Dave Ramsey: Money guru. Financial Expert. Radio host. Real estate mogul. Defender of the second amendment. Curse word to some. Whatever your take on him is, in reality he’s the guy that helps people get out of debt and build wealth.
With his simple financial plan, millions of people, myself and my wife included, have been able to break the chains of debt slavery. Some have failed and others are currently working through the process.
And I’ve done it twice now. The first time was by myself. I paid off all of my student loans and continued on with life for a few more years. Eventually, I got married and and my wife and I found ourselves back in debt, living paycheck to paycheck. But this time, we did something different. We followed the plan step by step and we’re still following it now…as you read this.
So in this post, I’m going to go over that financial plan and show you a few things like:
- What are the 7 Dave Ramsey Baby Steps?
- Why should I follow the Baby Steps?
- How can the Baby Steps help me?
- A detailed breakdown of all 7 Baby Steps and…
- 5 Tips for being successful with the Baby Steps
Alright, so let’s get to it!
What are the 7 Dave Ramsey Baby Steps?
The 7 Dave Ramsey Baby Steps are the 7 financial steps that a person can take when following the Total Money Makeover financial plan and include getting out of debt, building an emergency fund, investing, saving for kids college, paying off your home, building wealth, and giving generously.
The 7 Dave Ramsey baby steps are as follows:
Step 1 – Save $1,000 for your starter emergency fund
Step 2 – Pay off all debt (except the house) using the debt snowball
Step 3 – Save 3–6 months of expenses in a fully funded emergency fund
Step 3(b) – save for a home down payment
Step 4 – Invest 15% of your household income in retirement
Step 5 – Save for your children’s college fund
Step 6 – Pay off your home early
Step 7 – Build wealth and give
Why should I follow the Dave Ramsey Baby Steps?
1. On the verge of bankruptcy
One huge reason why you should follow the Baby Steps is because you don’t have to file bankruptcy! Most people think that bankruptcy is the only option because they don’t see a light at the end of the tunnel. Well, there is a way out. You just need a plan like the Baby Steps. Besides, a lot of debt doesn’t qualify for bankruptcy anyway. If you have any child support payments, alimony, student loans, or any of these other types of debt here in this post from policygenius.com, they won’t go away with bankruptcy.
I don’t believe that people should file bankruptcy anyway. Even though it wrecks your credit, it’s kind of a quick way to “wipe the slate clean” and this isn’t what people need. People need to have a mindset shift and work their way out of debt. Because if you don’t, the poor behavior and bad financial habits won’t change.
2. You’re under a crushing amount of debt
Another reason that you should follow the Baby Steps is because you might be under a crushing amount of debt. I’ve been under about $30,000 dollars in debt both times and that sucked. Currently, we’re working to pay our house off and we still owe about $120,000 dollars on that. Even though that’s a mortgage it still feels heavy. So I can’t imagine owing that amount of money in other consumer debt.
But if that’s you, it’s time to try something different. Because what you’ve been doing is digging a hole that’s going to be very difficult to get out of. But you CAN do it. No matter what the amount of debt is that you have, you can get out of it if you sacrifice and work your butt off from here on out.
3. you might not believe it
There are a lot of people who don’t think they can get out of debt. You might be one. You might not think that you can have financial peace. But that’s a lie. I’ve done it TWICE. Millions of people have been where you are. But they decided to try something new. They shifted their mindset and told themselves that it was possible. They followed the plan and started believing.
All I can say is – just give it a try. You won’t believe what happens.
4. you might be out of hope
If you’re low right now, I promise you that things can get better. If you’re struggling with financial problems, and it’s making you believe that there’s no hope, let me be the one to tell you that there is. There’s so much hope in the world. But YOU have to be the one that starts the process of fixing things. Whether it’s mental health, physical health, or financial health, no one’s going to do it for you.
But if it’s financial health, the Baby Steps can help you recover. And if you can get your money under control, you can fix everything else, too.
How can the Dave Ramsey Baby Steps help me?
Besides the things in the last section, the Baby Steps can turn your finances around in the following ways:
1. Get out of debt
The quickest way to building wealth is to get out of debt. But this is hard. Maybe one of the hardest things you’ll ever do in your life. But if you follow the Baby Steps to the letter, you will start working your way toward debt freedom. The Baby Steps are here to help you get out of debt.
