Dave Ramsey’s Baby Steps: The Pros And Cons

August 10, 2021

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Like I’ve mentioned in a previous post, personal finance can feel overwhelming and even daunting at times. 

Financial goals like paying off your debt, saving up for an emergency fund, or saving to buy a new house can be hard to accomplish if you don’t follow a budgeting plan — and budgeting, too, can be hard to maintain.

But it’s definitely not impossible.  

If you’ve read about personal finance before, you’ve probably heard of the name Dave Ramsey — he’s a personal finance expert and is most well-known for his 7 Baby Steps to help you get rid of debt and take control of your finances. 

Following these steps is a great starting point to your journey into personal finance, but it’s also worth mentioning that these steps are not perfect.

In this post, I’ll go through Dave Ramsey’s 7 Baby Steps, discuss the benefits of implementing them, the drawbacks, and some tips to help you get started.

Baby Step #1: Save $1,000 For An Emergency Fund

The first Dave Ramsey baby step I’ll be talking about is saving $1,000 as an emergency fund — it’s a financial goal that should take you less than a year if you save around $20 a week.

Basically, an emergency fund consists of money you set aside to cover any unforeseen expenses that may come up in the future. These expenses could be anything from a surprise medical bill or necessary house repairs to having some spending money in case you lose your main source of income. An emergency fund is typically stored in something like a high-yield savings account so that it grows over time, but you still have immediate access to it when you need it.

This first baby step serves two primary purposes — it allows you to handle minor repairs and accidents if they come up without sending you underwater, and it gets your financial journey started as well.

Now, it’s worth mentioning that $1,000 may seem like a lot of money for some, but when you think about it, it’s not really that much. To have an emergency fund that can actually cover things like house repairs or your living expenses as you look for a new job, you’ll need to have a bigger emergency fund than that. 

The main end-goals to this first baby step are to teach you how to create a budget and to allow you to identify ways to either increase income or decrease expenses as you move through the other baby steps.

After all, if you are spending more than you are making, you won’t save any money, not even $20 a week.

Baby Step #2: Pay Off All Debt (Except Your Mortgage) Using the Debt Snowball Method

Baby step #2 is about eliminating bad debt (which doesn't include your mortgage). This includes credit card debt, student loan debt, car loans, and personal loan debt — and you’ll be using the debt snowball method to pay it off.

The debt snowball method consists of paying your smallest debts first despite the interest rate attached to each one (but making sure you pay the minimum payments on each loan). 

For example, let’s say you have three forms of debt:

  • Student Loan: $25,000 (7% interest rate)
  • Credit Card Debt: $10,000 (20% interest rate)
  • Car Loan: $5,000 (15% interest rate)

If you were using the debt snowball method, you would first tackle your car loan. Next, you would take care of your credit card debt (despite having the highest interest rate of them all), and then you would pay off the student loan.

The main idea behind the debt snowball method is that the psychological benefit of eliminating one loan or type of debt outweighs the money saved by paying off high-interest debt first.

While this baby step has its upsides, it’s worth noting that there are alternative methods to tackling debt — for example, there’s the debt avalanche method, which involves tackling debt with the highest interest rate first. This means starting with the high-interest credit card debt, then moving on to the car loan, and finishing off with the student loan.

Like baby step #1, you use your budget to accomplish this goal — this means saving more and earning more until you have paid off all of your debt. And in case you’re curious, you don’t include your mortgage here because you usually have plenty of wiggle room to pay it, and it's an investment that usually gains value over time.

Baby Step #3: Save 3-6 Months Of Expenses In An Emergency Fund

Now that you have all of your debt paid off (besides your mortgage), it’s time to build up a more comfortable, fully-funded emergency fund. The objective of this emergency fund is not to teach you how to budget like the first one, but rather, to cover bigger unexpected expenses while preventing you from going into debt again.

Of course, there are exceptions to the rule — you might decide to go back to school, or maybe you haven’t purchased your house yet, but the idea of baby step #3 is to stop you from needing to take on “bad debt” (maxing out credit cards, for instance) to solve a short-term problem.

It’s also worth noting that there isn’t a one-size-fits-all recommendation with emergency funds. For a young, single person with a relatively stable job, having a one-month emergency fund might be enough, but for a family of five living on one income that has a mortgage, it might be better to have at least a year saved up.

Baby Step #4: Invest 15% Of Your Income In Retirement

Baby step #4 involves thinking a little more about the future by saving and investing for retirement.

What Dave recommends here is investing 15% of your overall income in a 401(k) and Roth IRA (or another pre-tax retirement account). Another thing he recommends in this baby step is investing in mutual funds (specifically, growth mutual funds).

