You’ve likely come across Dave Ramsey and the 7 Baby Steps when you were looking for financial guidance.
Dave is a financial “guru” who has helped thousands of people over the years.
There are so many people out there offering financial advice that it is difficult to decide who to trust or what methods to follow.
His workplace policies and practices have also been criticized. But I am not here to pass judgment on him.
Instead, I explore his 7 Baby Steps to see if they’re worth following in order to improve your finances.
Table of Contents
Who is Dave Ramsey?
What are Dave Ramsey’s baby steps?
The pros and cons of 7 Baby Steps
Do you need to follow Dave Ramsey’s 7 Baby Steps for Financial Success?
Who is Dave Ramsey?
Ramsey is a financial freedom expert, radio host, businessman, and radio presenter with a large following. He specializes in helping people complete their total money makeover.
He discusses all aspects of personal finances, including student loans, Roth IRAs, credit cards and daily budgeting. He has a large following all over the world for his “debt-snowball” and emergency fund methods.
Dave’s family was in debt and he worked hard to get them out of it. He also kept their books in good standing. In 1992, he began his career on Nashville radio with the vision of helping others achieve financial security.
Dave Ramsey has had his own TV show “The Dave Ramsey Show”, and filmed a documentary titled Maxed Out. The documentary focuses on the predatory practices and debt of the credit card companies.
Dave Ramsey: “What were You Thinking?!” gif.
Dave Ramsey’s net worth is also approximately $55 million+ for 2019. Some sites estimate his net worth at more than $200 million.
What are Dave Ramsey’s baby steps?
Dave Ramsey has outlined 7 Baby Steps to help you tackle specific areas of your finances. This process can help build good habits around money and discipline in those who previously struggled to do so.
These 7 Baby Steps help you break down your financial plan into smaller, more manageable goals and actions. They’ll help you feel accomplished, without feeling overwhelmed.
What are Dave Ramsey’s 7 baby steps?
You can save up to $1,000 for an emergency fund
All debts (except mortgage) must be paid off
Save up to three months’ worth of expenses as an emergency fund
Invest 15 percent of your income to save for retirement
College savings for your kids
Early home repayment
Give and build wealth
Baby Step 1 – Save $1,000 for an emergency fund
Unexpected expenses can be costly and cause a serious dent in your finances. Having an emergency fund is a good idea. This amount should be saved as quickly as possible. You can even reduce your normal expenses for a couple of months to reach this goal.
You can do this by canceling your subscriptions or meal-prepping. If possible, you can even sell any unused items, such as vehicles. Your new motto will be to be frugal!
You can then take the next baby steps knowing that you have enough money to do so, even if you experience an unexpected event, such as a broken water heater.
To prepare for baby steps, or any financial plan you may have in mind, it is a good idea to create a simple budget. To get started, use my budgeting 101 guide.
Baby Step 2: Use the debt snowball method to pay off all your debts (except for your mortgage).
Dave suggests a method to pay off your debts. This step is important because some people can be in thousands of dollars of debt due to student loans, credit cards with high interest rates, and other sources.
Dave suggests that you start with the smallest debt, whether it is a $200 credit card or furniture purchased on a payment plan.
For those in need, the sight of their debts disappearing can be a huge motivator to continue the challenge.
It is likely that immediate results will be beneficial to those with large debts which are difficult to repay. Don’t expect your debt to disappear overnight. Some people spend years paying off their debt. If you want to have financial stability in the long term, getting out of credit card debt is essential (and then staying out of it! ).
Baby Step 3: Set aside 3-6 months’ worth of expenses as an emergency fund
After you have paid off all your debts (except your mortgage), it is time to focus on your emergency fund. You’ll need to save 3-6 months worth of expenses.
The money will be used to cover larger expenses such as medical bills and job loss. If paying off debt has taken many months, then this next step should be easy.
Consider that you spend $2,500 a month on your living expenses. This includes groceries, car costs, childcare and so on.
Savings of $7,500 over three months would be enough to cover six months’ expenses. But, if you want more security, save approximately $15,000 or so.
You may be able to achieve this in less time than you thought if you are able to generate additional income from side hustles or passive streams.
Baby Step 4 – Invest 15% of household income in retirement
Dave Ramsey believes that diversifying your portfolio of investments is essential. Dave Ramsey encourages you put 15% of your earnings into different retirement accounts to maximize your retirement savings.