2. Build a fully-funded emergency fund
The Baby Steps can also help you build up a 3-6 month fully funded emergency fund. It’s going to rain so you have to build up a rainy day fund to help offset the storm. This is inevitable so make sure you’re prepared for when you need it.
3. Build wealth
If you want to build wealth, simply follow the plan completely. Eventually, you’ll have a paid for house, no debt, and a substantial amount of money in retirement.
4. Financial peace and happiness
Lastly, one of the byproducts of doing everything the right way financially is financial peace and happiness. You work hard to know that all of the chains of debt slavery are slowly disappearing. You end up with no debt, more money, and the peace and happiness to go with it. I love it.
So let’s check out all of Dave’s Baby Steps in detail.
The 7 Dave Ramsey Baby Steps
Step 1 – Save $1,000 for your starter emergency fund.
Before you start the journey to get out of debt, you have to have a $1,000 dollar starter emergency fund in place. This step is crucial to the plan. If you skip this step, you won’t have anything to help out if there is a small emergency while you’re paying off debt.
Getting your $1,000 dollars starter emergency fund together also needs to be done fast. I want you to get your $1,000 dollars together in 1 month. Do anything and everything that you can to build your starter emergency fund. Work more, sell stuff, cut expenses, and anything else you can think of.
I know you might be used to having more in your emergency fund, but that’s okay. The $1,000 dollar starter emergency fund is not meant to be a fully funded emergency fund, just a buffer while paying off debt. After you pay off your debt, you will increase your starter emergency fund to a 3-6 month fully funded emergency fund. But for now, any extra money over $1,000 dollars goes to debt.
But can I increase it? NO. This $1,000 dollars is meant to be uncomfortable. Use that as motivation to get your debt paid off as fast as possible. Then you can fully secure your finances with 3-6 months of emergency fund money.
If you’d like some help with this step, check out my post, “How to Create a $1,000 Dollar Starter Emergency Fund in 1 month!“
Step 2 – Pay off all debt (except the house) using the debt snowball
The next step in the Ramsey Baby Steps is to pay off your debt. And you want to do this as fast and as intensely as possible. Dave wants you to pay your debt off like your life depends on it. Because it does.
Dave uses an expression called “gazelle intensity” to describe this mad dash toward debt freedom. If you don’t know what gazelle intensity is, here you go: “Gazelle Intense is the term Dave Ramsey came up with to describe the speed and intensity you should have when paying off debt,” according to his website. Check out their article on it here.
I’m in complete agreement with Dave on this intensity. You should go CRAZY when you pay off your debt. Set your finances on FIRE and run toward debt freedom with everything you’ve got.
I hate debt. It robs you of your hard earned money and keeps you from building wealth. So the quicker you get out of debt, the faster you can change your whole life.
Here’s how you get out of debt:
First, list all debts smallest to largest and total it all up. SMALLEST TO LARGEST. Not by highest interest rate. Because that doesn’t matter. It’s about finding motivation and gaining momentum, not saving a few dollars on your high interest rates. Add up all of your debt as well to get a grand total.
If you’re still curious about why you should pay your debts off smallest to largest instead of by highest interest rate, check out this post: “Highest Interest Rate vs. Smallest Balance: Which Debt to Pay First?”
You then need to set a realistic goal for your debt payoff. Take your total debt and divide it by how much you can actually put towards it every month. Example – $30,000 in debt divided by $2,000 per month to put toward it. That equals 15, or 15 months. ($30,000 divided by $2,000 = 15). Your new goal is to pay off your debt in 15 months.
Next, pause all investments TEMPORARILY. I know this might seem counterintuitive, but trust the process. You’re only doing this for a short period of time so that you can free up every dollar to pay off debt with. Again, this only temporary.
Once you do those couple of things, start attacking your smallest debt with a vengeance. Make sure you’re paying your minimums on all other debts and hit the smallest debt with everything else. Do that until you pay the smallest debt off and move to the next biggest and then the next.
As for paying on your debt, do anything and everything you can to find money for paying on it.
Here are some ideas:
- Work overtime: most jobs will allow for 5-10 hours or more. Some places offer unlimited overtime. Take what you can get.
- Take extra jobs: extra part-time jobs can easily earn you $500-1000 bucks per month to put toward your debt.
