I’m going to guess you’ve heard of Dave Ramsey if you’re searching for his steps. So what are Dave Ramsey’s 7 baby steps and are they a good fit for you?
I didn’t use Dave Ramsey’s 7 baby steps to become debt-free. I actually discovered Dave Ramsey about a year after becoming debt-free.
That being said, I can relate to his steps and I think overall, they provide a strong foundation for financial success. His 7 baby steps are helping thousands become debt-free so it’s definitely something to consider and see if it’s the right choice for you.
where i’m coming from
During seven years, starting when I was 22, I saved more than $100,000. I got serious about saving when I graduated college at 22 with $41,000 in student loan debt.
What did I do with that $100,000? First, I finished paying my student loans. Interest is really really high so if you do have student loans, focus on paying that ASAP. Second, I paid for my car in cash, it cost me $13,700. Third, I had $48,000 in cash for a down payment on my first apartment.
As I said earlier, I didn’t use Dave Ramsey’s 7 baby steps during my saving and becoming debt-free journey. That doesn’t mean I didn’t want too, I didn’t know he existed. I developed excellent saving habits and that’s what truly helped me along my journey.
The only debt I have now is my mortgage. And of course I plan on finish paying that ASAP. Check out, How To Save Thousands On Your Mortgage Without Refinancing.
dave ramsey’s 7 baby steps
Below is a list of Dave Ramsey’s 7 baby steps. Overall, I think the foundation is strong. Get out of debt and invest for retirement! I think some of the steps need to be moved around depending on your household income and total expenses but either way, like I said, they are a strong foundation.
I’m not a certified financial planner and I don’t know your unique financial situation. I do know how to save money and have learned a lot about investing. Especially for the beginner individual investor like you and I.
That being said, when you are ready to commit to investing, find a Registered Investment Advisor (RIA). They are professionals that will help you maximize your investments.
baby step 1 – Save $1,000 For Your Starter Emergency Fund.
Dave recommends saving $1,000 for your starter emergency fund. The money in your emergency fund will be used for unexpected expense and usual household expenses.
He mentions how millions of Americans, more than 50%, don’t have $1,000 in their savings account. It’s unfortunate, but that’s the reality.
my opinion on step 1
I 100% agree with the first step. Save money for your emergency fund.
However, I don’t agree with starting with $1,000. This number seems really low to me. I recommend starting your emergency fund with $3,000.
It’s always important to have enough cash on hand for unexpected expenses. You never know when you might have an unexpected medical bill or need to spend money on house repairs.
For example, I recently found out that my toilet was leaking and caused water damage to the apartment below me. How much did it cost me? $2,500. Totally unexpected expense but I was prepared to pay for it.
baby step 2 – Pay Off All Debt (Except the House) Using the Debt Snowball.
In baby step 2, Dave recommends focusing on paying off debt expect your house (aka your mortgage) using the debt snowball method.
What’s the debt snowball method? “This is the theory you’ll apply to paying off your debt. You’ll start small with focused intensity.”
Using the debt snowball method, you make a list of all your current debts and prioritize paying the smallest balance first.
While you’re in baby step 2, your saving account or emergency fund is not growing. All your money is going towards your debt.
my opinion on step 2
I really like step 2. Focusing on paying off all debt (except your mortgage for now) is the key to successfully moving forward in your financial journey. What I don’t agree with is the debt snowball method. This is just my opinion but please look into it because it can work for you.
He doesn’t take into account interest rates on debt. I know how expensive interest can be after having student loans so for me. Focusing on debts with higher interest rates take priority.
To be clear on how to start paying of your debt and what to prioritize. Meet one-on-one with a certified financial planner. He or She will show you what’s best for you and what will save you the most money down the road.
baby step 3 – Save 3-6 Months of Expenses in a Fully Funded emergency fund
Dave recommends saving 3-6 months of expenses in your emergency fund. These expenses would include; mortgage/rent, utilities, car insurance, cell phone, groceries, household essentials, etc. For example, let’s say you need $1,500 every month. If you wanted to save for 3 months, you would save $4,500.
So should you save for 3 or 6 months? For one income households, he recommends 6 months. For two incomes households, 3 months.
