If you’ve been learning about personal finance for longer than five minutes then you’ve likely encountered Dave Ramsey and his baby steps to financial peace.
I’ve taken Financial Peace University and today I’m sharing a general review of Dave Ramsey’s 7 baby steps for getting your finances in order. This list is widely available online or if you listen to his radio show each day. This is not intended to replace the FPU course and I’m not affiliated with Dave Ramsey in any way other than as a graduate of Financial Peace.
What Are the Baby Steps?
Dave Ramsey’s 7 Baby Steps are a general step-by-step guideline to guide people from being in debt to living a prosperous life. They show you how to save for an emergency, eliminate your debt, and build wealth for financial freedom.
The baby steps are not magical. They are a proven, practical way to improve your finances and involve hard work to get through each step.
On his website Dave Ramsey lists what the 7 Baby Steps to financial freedom are:
- Baby Step 1 – Save $1,000 as a starter emergency fund.
- Baby Step 2 – Pay off all debt using the debt snowball.
- Baby Step 3 – Save 3 to 6 months of expenses in your emergency fund.
- Baby Step 4 – Invest 15% of household income into retirement accounts.
- Baby Step 5 – Save for college funding for your children.
- Baby Step 6 – Pay off your home early.
- Baby Step 7 – Build wealth and give!
Below I’m going to go into each one in a bit more detail and share some of my own thoughts and experiences with the baby steps. I took the Financial Peace University course back in 2015.
Who is Dave Ramsey? Why should you listen to him?
Dave Ramsey is a widely known personal money management expert and radio talk show host. He has helped millions of people get out of debt and improve their financial lives through his Financial Peace University course and baby step program that comes from the FPU class.
He gives no-nonsense advice to people drowning in debt and has helped many get out of debt responsibly. His advice doesn’t sugar coat anything and it’s built upon a foundation of hard work and discipline.
Before The Baby Steps
Before beginning the 7 Baby Steps and working to achieve financial freedom you must decide to change.
If you are married you need to sit down with your spouse and decide together that you want to change your financial life. Trying to tackle the baby steps by yourself will set you up for disappointment, especially if your spouse is working against you by continuing to increase debt. If you both aren’t ready to change then it isn’t going to happen.
For many people the desire to change comes on instantaneously when they have a moment where they’ve had it and felt sick and tired of being crush by debt. Other people have the desire to change come on more gradually. Once you get to the point where you are ready to change, then you are ready to start the baby steps.
Baby Step 1: Save $1,000 for your starter emergency fund.
In the first baby step you will need to save up $1,000 as fast as you possible can. This step is all about saving up this small amount of savings quickly so you can stop increasing your debt load.
Your beginner emergency fund will cover all unexpected life events you forgot or couldn’t plan for in your budget. This emergency fund will create a buffer so you don’t go into debt further to cover surprise expenses. $1,000 emergency fund doesn’t seem like much but it will cover many surprising expenses like medical bills or small home repairs. You don’t want to go deeper into debt when you are trying to get out of debt.
When you save up your $1,000 emergency fund you’ll want to keep it in a different checking account so you are not tempted to spend it on every day expenses. It is there for emergency situations only and should not be used to cover normal budget items.
Baby Step 2: Pay off all debt (except the house) using the debt snowball.
Baby Step 2 is the most widely known “baby step” of the plan and it’s also the one that intimidates most people. During baby step 2 you will be eliminating all the debt you have accumulated.
You start this step by listing all your debts outside of your mortgage from smallest to largest. This includes student loans, credit cards, store cards, car loans, etc. You put each debt in order by the balance amount from the smallest balance to the largest balance. This is the order you will begin paying off the debt.
In this debt snowball method you knock out the small debts first and then move on to the larger debts. You won’t have to worry about interest rates in this method.
Once you’ve listed your debts you’ll start attacking the first balance (the smallest) on the list. You’ll pay as much money as possible toward the targeted balance while making the minimum payments on all other debts. You must pay as much as you possibly can toward the targeted debt bye selling things, getting an extra job, working overtime… do whatever you can to earn money to pay it toward the debt! The goal is to eliminate a balance quickly so that you can add the minimum payments from that debt to the next debt when you start attacking it.
As you can see, baby step 2 can be the hardest and longest step of all the baby steps. Despite the challenge it can be very motivating in the beginning of the debt snowball when you make progress. Before you know it you will be debt free and ready to move on to the next baby step.
Baby Step 3: Save 3–6 months of expenses in a fully funded emergency fund.
