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Dave Ramsey’s Baby Steps

Written by Nickel - 11 Comments

While I’ve been somewhat critical of Dave Ramsey and his “Debt Snowball” in the past, he’s definitely helped an awful lot of people get their finances in order. Thus, I thought that it might be worth spending a bit of time talking about Dave’s “Baby Steps” for getting out of debt and improving your finances. Here they are:

Step 1: Save up $1,000 to start an “Emergency Fund”
Step 2: Pay off all debt (except the house) using the “Debt Snowball” (smallest to largest)
Step 3: Save up three to six months of expenses in savings
Step 4: Invest 15% of your household income into Roth IRAs and pre-tax retirement accounts
Step 5: Save up college funding for your children
Step 6: Pay off your home early
Step 7: Build wealth and give! Invest in mutual funds and real estate

Pretty sound advice, although some might argue that paying off your home early isn’t a good idea if you have an ultra-low mortgage rate. After all, it’s quite possible that investment returns will far outpace what you’re paying in interest. Either way (whether you choose to make extra mortgage payments or invest the difference) I’d suggest that you “Make it Automatic” (as David Bach would say). That way you don’t have to worry about a lack of discipline getting in your way.

As it turns out, Dave has a handy-dandy pdf of his Baby Steps that you can print out and hang on your fridge to keep yourself motivated. If you’re looking for additional details, I suggest that you spend a bit of time digging around daveramsey.com, or perhpas check out one (or more) of Dave’s books.

Published on February 21st, 2006
Modified on February 23rd, 2006 - 11 Comments
Filed under: Debt Reduction

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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11 Responses to “Dave Ramsey’s Baby Steps”

  1. 1
    Tim Freund Says:

    I think it’s great that his first step is to build up a $1000 emergency fund. I started my debt elimination kick shortly after purchasing a house, and my budget was tight because I wanted my debts gone as soon as possible. As any home owner knows, sometimes life happens regardless of our best laid plans and budgets. Furnace repair comes to mind in my case. That was a fun month.

  2. 2
    Emma Says:

    The first baby step is often the most neglected in people’s ‘plans’ to get out of debt. I’m not sure they’re actually plans, but maybe hopes. But having that starter emergency fund really helps you lean on the ‘emergency’ credit card less, which is what got most of us into debt in the first place.

    For us, I know that these baby steps have produced phenomenal results. Above all of these steps though is what Dave calls the ‘dreaded’ budget. It’s important to give your money a place to go before you even get it. By doing that, you can squeeze every penny for what it’s worth and really do some damage on baby step 2 (debt snowball).

    I get so irritated when mathgeeks try and tear apart what Dave teaches. They do so based on one thing, math. And personal finance has little to do with math and more to do with behavior. Dave helps people fix their behavior so then thay can focus on the math later.

  3. 3
    Caitlin Says:

    I have friends who are using Ramsey’s baby steps and I think it’s incredibly useful to them. I just wish Ramsey would have allowed for a higher priority to matched retirement savings over particularly low cost loans. I understand he is trying to keep it simple, and I believe this is what helps a lot of people…having simple rules to follow, but without a little bit of wiggle room folks are potentially giving up larger gains because they fear deviating from his plan.

  4. 4
    Emma Says:

    I’m curious now, what do you mean by wiggle room and giving larger gains? See, there is no wiggle room through the first three baby steps, after that, there’s all sorts of wiggle room so I’m not sure what you’re getting at.

  5. 5
    ncnblog Says:

    I used Dave’s plan, and it worked for me. I found myself in 3 different situations where I had to use my 1000 dollar emergency fund. I was glad to have it. The pain is, building the emergency fund BACK up after you have used it, and putting your extra debt payments on “pause” for a while.

    As for wiggle room, I think that there are circumstances where 500 dollars for an emergency fund is enough, and some where 2000 dollars is NOT enough. (If you are single, with no children, 500 might be enough. If you are married, with a child on the way, 2000 might not be enough.) 1000 was always a “goal” for me, and I managed to stay somewhere around that amount, give or take a bit, the whole way through.
    ncnblog.com

  6. 6
    Guest Says:

    I saw this on TV a couple of weekends ago and it beats ANY system for getting out of debt. I’ll even go so far as to state that it is probably 100% effective. Check out the short clip!

    http://www.youtube.com/watch?v=H-GsjW28izo

  7. 7
    Emma Says:

    Hey, thanks for sharing that! I saw that clip at church during a service about finances. What’s crazy is that people actually act that way when you tell them they should live within their means. What an idea?

  8. 8
    Tom Says:

    I think that some of what Dave Ramsey says is good, but much of what he says is just repackaged advice. I think that once one begins to do the research into why they go into debt, and how they can get out of debt, one can (and will want to) do without the hype that Dave gives to saving money and getting out of debt. The problem I see with putting extra payments toward debt on hold, while reloading the emergency fund, is this. If there is too much time in between the last extra payment toward debt, and the moment the emergency fund is complete, the interest lost from those extra payments and the exponential risk of having an expensive emergency, can put a person further behind.

  9. 9
    Emma Says:

    Tom, that makes sense mathematically. Like I said before, Dave Ramsey focuses on the behavior aspect. If you can’t make that mental change, numbers won’t help. Also, without that emergency fund in place, people will have that tendency to fall back on those credit cards.

    The debt snowball is all about small victories. You can’t beat the war on debt without winning the battles. The enemy is not interest, it’s debt. If you don’t build that momentum, you’ll lose steam.

    And, Dave doesn’t claim that his material is new. He is completely upfront about that. Being repackaged advice, doesn’t reduce its’ potentiality.

  10. 10
    DEBTective Says:

    You hit the nail on the head, jack. Dave Ramsey’s plan makes a lot of sense; thanks for spreading the word about deep-sixing the debt and connecting with the cash. Doing that helps tons of joes and jills everyday. Go get ‘em, bub!

  11. 11
    Jessica Says:

    Dave’s plan focuses on the behavior. Because he did the mathematical way and he did the savings and retirements and had over 4 million to his name by 26 years old. The only thing was that he kept spending and then he lost it all. He had a budget based solely on math and the “old” way of budgetting. The reitrements can be lost due to a struggling economy and savings can be spent in no time. You have to change the way you look at money and the way you approach your spending or else like Dave and many other millionaires, you can loose it all. Using Daves plan has already been proven to work because it requires discipline which is what other sources are forgetting to include. His methods aren’t that different, but his approach is.

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