Dave Ramsey is one of the most popular personal finance gurus in the US. He has sold millions of books and his radio show is syndicated across the US. Along with his best-selling books and radio station, he runs Dave Ramsey’s Financial Peace University, his plan to achieve financial freedom. Dave Ramsey’s Financial Peace University includes his Baby Steps to financial freedom, a 7 step program to become financially free.
Here are Dave Ramsey’s Baby Steps, in order:
- Step 0: Make the commitment to become debt free and get current on all bills.
- Step 1: $1,000 to start an Emergency Fund.
- Step 2: Pay off all debt using the Debt Snowball.
- Step 3: 3 to 6 months of expenses in savings.
- Step 4: Invest 15% of household income into Roth IRAs and pre-tax retirement.
- Step 5: College funding for children.
- Step 6: Pay off home early.
- Step 7: Build wealth and give!.
Dave Ramsey’s Baby Steps are easy to understand, and in a vacuum, they make perfect sense. But that doesn’t mean the system is perfect.
Are Dave Ramsey’s Baby Steps realistic?
Here is a comment I received about DR’s Baby Steps:
Ramsey’s baby steps seem to be common sense and easy to understand, but as a young person (24) they seem unrealistic even without a house note. (Granted my salary isn’t as large as one would hope to have after graduating college) How can one save $1,000 for emergency funds plus 3-6 months of wages, give 10% to charity, AND put away 15% to retirement? All of my money goes towards loans from college, car notes, and car insurance (thankfully my job has a mandatory retirement plan, in which I only put in 5%!). I just don’t see how these baby steps are plausible with all the other extra bills in life. Please help me understand…maybe it’s just my age and my starting in the “real world”? Or this plan takes years and years to achieve?
~ ConfusedYoungster!
Should You Follow Dave Ramsey’s Baby Steps?
Dave Ramsey isn’t recommending you do all of these steps at the same time – rather that you do them one at a time until you complete them all.
The most important steps are step 0 and step 1 – making the decision to live within your means and then setting up your emergency fund. Once you have your emergency fund in place, then start working on eliminating your debt.
Do you have to use a debt snowball? No, you don’t. The debt snowball may or may not be the most mathematically correct way to eliminate debt. The advantage to using it is the psychological advantage of making quick wins and seeing steady progress. As long as you eliminate your debt, you are staying true to the purpose the program.
3 -6 months living expenses. Once your $1,000 emergency fund is in place and you have eliminated your debt, a larger emergency fund is a great idea – particularly in a bad economy such as the one we are currently experiencing.
Investing 15% of household income. Again, this is a great idea – especially if you can max out a Roth IRA or 401k. But not everyone can put away 15%, especially when he or she is right out of school. Put away what you can, but don’t forget to live in the present either.
College savings, mortgage payments, and wealth building. You are probably not yet at the stage of life where these are applicable. That’s fine. If it doesn’t apply, then don’t stress about it. But it is a good idea to understand how these things may affect you in future years, and having an understanding of debt repayment, saving, investing, and other financial matters will help you when it comes to important decisions such as buying your first house, saving money for college, building wealth, etc.
Dave Ramsey’s Baby Steps are not designed to happen overnight
This plan can take years to achieve, and it’s effectiveness depends on many variables. But you are young, so you have a great advantage working for you – time. Starting now will make it much easier for you to become financially successful and live the life you want to live. The good news is that as a college grad, your income should increase through the years, and as long as you are living within your means and aggressively repaying debt, it should become easier with time – especially if you can use a portion of your annual raises to help make this happen.
Should you folllow Dave Ramsey’s Baby Steps? Dave Ramsey’s Baby Steps are only a guideline, which doesn’t mean they should be followed exactly to the letter by everyone, nor does it mean the Baby Steps apply to everyone. But I think that for many people, they are a good place to start.
{ 7 comments… read them below or add one }
You make a great point that these steps are guidelines. There is flexibility to adapt to your specific circumstances. What I like about the baby steps is that they build on each other. You start with one, accomplish that goal, and then move on to the next. Each step provides a foundation for the following step. And, of course, since it is personal finance, you can adjust some of the steps to fit your situation.
Maybe I should have quoted “Pirates of the Caribbean” regarding the Pirate Code…
I think “ConfusedYoungster” makes Ramsey’s point perfectly. You can’t save and give if you have student loans and car notes. He’s right. It’s impossible. That’s why you have to get rid of all that stuff and never do it again.
I’d like to invite the ‘confused youngster’ to add up how much he/she is spending per month on student loans and car payments. Is it at least $500? Let’s say it’s $500.
Once those bills are paid off, you’ll have an extra $500 per month to do what you want. At that rate, it won’t take all that long to build up your emergency fund and then once that’s in place, you can start contributing 15% toward retirement.
If you try to do all the steps at once, you’ll never get anywhere. That’s why these are baby STEPS. You have to complete a step before moving on to the next one.
Get your $1,000 together fast. Then, get to work on your debt. Pay it off as fast as you can. You’ll free up a ton of your income and you’ll really start to make progress.
Trust me. Next month, I’ll turn 24. I just paid off my car and now I’m 100% debt-free. My husband and I (on a modest income, for sure) are now going to have anywhere from $1,200 – $1,500 or more per MONTH to save for a house.
The key is what you said at the end of the post– this won’t happen overnight!
Any of us could put together this list– the hard part is the discipline and patience to really make it happen.
The earlier you can get out of debt, the easier it is to stay out of debt. Those habits of always having “bills” are hard to unlearn after 10, 20, 30 years. (I love that phrase, “bills” – like credit card bills & student loans and electricity are all the same kind of thing) .
And totally aside from any expectations or hopes you may have of being rich someday, debt freedom is *freedom*. You might want to travel, to be a stay at home parent, to help your siblings or parents, to work in a nonprofit or for a church…the less debts you have, the more freedom you have to choose what to do with your life.
Rosa: Thanks for your comment. You’re right, there is a big difference between types of bills, but it is easier to just say bills than list them all out each time. And I love the idea of being 100% financially free. To me, not having any debt is a big part of that!