- Side hustle: side hustles are a little tougher to get started, and require some can-do, but can often make you $30-40 dollars per hour.
- Increase income: aside from those couple of things, do anything else you can to increase your income or make extra money. Check out this post for 27 easy ways to make money while in debt.
- Decrease expenses: you should also seek to decrease expenses as much as possible while getting out of debt. My post, “101 Ways of Creatively Cutting Expenses to Save a Ton of Money,” can help with this.
- Check out this post: “47 Creative Ways to Pay Off Debt This Year.”
Once you’ve paid off smallest debt, take ALL money that you were paying and add it to the money you were paying on the next biggest debt. Then the next debt and then the next. As you pay each one off, your debt snowball (money you have to pay on your debt) keeps getting bigger and bigger.
Work your way up the debts list until you get to final biggest debt and pay that off. In the end, you’re left with a large pile of money that you can save, invest, give, and spend how you want to.
Between the extra money in your snowball and your budget, you can continue cash flowing everything (paying cash for what you buy). This is easy to do once you’re not living with debt anymore.
Step 3 – Save 3–6 months of expenses in a fully funded emergency fund
This next step is REALLY important. This is where you’ll start to build your emergency fund up.
In Baby Step 3, you need to have a fully funded emergency fund of 3-6 months of all required and necessary expenses (how much it costs for bills, groceries, and other expenses times 3 months, 4 months, 5 months, or 6 months). How much you save is up to you.
But you do need to decide how much you’re going to have in your emergency fund. Do that now.
- Stable job: if your job is stable, you may only need a 3 month emergency fund.
- Less stable or self employed: if your job is less stable or you’re self employed, you should probably have a 6 month emergency fund loaded up for protection.
My family: we have 2 stable state employee incomes plus income coming in from my blogs so we have a 3 month emergency fund ($3,000/mo expenses times 3 months = $9,000 dollars so our emergency fund is $10,000 dollars).
Quick note: get this done as fast as possible. Same intensity level as step 5 and 6. You should have this done in less than 6 months.
Having your 3-6 month fully funded emergency fund in order will help you stay out of debt and keep your finances in order if you get hit with an emergency.
Step 3B – Save for a home down payment
Baby step 3B was added in to help those who wanted to save up a down payment on a house. Dave recommends getting out of debt completely AND having a down payment saved before you buy a house. But he added in Baby Step 3B for those who wanted to quickly save up for their down payment before starting up retirement.
If you desperately want to get in a home, Dave recommends a strong 10%-20% percent down payment saved up in no more than about 2 years. If it’s going to take more than 2 years, you need to save up while you’re investing your 15% percent into retirement.
For a quick video, here’s Dave Ramsey’s daughter Rachel Cruze explains Baby Step 3B in this video.
Step 4 – Invest 15% of your household income in retirement
My family is currently on this step – Baby Steps 4, 5, and 6. These three steps are completed simultaneously.
Step 4 of the Baby Steps is to invest 15% percent of your gross annual income (not net income). Your annual income BEFORE taxes are taken out.
Once you’re out of debt, and have your 3-6 month emergency fund built up, you need to set up your investments at 15% of your gross annual income. 15% percent is fairly easy to do and anyone can become wealthy on 15% percent (over the course of their life).
When investing this money, Dave recommends a 401(k) with a match, a Roth 401(k), or a Roth IRA with good growth stock mutual funds that have long track record of success. And almost all of us have access to these kind of accounts.
A quick way to remember what to invest in: “Match beats Roth beats Traditional.”
Step 5 – Save for your children’s college fund
My family is currently on this step – Baby Steps 4, 5, and 6. These three steps are completed simultaneously.
Step 5 is to start saving for your children’s college fund. This college fund can give your children a head start on college and can accumulate quite a significant amount of money with diligent monthly contributions.
When starting this college fund, you should open a 529 College Savings Plan with mutual funds. That will allow this investment to grow with the market.
Dave doesn’t recommend a certain amount for Baby Step 5 because everyone and their kids are always in difference situations. So the amount depends on how old your child is, when they’re going to school, and how much you can afford to invest.
The real recommendation is to at least do something. Set an amount and stick to it every month. If your kid is older or close to going to college, you may have to add more and start thinking about college choice (public only), community college, your kid getting a job while in school, and your kid working hard to get scholarships. Obviously, there’s a lot that goes into each specific situation.