A general rule of thumb is that you need 25 times your annual expenses saved up in order to retire. If you save 15% of your annual income as per Dave's recommendations, it will take you about 35 years to save enough for retirement.

It’s important to do the math yourself in order to determine whether or not waiting 35 years is acceptable. Taking your calculations into consideration, you can then adjust your savings rate from there in order to better meet your goals.

Baby Step #5: Save For Your Children’s College Fund

Once you've gotten to this step, you should have plenty of fewer things to worry about. So, for baby step #5, Dave recommends saving for your children’s education in the future.

People generally recommend opening a 529 College Savings Plan or Education Savings Account (ESA), which are both tax-advantaged accounts (similar to a 401(k) or Roth IRA). The key difference is that these accounts are designed to be used exclusively for education expenses.

This step is important, but it may not be necessary — for instance, your kid might get a scholarship or decide college isn’t for them, or you might not even be planning to have kids at all.

Baby Step #6: Pay Off Your Mortgage Early

By this step, if you've done everything correctly, the only debt left to worry about is your mortgage. 

Now, before you go straight to paying your mortgage off earlier than originally intended, there are a few factors you should keep in mind. For example, one of the most important things you should determine about your mortgage is whether or not it has prepayment penalties.

However, if you can free yourself from house payments earlier than expected, it usually saves a lot on interest.

Baby Step #7: Build Wealth And Give

Once your debt has been paid off, you have your entire retirement planned out, your children’s college is paid for, and you have no mortgage to worry about, you're capable of spending the money you earn on whatever you please.

Some suggestions on what to spend your money on include:

  • Max out your 401(k) and Roth IRA.
  • Open a brokerage account and continue building wealth there.
  • Invest in real estate.
  • Give money to charity and philanthropic causes.
  • Spend money on things you enjoy without guilt.

Should you follow Dave Ramsey's 7 Baby Steps?

These steps might sound like a lot of work, and they can be — but they’re also worth it. 

Some of the pros of following Dave Ramsey’s baby steps are:

#1 They’re Easy To Follow

The baby steps are straightforward and easy to follow, even if you're completely new to personal finance.

You can also find many online communities dedicated to the baby steps by doing a quick Google search, which is a great way to find people who are on the same journey as you are while simultaneously helping you to stay accountable.

#2 It’s Free

You don’t have to pay anyone to teach you the 7 Baby Steps method, and you don't need a whole lot to get started with the baby steps either.

That being said, if you want to make the most out of these baby steps, you could pick up a copy of Ramsey’s bestselling book, “The Total Money Makeover” or you could subscribe to Dave Ramsey's Financial Peace University course for $129.99.

Nevertheless, the baby steps are well-documented online, so this would be completely optional.

How To Get Started With Dave Ramsey’s 7 Baby Steps

Before you start following Dave Ramsey’s Baby Steps, there are a few preliminary things you should be doing. For example, you should:

#1 Ask Yourself Questions

Before looking at your financial numbers or figuring out where you can save, ask yourself why you want to go through with this. Why now? What is your motivation for financial freedom?

Whatever your motivation may be, it's important that it's clearly defined in your head. This will serve as your motivation you might be tempted to give up, either because progress is slow or for any other reason.

#2 Study

You'll be more likely to stick to the program if you have a pretty good idea of what it's all about before you even begin. So, read through Dave Ramsey's website (or read through his books if you can) and make sure you're very familiarized with the baby steps.

#3 Make The Time

Once you get started, it doesn’t really take any time to keep the ball rolling. You should, however, schedule some time for yourself so that you can read and implement the lessons learned here.

#4 Commit To Change

Paying down your debt and investing in your future will involve lifestyle changes and a few sacrifices.

For others, it might involve an entire overhaul of their spending and savings, which means that it's important to mentally prepare yourself for this before you begin. 

An effective way to commit to change is to get your partner and other family members on board with the process.

Even if this is a decision that's being made primarily by yourself, it's a lot easier to go through with it if you have people just as committed as you are alongside you every step of the way.

#5 Be Patient

This might be the most challenging part, but it’s crucial to your success! This journey takes time (a lifetime, actually), but as many who have completed the Dave Ramsey 7 Baby Steps over the last couple of decades can attest, it’s well worth it!

In Summary

Personal finance can be a tough topic to master, especially if you’re new to it. But Dave Ramsey’s 7 Baby Steps are a great way to get started with personal finance in general.

Even if they’re not perfect, they teach you the core fundamentals of personal finance and budgeting in a way that’s easy to follow.

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