Dave Ramsey Baby Steps: 4 Things You Need to Know

The Dave Ramsey Baby Steps have helped me tremendously. Use this guide as a resource to continually come back to and help you get out of debt 3 months faster on your Baby Step journey.

Let’s begin with some background. The name Dave Ramsey won’t be strange to you if you’ve read about his Baby Steps in his book, The Total Money Makeover. The Baby Steps method was created in the early 1990s and has helped thousands eliminate debt and begin to invest and gain wealth in your future. In fact, his book is so popular that it has sold over 5 million copies. It’s no surprise that the baby steps from his book have become so popular. Dave Ramsey exudes confidence, has amazing quotes, and preaches behavioral change and gazelle intensity to eliminate your debt and achieve financial freedom. Sometimes his words feel like tough love although Dave says it’s just love (Youtube video of his explanation).

The purpose of this article is to explain the Baby Steps, share the pros and cons, show how you can be successful, and share how I would update them in 2021. Without further ado, let’s dive into Dave Ramsey’s baby steps below (source). Click on the link below to read a more in-depth article to help you succeed.

Dave Ramsey 7 Baby Steps

  • Baby Step 1: Save $1,000 for Your Starter Emergency Fund
  • Baby Step 2: Pay Off All Your Debt (Except the House) Using the Debt Snowball
  • Baby Step 3: Save 3–6 Months of Expenses in Your Fully Funded Emergency Fund
  • Baby Step 4: Invest 15% of Your Household Income in Retirement
  • Baby Step 5: Save for Your Children’s College Fund
  • Baby Step 6: Pay Off Your Home Early
  • Baby Step 7: Build Wealth and Give

My Baby Step Journey Essential Toolkit

  • Get the Debt Payoff Planner Specifically Created for Baby Step 1 and Baby Step 2
  • Join Top Dave Ramsey Baby Steps Facebook Groups that will keep you encouraged and give you tips.
  • Understand how you can Stay Encouraged on the Baby Steps
  • Check Out Dave Ramsey’s Top YouTube videos
  • See 15 Money Saving Hacks for the Baby Steps from other Dave Ramsey enthusiasts.

Does getting out of debt 3 months faster seem interesting? Hopefully, the tool kit above will help!

Picture shows how Dave Ramsey Baby Steps help achieve 3 months faster debt freedom date.
My debt payoff date is 3 months sooner

Now let’s jump into the 7 baby steps, how to succeed in the baby steps, the pros and cons of the baby steps, and how I would update the baby steps in 2021.

Understand How The Dave Ramsey Baby Steps Works

Baby Step 1: Save $1,000 for Your Starter Emergency Fund

The 1st baby step to Dave Ramsey’s baby step is to start an emergency fund. You may want to check out our article how to build a successful emergency fund. You want to do this by building up $1,000 as quickly as you can. Many people might find this difficult to do at first. Though this is a way where you will start your journey on the path to financial success. 

Try to think about anything you might be able to give up on certain expenses. This will allow you to build your emergency fund faster as you can save more money. If you work you can take a few more shifts or earn a second income on the side to help gain money faster. Check out our guide below to see how to be successful and whether to store the emergency fund in cash or in a money market account.

Baby Step 2: Pay Off All Your Debt (Except the House) Using the Debt Snowball

Personally, I have the greatest expertise in baby step 2, so this is where I can help you the most.

For the 2nd baby step, Dave Ramsey says that you need to pay off your debt using the snowball method. To start you will need to list of all your debt from largest to smallest. Then, starting with the smallest debt start paying it off. You may want a planner to get through this, especially if you have more than 2-3 debts. I surveyed 15-30 debt payoff apps in Baby Step 2.

By applying for extra payments on that smaller debt, the payments will reduce way faster. Afterward, move on to the next smallest debt on your list and continue upward towards your largest ones. If you have a lot of debt, it might seem like it will take an eternity to pay it all off. The goods news is that during the process it starts to speed up as you pay from smaller to larger debts.

You can check out my guide below which is built for baby step 2. It consists of finding the right payoff app, getting a month ahead on expenses, working with a zero-based budget, knowing your income and expenses to the penny, and growing your hatred of your debt.