My family: since my son is still young, we invest $100 dollars per month and plan to increase that over time. This should be a decent amount by the time he is 18 and we will factor in more when the time comes.
If this doesn’t apply to you, move on. Only open a 529 if you currently have a kid. If you have no kids, you will only be on step 4 and 6 at the same time.
Step 6 – Pay off your home early
My family is currently on this step – Baby Steps 4, 5, and 6. These three steps are completed simultaneously.
Step 6 is to simply start paying extra on your home so that you can get it paid off early.
If you’re on step 4, 5, and 6, congrats because paying off your debt and building a fully funded emergency fund are difficult enough. Well, now you’re working on getting to step 7 with the baby steps!
But in order to get your home paid off, you’re going to hear all the haters come out. Lots of people are going to tell you that you can’t, that you “still have debt,” that you’ll always have debt, or that you shouldn’t pay your home off early for various reasons including getting tax write offs or low interest rates. Don’t listen to those people. What they’re telling you is a bunch of freakin’ crap. Let me tell you what I know: people who become wealthy pay off their home early and steadily invest until they eventually build wealth. It’s a proven fact.
Seriously, don’t listen to those idiots. Get your house paid off early and take away the risk that comes with a mortgage payment. Because if you want to become wealthy, it’s important to become completely debt free including your home.
So start paying extra on the mortgage if you can. Just like with putting money aside for kids college, try to dedicate at least a little bit of money to this and stick to that EVERY month.
Also, if you can a decent interest rate, try to get your home refinanced from a 30-year mortgage to a 15-year mortgage. That can cut 15 years off of your mortgage and can save you thousands in interest over the years.
My family: we are personally paying extra every month to get our home paid off early. At the end of the month, we press submit on our extra mortgage payment, $1,200 dollars, every single month without exception. Our plan is to have this paid off in 5 total years from when we started paying extra.
Our target payoff date: August 2026 – started August 2021.
Lastly, I want you to pay extra on your house, but once you’re debt free, you can use a little bit of money to spend and enjoy. Once you’re out of debt, instead of being gazelle intense, you simply need to continue being intentional with your money. That will quickly lead you into Baby Step 7.
Step 7 – Build wealth and give
My family is working on this Baby Step and we can’t wait to be debt free!
At Baby Step 7, you have no debt and your house is completely paid off. After your home is paid for, you need to max out investments, use some of your money for charity and giving, and use some to have fun. At this Baby Step, you will also continue to build wealth and give generously as well.
And in order to keep living your best life, and stay out of the debt, you need to continue doing the following things:
- Continue investing. Max out your retirement accounts.
- Continue budgeting.
- Continue living without debt.
- Continue living below your means.
- Continue being intentional with your money.
- Save up for everything.
- Build wealth.
- Give generously.
- Spend and enjoy some of your money and…
- Swear that you will NEVER borrow money EVER again.
So that’s it for the 7 Dave Ramsey Baby Steps. If you follow the Total Money Makeover financial plan to the letter, you will get out of debt and built outrageous wealth over time. It isn’t easy. But it’s worth it.
5 Tips for being successful with the Dave Ramsey Baby Steps
1. Work your butt off
This tip is a given. In order to achieve just about anything in life, you have to work hard. But to get to the end of this plan, it takes years – decades even – of hustling, grinding, and straight up hard work. But don’t be afraid if it. The more you put in, the better your finances over time.
2. Find your why
Having a BIG reason WHY you’re doing any of this is RIDICULOUSLY important. Because if your WHY isn’t big enough, you’ll fall back into those bad habits you’ve had for so long.
That’s exactly what happened to me. I got out of debt just to get out debt. Eventually, I fell back into debt again. I soon realized that I needed a bigger reason WHY I was trying to get out of debt. I needed something HUGE.
Here’s my BIG reason WHY: I’m sick of debt, tired of being broke and having nothing, sick of not being able to afford anything, sick of a negative net worth, my wife and I want to travel one day, I want to help my son go to college without loans, and my wife and I want to be a millionaires.
My WHY cuts deep. I’m doing this for something bigger than myself. So what do you want? Find your BIG reason WHY and you’ll find the success to go with it.