He recommends combining a Roth IRA with your tax-deferred 401 (k) or 403(b) if you are eligible.
You will never be able to have enough money for retirement. However, if you want some peace of mind, investing 25x your annual costs is a good place to begin.
This is a good starting point. I personally try to invest more than 15%, but it’s a great place to start. You can also invest less in platforms such as Stash, Acorns or Ally Invest.
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Baby Step 5 – Save for your child’s college fund
Dave Ramsey’s philosophy focuses on living debt-free, and paying for everything with cash. It’s natural that it will also extend to your kids.
I don’t believe in using cash to pay for everything. However, if you are struggling with debt or have trouble sticking to a budget, this is a good tip.
You can contribute to a 529 College Fund once you have saved enough for retirement. This will help to ease the financial burden of your children.
You can also take advantage of a tax benefit by using this type of account. However, there are many other options for saving money for college. Custodial or Education Saving Accounts are two options.
Baby Step 6: Pay your mortgage early
Your financial freedom will increase dramatically if you pay off your mortgage early. Your monthly mortgage payments, like any other debt, are likely keeping you from living a better life.
Dave suggests that you increase these payments as much as possible to eliminate the burden. The sooner you pay off this debt, the less interest you will have to pay. Imagine how much money you could potentially save!
Baby Step 7: Build Wealth and Give
After you’ve completed all the Dave Ramsey baby steps, you can start building wealth and giving. Dave is a Christian who advocates charitable donations and leaving an inheritance to family members.
Step 7 will give you true financial freedom and the ability to spend money on things that are important to you.
This could mean investing in real-estate, traveling more frequently, or even buying a vacation home.
How long does it take Dave Ramsey to complete his baby steps?
Dave Ramsey’s 7 Baby Steps may take anywhere from a couple of months to several years to complete. Your personal finances, your income and how diligently you track and adhere to your budget will determine the length of time it takes for you to complete Dave Ramsey’s 7 Baby Steps.
Although it may seem like an eternity, fixing your finances is not something that happens overnight.
The pros and cons of 7 Baby Steps
There are always positives and negatives to any financial strategy. The 7 Baby Steps will also have both positives and downsides. Here are some things to consider before you dive into his method.
Pros
Commitment: As each step is completed, motivation to continue can snowball. Dave’s plan includes baby steps that will make you more motivated to continue.
It makes sense: It is hard to argue with the necessity of an emergency fund, or the order in which the steps should be taken. Dave’s plan is a good financial decision and will help you out in an emergency.
Building a Stable Financial Future – It is great to build generational wealth for your children and provide a solid foundation. It will help them to manage their finances and teach them money management skills from an early age.
Giving You More Financial Freedom: When you reach Step 7, you can start to have fun with your money. You can reduce financial stress by spending within your budget, building your net worth and continuing to grow your money.
Money Doesn’t Owner You: One of the biggest advantages of the 7 Baby Steps, is that you can take control of your money and own it. We often let money decide for us instead of taking control and action. You can take control of your finances by following his steps.
You can also find out more about Cons
It may be better to start with the account that has the highest interest rate. The sooner you start, the easier it will be to pay off your debt. Dave’s method is based on the emotional aspect of paying back debt rather than the most logical.
Dave’s Seven Baby Steps also ignores the power of compounding interest, as you do not save and invest for retirement at the start. Even if you only take five years to complete steps 1-3, this time could have allowed your investment account to grow exponentially.
Saving and investing only 15% of your income will also limit the age at which you can retire. Most of us need to save 25 years of annual expenses before retiring, but with only 15%, it would take 35 years. You could and should save more money each month to increase your flexibility.
There is not much personalization. The framework has a rigidity that does not allow for much individualization even though everyone starts at a different place. Some people will find the 7 Baby Steps to be very helpful, while others may prefer other action steps or routines that lead them towards financial freedom.
Do you need to follow Dave Ramsey’s 7 Baby Steps for Financial Success?
Why the 7 Baby steps Work
The 7 Baby Steps can help you with your finances, regardless of whether you know Dave Ramsey or not.
Give his method a try if you’re not sure where to begin and you resonate with his approach. This plan can help you get out of debt and improve your financial situation. It will also teach you how to manage your money more effectively.
Don’t hesitate to add or modify these steps if you feel they are not meeting your needs. You should be proud that you are taking the initiative to improve your finances.