Baby Step 3: Save 3–6 Months of Expenses in Your Fully Funded Emergency Fund

On to Dave Ramsey’s baby step 3! Which is now using the money that you have been putting towards your debt to an emergency fund that is worth 3-6 months of expenses. This will allow you to plan out for unexpected events. For instance, medical emergencies, car repairs, home repairs, late fees, and more. 

Three months’ worth of savings is the minimum amount. Preferably, having 6 months’ worth of emergency funds is more beneficial for larger unexpected expenses. It might seem like a ton of money to have on the side but it’s always better to be safe than sorry. 

Baby Step 4: Invest 15% of Your Household Income in Retirement

Next is baby step 4, which is about your retirement. Even if you are still young there is no harm in already preparing for your future. It’s not fun planning your retirement year or two before so it is always good to have a head start.

Dave Ramsey recommends investing 15% of your gross income every month in a tax advantageous account. Such as a 401k or an IRA for both you and your spouse. It might seem a bit tedious but will be all worth it in the long run. 

Baby Step 5: Save for Your Children’s College Fund

Now let’s talk about baby step 5. In this step, you will now be creating a college fund for your (future) children. Your child’s education is important and as we all know, it’s not cheap. It is fundamental to make sure your child doesn’t fall into a pile of school loans/debt. Dave Ramsey believes in college, but not student loans.

So, if you do have children in high school, don’t panic because it is never too late to start a college fund for them. Also, if your children are still very young you can use the 529 college saving plan. As well as trying out the ESA education savings account. These are meant for college savings and they will even give you a break on taxes. Saving now will allow them to be debt-free once they graduate. Make sure you do not skip ahead to this step, it is important to do the others first. 

Baby Step 6: Pay Off Your Home Early

The following step is baby step 6. This step involves paying off your home mortgage. This will most likely be the largest debt you still owe. This means it will probably take a while to be able to pay it all off. 

Since you have already paid off your other debts from baby step 2, you should have extra money now to make extra payments to pay off your home mortgage. Once you are finally able to pay it all off, you will have way more money that can be put towards somewhere else. 

Baby Step 7: Build Wealth and Give

Finally, on to our last step, baby step 7. Now that all your debts have been paid off you can start giving back. This is considered the most fun and enjoyable step. Since now no longer have to worry about paying for debts and saving money on the side. 

Dave Ramsey likes mutual funds as a building wealth mechanism. You will now be able to direct the intention of your additional income towards investments and retirement accounts. This will give you the ability to gain more interest for yourself. You can also max out your 401k so you can relish in your new life. Now if you want to buy any properties you can do so by paying in cash instead. You can also donate to any organizations you have always been fond of. This is the moment where everyone wants to be because that means you finally finished all 7 of Dave Ramsey’s baby steps.

Pros and Cons of Dave Ramsey Baby Steps

Pro- Motivation

The Dave Ramsey 7 baby steps have so many great advantages to them! One of the first things that many people love about the baby steps is how the plan is easy to follow since it’s just seven simple steps to financial freedom. So, if you follow the plan you will be debt-free quicker. By using the snowball method, it will also help motivate you to keep ongoing. This will help boost your excitement of becoming closer to being debt-free because you are starting to pay off the smaller debts first. 

Pro- Financial Stability

Dave Ramsey’s plan guarantees financial stability, even throughout his plan. One of the first steps is having an emergency fund of $1,000 which allows you to have a fallback if anything bad were to happen. He made sure to carefully think out all the baby steps to ensure as well it can apply to every single person, in every single situation. Also, once you’re done you’ll have 3 to 6 months of expenses in savings which will help you during emergencies or any incidents in the long run. 

Pro- Potential Wealth

 When you are finally done with all the baby steps you have the potential for wealth especially if you are young when you start the plan. This will allow you to finally start allowing yourself to enjoy life with your money. No more stress about being in debt and having to owe thousands of dollars. This is your time to shine by continuing to build your wealth and now be able to support the rest of your family as well. 

Con- May Create Unhealthy View of Spending Money

The whole purpose of Dave Ramsey’s baby steps is to help you gain financial stability and wealth. Though with saving so much money over a long period it can cause you to have an unhealthy view of not being about to spend your money. By only saving your money you may create a habit of always feeling the need to continue saving because of the fear of going backward. Even after all the baby steps are complete and become financially stable, many find it difficult to start spending their money. You need to get in the habit of practicing spending so you don’t fall into this trap. 