3. Find your motivation
While you’re going through your wealth-building journey, you need to also find your motivation. This is especially important while you’re getting out of debt. It’s a long slog, so do whatever you can to keep yourself motivated. Here are a couple of ways that you can stay motivated while working the Baby Steps plan:
- Listening to the Ramsey Show.
- Watching debt-free screams on YouTube.
- Attending Financial Peace University classes.
- Have an accountability partner or friend (someone that’s either doing it with you or cheering you on).
- Keep a colored picture to color off blocks as you pay a certain amount off.
- Keep a debt “chain” and cut off links when you pay a certain amount off.
- Reward yourself with something small when you pay off a certain amount and give yourself a big reward at the end.
There are a ton of ways to stay motivated so find yours.
4. Set goals
Goals are incredibly important, not just for the Baby Steps plan, but for your whole life. But in finances, they can play a vital role in your overall success. You NEED money goals.
First, write out these goals so you can hold yourself accountable. You want to make them specific and have them in writing, in front of your face.
You also want to create short-term, medium-term, long-term, and legacy goals.
Short-term goals: goals that are easily achieved in as little as a day or a week in up to 36 months (3 years).
- “I want to increase my income from $80,000 dollars to $100,000 dollars over the next 12 months.”
- “I want to pay off my debt in the next 24 months.”
Medium term goals: these goals are a little bit harder and get completed from about 36 months (3 years) on up to 10 years.
- “I want to go to my 4-year college debt free without loans.”
- “I want to pay my house in off in 5 years.
Long-term goals: these goals are incredibly difficult to achieve because they require hard work and patience over a long period of time. You can teach these goals anywhere from 10 years to multiple decades or your whole life.
- “I want to be a millionaire by the time I retire in 25 years.”
- “I want to pay my 30-year mortgage off in 15 years.”
Legacy goals: these goals can be the most fun and are those goals that you wish to achieve upon changing your family tree or leaving a legacy behind.
- “I want to leave my son an inheritance of a million dollars or more.”
- “I want to create a perpetual debt-free college scholarship that pays out one single $2,000 dollar scholarship every year for the next 50-100 years.”
The beautiful thing about goals is that even if you don’t achieve them exactly how and when you wanted, you’ll be that much farther along than if you didn’t set any. Forward progress is all that matters.
Because as the great speaker Zig Ziglar once said, “If you aim at nothing, you’ll hit it every time.”
For more on goals, check out my post, “How to Make More Realistic Financial Goals This Year.”
5. Get negativity out of your life
One of the last tips that I have for you while you’re working the Baby Steps is to get ALL negativity out of your life while you’re working the plan. Honestly, it’s good to just get all that negativity out of your life for good, but especially while trying to get out of debt.
Because you’re going to have people that will tell you it’s impossible. That you can’t get out of debt. Or even if you do, you’ll eventually borrow again. You’re even going to have people that say, “Oh you’re out of debt? Well you still have a mortgage, right?! Hahahahaha.” Yep, I had that one recently. There are so many negative people when you’re trying to get out of debt. The trick is to find a few that will support you. It’s tough, though.
My wife and I only have a few friends that are truly supportive about us getting out of debt. Most of our friends and family live in debt, so we’ve had to either cut negative people out of our life or just not talk to people about money. It’s sad but it’s how you have to live if you’re serious about getting out of debt and building wealth. Don’t let the negativity stop you.
Extra – get on the same page with your spouse
The last tip on this list is something extra I wanted to throw in here. It’s not going to apply to everybody, but if you’re married and thinking of doing this plan, you HAVE TO BE on the same page as your spouse. If you’re not, it’s not going to work. It took me 7 years to get my wife on board with the Ramsey Baby Steps. But since 2020, we’ve been on fire with our finances. And we’ll never go back to a life of debt and living paycheck to paycheck. NEVER again.
So what’s it gonna’ be?
Some people can’t stand Dave Ramsey. But his plan, mentorship, and financial advice has personally helped my family become debt free and start the journey toward building wealth. And I’m extremely grateful for his guidance. But it’s not about me anymore.
It’s about helping you find your way to debt freedom. So what’s it gonna’ be? A life of crushing debt and extreme financial despair? Or is it time to change things up and try something different? Because your plan doesn’t work. Try out Dave’s Total Money Makeover and watch your finances transform themselves completely in just a short period of time.
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