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Should You Follow Dave Ramsey’s Baby Steps?

by Ryan Guina

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:

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 follow 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.


Published or updated March 20, 2014.
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{ 12 comments… read them below or add one }

1 Miranda

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.

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2 Ryan

Maybe I should have quoted “Pirates of the Caribbean” regarding the Pirate Code… ;-)

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3 Michael @ The Life Insurance Insider

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.

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4 Happy Camper

Confused Youngster has a very valid point and he’s right in many different areas, however, the system really works when you follow it step by step. I was skeptic in a huge way because I have tried to get out of debt myself and haven’t. It is not impossible to dig a hole (debt) and it is not impossible to crawl out. The main thing thing here is to be patient and constant and treat this system as a diet plan with someone to hols us accountable for every penny we spend. When I started this system, I was in debt about $31,000 and I’ll be honest… I still owe about a $7000, however, without the discipline that I built, I don’t worry about creditors calling my house and I have not incurred any debt for the last 18 months. I started the plan a little over 2 years ago.
His book or video will not get you out of debt — You and your discipline will!

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5 Kacie

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.

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6 DDFD at DivorcedDadFrugalDad

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.

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7 Rosa

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.

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8 Ryan

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!

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9 Yoel Cohen

Dave Ramsey has great deficiencies in knowledge and understanding of how to finance college education. His suggestion to open college savings when the child is born and invest the maximum allowed $2000 per year and with earning on this investment 12% to the child age 18 you should have $136,000 for college.

What is wrong with this advise? first, were can your invest to receive yearly12% return on your investment every year for 18 years, with Berni Madoff? the S&P for the last 10 years did not produced any profit at all, and very low percentage by mutual funds.

I have send my 3 children to college while earning less $100.000 a year and few years they were all in college at the same time, how did I do that? first, you take two year, prior of sending your first child to college, and learning how the FASFA application works in order to get the low EFC, position your child assets and yours to get the highest and as many grants which the school financial officer decide to meet the gap between your EFC and the school total amount they came up with for the year education cost, the balance to be in subsidized loans.
Your children should not own a car or credit cards, work part time jobs while attending college.
For 15 years I have advised friends and family and help them to use my system that cut their expenses by at least 70% I have managed to send my 3 children to college by paying not more then 10% of total of their education

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10 Laura

*advice
*where
*Sentences start with capital letters

I’m not sure you’re qualified to point out anyone’s knowledge deficiencies.

Are you saying children should or should not work part time jobs while in college? Because they certainly should. It gives them less time to get into trouble and they respect the experience more when they see how much work goes into making it happen. I worked a full time job while in college, my grades were good and it didn’t kill me.

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11 Ronald Spencer

Dave Ramsey uses a lot of catch phrases and humor to get his point across. He is an entertaining, funny, charismatic radio and tv personality (FoxNews), who does not pretend to be a rocket scientist. One of his most famous phrases is “Common Sense for your Dollars and Cents).

I, for one, am a fan of the guy. His program has helped me payoff my credit card, auto loan and in a year or so, my remaining note (a pool). For Yoel: History has shown us that 95% of all 5-year periods in the stock market have made money. 100% of all 10-year periods have made money (this is to include the Great Depression. Further, the stock market, on average, earns 12% a year. My own portfolio (which is all mutual funds -I don’t invest in single stocks) is right about 13%, and there are so many that earn more than that.

For everyone else, We live in america. Land of the Free, home of the microwave. Most people want what they want now! They don’t want to have to wait for anything. Delayed gratification is really a sign of maturity (something I am only now acknowledging -at 34). Children do what feels good (instant gratification). Adults make a plan and work it.

As mentioned before, the baby steps (of which I am on #2 -as mentioned before) are a guide to true financial peace. $1,000 in the bank might be a daunting task (especially if you are just out of college with a rather low paying job). In that situation, perhaps $500 is more appropriate. The idea is that you want to have an umbrella, in case it rains. You start by putting $1000 (or $500, if you have lower income) in an account, and earmark it for emergencies, then when the car needs tires, or there is a leaky faucet, etc) you go there for the money to repair, and not to the Credit Card.