Con- Intimidation

One of the main reasons why so many people have trouble with the baby steps is trying to start the process. It can be intimidating because sometimes it can take longer than others depending on how much debt you are in. Especially baby step 2 is known to being the step where people tend to quit the most because of how long it takes. 

Con- Not Meant For Everyone

Dave Ramsey’s baby steps are intended to help everyone’s financial situation but that might not be the case. This plan can be more difficult to execute for a low-income family of 5 struggling to keep a roof over their head. This can also cause the emergency fund of $1,000 to not be enough to support a larger family. This plan may also not work very well for those who are financially stable already with a large income who just wants to get out of debt just because they don’t feel like paying every month. 

Con- Losing Investment Opportunities

Now, let’s say you have $4000 of disposable income to put towards debt or investment. You would then put the $4000 into the house: $2000 for normal payment and then $2000 extra. Which will lead you to pay off your house early → 3.5% interest rate of $2000 per month. 

Though if you were to put the $2000 and $2000 into an investment that makes 15%. We use an extreme example to show how this works. You would be making much more money on your investment than paying off your house early. 

How To Be Successful With The Dave Ramsey Baby Steps

Step 1: Get A Budget and Debt Payoff Plan

To get started on Dave Ramsey’s baby steps, you need to create a budget for yourself. Luckily there are so many different budgeting methods that you can use for the baby steps. By creating a budget you are saving time and preparing yourself up for success in the baby steps. Also, finding a debt payoff planner can help you keep track of your progress while paying off your debts first. This will help you keep organized and if you use an app, many of them tell you how long it will take depending on which method you will use such as snowball or avalanche. 

Step 2: Join A Dave Ramsey Baby Steps Facebook Community

One of the best ways of finding encouragement is joining a Dave Ramsey Facebook community. There, you will find thousands of others also going through the 7 baby steps just like you. Seeing others post about their progress can be motivating to also work on your steps towards financial freedom. It is always a great way to communicate to others if you have any questions to ask and even answer for others. It is an amazing place to learn from others and you may even find a cool new tip to use on your baby steps.  

Step 3: Potentially Join a Local Financial Peace University

Joining a Financial Peace University offers a life-changing program to help you take control over your money, become debt-free, and gain wealth. This is a great tool you can use up your sleeve for when it comes time to do your baby steps. You will be able to learn so much about becoming financially stable but you have to work for it. The reward afterward is worth it if that means it could help you with Dave Ramsey’s baby steps.

Step 4: Listen to Dave Ramsey Podcast

As we all know Dave Ramsey has his show called The Ramsey Show, where he talks about how to manage your money, gives financial advice, and life-saving tips for your future success. Listening to his show can give you many benefits such as up-to-date information on things such as inflation and other financial tips. It is another great way to become more motivated to continue your path to financial success and wealth.

How I Would Update the Dave Ramsey Baby Steps in 2021

Let’s say you like some of the core principles of the Dave Ramsey baby steps, but you believe it should be updated. You can look for alternatives or you can also see how we would update the baby steps in 2021 below.

1. Create a suitable budget 

You will find it very difficult to have any funds for an emergency if you’re the type that has no means of tracking your expenses. If you can’t tell the exact amount of money coming and leaving your account, you will have challenges filling your safety funds. 

Although he didn’t include any of the baby steps, I really feel that it’s necessary to build the perfect budget if you want to have long-term financial success. 

Dave Ramsey’s preference is the zero based budget, built a budgeting app, and is even provides recommended budget percentages. All that, and it’s not a baby step. I believe a good financial habits start with budgeting, which is why I would put this at the top of the baby steps.

2. Build an Emergency Fund that is Set by a Percentage of your monthly income.

This baby step has existed for long; however, I’ll update it for the following reasons: 

  1. Inflations exist; as such, $1,000 does not worth the same as it did 20 years ago—which means that you may need to invest back into your credit card if your dishwasher breaks and you need to replace it. 
  2. In reality, you may earn a lot of income and have a high expense; as such, you should have an emergency fund that is designed based on a percentage of your income. 