After you’ve paid off your debt you are ready to build a stronger financial foundation, starting with a larger emergency fund. In this step you take the momentum from the last baby step to build up a full emergency fund.
Your emergency fund should be large enough to cover 3-6 months of your regular expenses. This amount will protect you financially against many of life’s worst setbacks and surprises. You’ll never have to slip back into debt with an emergency fund in place because you will be able to cover a job loss or car breakdown.
While building your emergency fund you will want to keep it in a separate high interest savings account or money market account. This way you won’t be tempted to touch the emergency fund unless it is an actual emergency.
Baby Step 4: Invest 15% of your household income in retirement.
In this baby step you enter a new world of investing! It’s the step where you get serious about retirement and start putting 15% of your household income into your retirement savings.
While investing can feel intimidating to many people, it’s not as hard as you might think to get 15% of your income invested.
If you have a 401k at work with a match you should start there and contribute enough to get the full employer match. Next you’ll want to open Roth IRAs if you qualify and contribute the full amount there. Then if you still have more money to contribute you can go back to your 401k!
Once you start investing and seeing your money grow then you will be much more likely to want to contribute. Having your money work for you is exciting! If you still feel overwhelmed by investing options then you can work with an investing professional to find the right funds.
Baby Step 5: Save for your children’s college fund.
In baby step 5 you’ll start saving for your children’s college funds. When you are debt free and saving for college it is the perfect time to start saving for your kid’s college expenses. If you don’t have kids you can skip this baby step and if you have older kids then you will need to save up money here more aggressively.
There are multiple ways to tackle baby step 5, but two smart ways are by using 529 college savings plans or ESAs (Education Savings Accounts). These college savings options are designed to help you save money in taxes while saving for college expenses. You’ll need to do your homework and learn about these types of accounts to determine which one works best for your situation.
Saving for college expenses for your children will set them up to live a better financial life and not have to worry about debt. It’s a gift that will change your child’s life and change your family tree forever.
Baby Step 6: Pay off your home early.
In this baby step you tackle something most people can’t fathom: paying off your house early. Your mortgage is the last piece of debt you have and it’s the last roadblock in your way to complete financial freedom.
In this step you put all extra money you have beyond baby steps 4 and 5 toward paying off your mortgage faster. Any extra money you have available going toward your mortgage balance will save you thousands upon thousands in interest costs.
Life without a mortgage payment will prepare you to build wealth rapidly in the next baby step.
Baby Step 7: Build wealth and give.
In the last and final baby step of the Dave Ramsey plan you get to do the most fun things of all: build wealth for your family and give a lot of money to causes you care about.
In this final baby step you get to live like no one else. You can build wealth beyond your dreams and give enough money to make a true difference. Becoming both insanely wealthy and insanely generous go hand in hand. These things will build a legacy for you and your family.
Personally I love Dave Ramsey’s view of Baby Step 7 and giving in general. He routinely points out how important generosity is and he stresses that wealth won’t truly make you happy. The only true happiness will come from having a personal relationship with Christ and giving as He did and will.
Continuing the discipline and good habits of the first 6 baby steps will help you achieve success in this last step.
The baby steps are easy to understand and implement and they have helped millions of people change their financial lives and legacies. If you are interested in building a stronger financial foundation I recommend following the baby steps.
No More Debt Forever
Success with the baby steps is built upon the decision to never incur consumer debt again. Things like credit cards, card loans, and home equity loans are off limits to you. They are not part of your future of financial freedom.
After you make the decision to change your financial life and work through the baby steps this should be an easy practice. You’ll be able to save for any of the things in life you want. You’ll never have to take on debt again.
My Thoughts On The Baby Steps
Dave Ramsey’s plan is very effective, especially when getting out of debt. The debt snowball might not make the most sense math-wise but it is incredibly effective when getting out of debt due to the psychological aspects of debt repayment.
Like many personal finance bloggers, I differ from Dave Ramsey’s view in a few places. I think the $1,000 emergency fund is a bit slim and we decided to do a small emergency fund of $1,000 per person in our household. I also could not get on board with skipping retirement savings even if there is a match. That retirement match from your employer is part of your compensation package and I would never skip it.
Despite a couple areas of divergence, I still think the Dave Ramsey plan is solid and one of the best for people getting out of debt. I recommend people using the 7 Baby Steps and taking Financial Peace University if you are struggling with debt and need help managing it.
More Dave Ramsey related posts:
- Our $43,000 Debt Snowball Plan
- Best Books To Read When Getting Out Of Debt
- Financial Peace University Week 1
- Financial Peace University Week 2-4