their emergency fund at the same time.
Others might want to start a business instead of using their extra money to pay their home off early. I’ve even heard some people say they’d keep their mortgage and invest more money in the stock market to get a higher return.
I also feel like these steps are meant for a specific person during a specific period of their life. For example, what if it takes too long to get to step 5 and your kids are headed to college before you can set aside any money for them?
What if you move and get another mortgage during the 7-step process? Is Dave instructing people to live in the same home throughout the 7 steps in order to pay that one mortgage off? What if that’s not your forever home?
There are lots of questions and variables.
The thing is, the 7 Baby Steps aren’t going to appeal to everyone but they do work for the right person. Just ask the millions of people who have benefited from following them.
Whether you love or hate Dave, or agree or disagree with the order of the steps, he is consistent in what he says. He makes it clear that you do better when you focus on one step at a time.
The steps are geared toward people who want to live a debt-free life long-term. If you’re okay with certain types of debt, have different goals, or are not willing to make sacrifices, the 7 Baby Steps may not be for you.
But if you are willing to do the work, and are debt-averse, following Dave Ramsey’s Baby Steps will put you on a course for financial security.
What do you think about Dave Ramey’s baby steps? Do you follow them, or do you think there are better methods to consider? Do you think there is such a thing as good debt?