What would I advise that you do instead: I advise that you take a percentage of your income, and save it in an easily accessible bank. 

3. Use the Debt Savvy or Avalanche method to eliminate your debt

Dave Ramsey’s third baby step is meant for individuals who want immediate results for their efforts. It does this by making them eliminate the smallest debt first with the Snowball Method. I would change this completely. 

Beginning with the basics: 

  • The Avalanche Debt Payoff method is centered on using any extra income remaining after meeting your needs and settling minimum financial obligation to settle debts and prioritizing debts with a larger interest rate by putting all your disposable income into them. This method doesn’t focus on the amount of debt. 
  • The Savvy Method: This method is considered as a modern one that makes use of both the avalanche and snowball method. If you have debts that are small, you should prioritize them first, and then start using the avalanche method to save your interest. 
  • The Snowball Debt Payoff Method is focused on using your additional monthly payment to pay the smallest debts first, before paying off larger debts. The Snowball method doesn’t consider interest rates. 

In some instances, you may lose thousands of dollars in interest payment when you use the snowball method. What you should rather do is find a debt payoff planner that best helps you reach your goal and set your focus on either the Savvy or Avalanche method. The Savvy method is the least known method, although, it’s also one of the most effective. 

4. You should have 3-6 months of expenses in a long term emergency fund 

Although I disagree with Dave Ramsey on some of the points he made, I still find some of his points really helpful for individuals who need financial education. On this 4th baby step, the focus of Dave Ramsey is on teaching how to reallocate funds to build a safety fund. 

I noticed that an emergency fund is highly beneficial during the period of sudden and necessary expenses—especially during this period of coronavirus, where the threat of unemployment is high. 

5. Invest 15% of your household income in retirement

This is a very great baby step, as I believe that it is a necessity to save for retirement. However, I don’t think the right number is 15%, as incomes and expenses vary. Thus, you may alter the percentage to something that best represents your financial capacity. 

6. Save for Your Children’s College Fund 

It is a directionally useful step to save for your children’s college fund. The amount of money you should put into it is at your discretion. 

I noticed that the primary reason why I took college seriously was that I funded my study by myself. Whether a family should use this method or not is up to the disposable income they have. 

7. Invest where you can get high returns 

For Dave Ramsey, it’s highly essential that you pay off your mortgage as early as possible—however, it’s not a suggestion that’s smart to follow in all instances. For example, if you made an investment that is giving you high returns, should you focus on paying off your mortgage early, or should you increase your investment? I would advise that you weigh the alternative forgone before making any investment decision. 

For example, let’s imagine that you have a mortgage balance of $50,000 at a set rate of 3.5% fixed. And assuming you have an inheritance that’s worth $10,000 and gives you an interest rate of 9.3%. Dave Ramsey’s advice says that you should first pay off the $50,000 even if it means using the $10,000. If you carefully examine this strategy, it means that you’d be depriving yourself of the opportunity to earn lots of interest on your investment. 

I will also eliminate “Build Wealth and Give” for these two main reasons: 

  1. My modification on this baby step will be that you should build your wealth. Of course, you won’t be free from your mortgage debt as soon as you wish, but you’re building a life of financial freedom for yourself. 
  2. You shouldn’t wait for the 7th baby step before you give. Always have it at the back of your mind that “It is better to give than to receive.” 

4 thoughts on “Dave Ramsey Baby Steps: 4 Things You Need to Know”

  1. I was never a follower of Dave Ramsey, just b/c I didn’t have debt other than “good debt” like student loans and mortgage, and I disagree with paying down these low-interest debts. It definitely paid off for us, as we funneled our remaining money into retirement and real estate and achieved a base level of FIRE in our late 40’s. That said, I know Ramsey’s teaching has helped lots of people so it’s good to know the principles. That said, I think the pandemic has upended even more of his teachings — I would rather have cash than a paid-off house, and a typical emergency fund isn’t going to be enough in this environment though better than nothing of course.

    1. Hey Dorian, that’s a great quesetion. From my perspective, the goal of the Baby Steps is to help you achieve debt and financial freedom. I believe there’s value in the Baby Steps, but that it could be updated for 2020 as the original Baby Steps were created so longa go. What are your thoughts?

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