He also recommends having your emergency fund money in a high interest saving account or money market account with check-writing privilege’s so that you quickly take out money if you need too.
my opinion on step 3
I recommend you have at least 3 months of expenses (or at least $3,000) in your emergency fund before you start paying off your debt.
Better safe than sorry. What if you lose your job and only have $1,000 in your saving/emergency fund? For most people, $1,000 is not enough to cover a months worth of expenses. The last thing you want to do is fall behind on essential household payments.
So again, I recommend saving at least 3 months of expenses (or $3,000) in your emergency fund before you focus on paying off your debt.
baby step 4 – Invest 15% of Your Household Income in Retirement
Dave Ramsey recommends investing 15% of your household income in retirement accounts.
He mentions that some people don’t worry about investing for retirement until later in life but that it’s important to prioritize after paying of your debts.
As far as retirement accounts, he recommends starting with your 401(k). If you don’t know what a 401(k) is, it’s a retirement investment account you can get through your employer.
If you max out your yearly contribution (you can contribute only a certain amount every year), he suggest an IRA. An IRA is an Individual Retirement Account, a different retirement account than a 401(k).
Dave recommends that before you start investing in your retirement accounts, you should consults a professional.
my opinion on step 4
Step 4 is my favorite. Investing for retirement is so important. You don’t have to worry about retirement until you need the money in your 60s but you do need to worry about the money going into the account ASAP!
I also like that Dave encourages you to seek out professional advice before you start investing in retirement accounts. There are so many options that maximizing (contributing the most you can) your 401(k) may not be the best option for you.
Again, seek an investing professional when it comes to investing. They will guide you in the right direction, it’s their job 🙂 Find a Registered Investment Advisor as soon as you’re ready to invest.
baby step 5 – save for Your Children’s college fund
If you don’t have kids, your kids don’t need help paying for college, or your kids are grown and out of the house, you can skip this step.
If you do have kids, he recommends saving cash and doing your search when it comes to finding the right investment account for college savings. A certified financial planner should be able to help with the details.
my opinion on step 5
I don’t have kids yet so I can’t comment on my experience with this 🙂
baby step 6 – Pay off Your Home Early
Dave suggests switching from a 30 year mortgage to a 15 year mortgage if the rates are better. This would mean you would have to refinance your mortgage.
He also recommends making an extra payment per quarter.
my opinion on step 6
Totally agree with this one!
I’m hesitant with the refinancing part because it’s not simple to refinance. It usually costs you money and your monthly payment goes up.
I do however recommend making an extra payment. I learned that you could save thousands, possibly hundreds of thousands by simply paying your principle payment a month a head. More about that in, How To Save Thousands On Your Mortgage Without Refinancing.
baby step 7 – Build wealth and Give
Dave recommends building wealth by maxing out your 401(k) and Roth IRA. Maximizing means contributing every dollar you can to the account. For example, in 2020, the most you can contribute to a 401(k) is $19,500. In a Roth IRA, the most you can contribute is $6,000 ($7,000 if you’re older than 50).
Contribution limits can change so always check the latest with the IRS.
my opinion on step 7
I’m on board with building wealth. Who doesn’t?
My concern is the advice to maximize your 401(k) contribution. I also thought maximizing my 401(k) would be the best option but that’s not always the case.
After reading, Money Master The Game by Tony Robbins, I understand that a 401(k) is not always the best option.
Also, remember the millions of people that lost over half of their savings in their 401(k) after the 2008 financial crisis? If you’re not aware of what happened to 401(k) accounts during this time, watch, Inside Job.
The truth is, companies managing your 401(k) are in business to make money and most of the time, they are watching out for themselves.
I’m not saying a 401(k) is bad or possibly not the right option for you but please do your search.
final thoughts
Overall, I think the 7 baby steps build a strong foundation for financial success.
I have a different opinion when it comes to the details and order but overall, they are really good.
As always, don’t just listen to one opinion. Do your search and always always consults the professionals when it comes to investing. I recommend not taking mine or Dave Ramsey’s advice alone when it comes to investing. A certified financial planner and/or Registered Investment Advisor (RIA) are the professionals.
Let me know what you think about Dave Ramsey’s 7 baby steps. Is this something you are willing to try? Are you hesitant about any of the steps?
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