Step 2, the debt snowball is, as mentioned before, about behavior modification and quick wins, as much as it is about erradicating the debt. Basically, you order the debts from smallest to largest -by balance owed, not interest rate (unless 2 debts have similar balances, then you would put the lower of the 2 rates first). There are a number of people who say that you order the debts from highest rate to lowest, but that will not provide you quick wins. (Lets face it, if you diet for 6 months and see no real progress, there is a good chance you won’t continue). Besides, as Ramsey says, It is not about the math, if we could do math, we would not be in this mess anyway. After you ordered the debts, you pay minimums on all but the smallest. The smallest one you attack with a vengence (all moneys you can scrape together). Once it is payed off, you attack the next, with the same philosphy. The idea is that as the snowball rolls over, it continues to amass more snow. By the time you get to the last one, you’ve likely freed up so much money (in payments that used to go to other things) that it will likely not be around very long at all.

Baby Step 3 has you finishing off the emergency fund. Really, this is not as difficult now, as all the other payments are now gone (thus they don’t affect your monthly budget any more). Additionally, when figuring out how much to put away, many opt to not include discretionary items in that figure (cable tv, eating out, etc). The idea is that if there is an emergency, we are probably worried a whole lot more about just surviving that we are about having cable tv. As mentioned previously, with all those other bills gone and, possibly incidentals and a mortgage left, that number is probably less than you think.

Baby step 4: ( oh that I would one day be there) says its time to start really planning ahead… Retirement. in Baby step 4 you put 15% of your income (pre-tax, preferably) in good growth-stock mutual funds. If your company offers matching-contribution 401k’s do that too, but don’t do you 15% in the company portfolio.

Baby step 5: kid’s college. Because you, have no more consumer debt, because you have 3-6 months of expenses in a fairly liquid acount (think Money Market, with check writing privileges), because you are putting 15% of your income to retirement, you will likely be able to do baby step 5 at the same time. There are tax laws concerning where you can put money and how much you can contribute (given income, etc).

Baby step 6: Pay off the house. To do this puts you in a very elite group. Less than 2% of all americans own their home (free and clear).

Baby step 7: Give like know one else, save like know one else, LIVE LIKE NO ONE ELSE.

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12 Laura

I can’t find a date anywhere on this article, so maybe I’m not bumping a three year old topic, but…

“Should You Follow Dave Ramsey’s Baby Steps?”
Only if you are interested in becoming stress free and wealthy. Some of the effects of the Ramsey plan can’t be summarized into a “step”. Let me explain:

We were dead broke and six figures under water, despite a meager income that should have been plenty. The happiness of our marriage was only interrupted by the weekly claws out, frying pan flying money fights. After finally taking the problem to the Lord we were introduced to the radio show. The second we decided to give it a try it was like a weight was lifted off our shoulders.

It was NOT fun, it was NOT quick, we were NOT popular with our kids, who had to learn the word NO. We were viewed as extremists. “What? You’re going to keep driving this, this, this FOUR year old car instead of trading it in for a new one???”. Insane right? :)

Somewhere along the way the chink in our marriage’s armor solidified and our financial progress turned into hope and wonder about what else we might achieve. We got healthier. Husband wasn’t always on his last dime, so he could afford to tinker with broken washers/cars without the fear that buying just one wrong part might drop the bank account so low that we couldn’t afford to pay someone else to do it right the first time.

Now we’re six figures up instead of six figures down. We anonymously slip family/strangers/friends in need a little cash (yes even the ones that think us capitalist are evil). Life is good and we’re prepared for any unexpected storms.

“Should You Follow Dave Ramsey’s Baby Steps?”
I dunno, how happy/healthy/helpful/secure do you want to be?

I like Ramsey’s saying “I like the way I get people out of debt better than the way you don’t”

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