If you’ve known me for any amount of time, then you know I’m a big Dave Ramsey fan. In fact, all of my financial coaching training comes from Ramsey Solutions. Not only that but I also actively apply Dave Ramsey’s seven baby steps to my own personal finances. So, what are Dave Ramsey’s seven baby steps?
The baby steps are simple, easy to follow steps to building wealth. Following the baby steps will help you build financial security, get out of debt, and save for the future. It’s a simple concept, yet the steps take discipline to follow.
Furthermore, it is not a “get rich quick” scheme. The baby steps take years to make you a millionaire. But if you follow them, you’ll find the best path to financial freedom.
Dave Ramsey’s 7 Baby Steps
Below is an overview of Dave Ramsey’s seven baby steps. Also, before you begin the baby steps, you need to have a budget. Remember, a budget is key to your financial success.
Baby Step 1: Save $1,000 for a starter emergency fund
Planning a beginner emergency fund of $1,000 comes first. And no, $1,000 is not enough to cover every possible emergency. But I want you to consider the fact that 40% of Americans cannot cover a $400 emergency.
You will most likely encounter some sort of minor emergency within the next few months. Minor emergencies include flat tires, minor injuries, plumbing leaks, and so forth. The possibilities are pretty much endless. Having $1,000 in the bank to cover the unexpected brings a sense of comfort and security.
Baby Step 2: Pay off all debt (except the house) using the debt snowball method
Debt is not a tool. It’s a chain. You’ll hear me say this over and over again. And for good reason! My own definition of debt is, “using other people’s money to get stuff you can’t afford.” Not only are you obliged to pay them back, but you have to do it with interest!
So, if you have a lot of debt, where do you begin? The best and fastest way to pay off debt is by using the debt snowball method. Order your debts from smallest to largest, attacking the first one with everything you have. You make minimum payments on everything else until you finish the first debt. After you pay the first one, you snowball the payment into your next debt. Continue until you’ve paid off all your debt except for your home.
Some people will argue that mathematically other methods save you more money. While this is true, I’m a long-standing believer that personal finance is more about behavior than math. Seeing your debts disappear one-by-one provides great motivation! Just imagine for a moment what it would be like to live without debt. Pretty cool, isn’t it?
Baby Step 3: Save 3-6 months of expenses in a fully-funded emergency fund
Remember when you were thinking that a $1,000 emergency fund wasn’t enough? Well, you were right. Now that you’re debt-free, it’s time to build up a full emergency fund! The question is whether you need 3 months or 6 months of expenses. It’s up to you, but I shoot for the 6-month mark because my wife values financial security.
Now, notice I said 3-6 months of EXPENSES, not 3-6 months of INCOME. The point of this emergency fund is to ensure your survival in the event of job loss, major medical events, or other disasters. Unless the emergency is something truly debilitating, most people recover within 3-6 months.
At this point, you should also commit not to go back into debt. You should no longer need debt to cover emergencies or the things you want. But of course, I won’t yell at you if you decide to get a 15-year fixed-rate mortgage.
Baby Step 4: Invest 15% of your household income in retirement
This is where the real wealth-building begins! It’s time to take advantage of all that cash flow you just freed up! Most people tend to view investing as risky and complicated. While it’s true that investing always has an element of risk, it doesn’t have to be complicated.
You will want to set aside 15% of your gross income for retirement. So how do you go about doing this? First, if you have a company 401(k) or 403(b), you’ll want to see if they have a company match. For example, if you put in 3% and if your company will match you 3%, then you want to contribute at least 3%. After all, that additional 3% is free money!
After contributing to your company retirement plan, you’ll need to look at your options. If your company plan has good mutual fund options with a Roth option, you can contribute the whole 15% in your Roth 401(k). If not, you’ll want to consider a Roth IRA.
Always have your money in the following four types of mutual funds: growth, growth and income, aggressive growth, and international. 25% in each will give you a well-diversified portfolio and ensure maximum growth over your career. Also, be sure to look for mutual funds that out-perform the S&P 500. If you need help doing this, I recommend working with an investment professional.
Baby Step 5: Save for your children’s college education fund
My wife and I have a shared dream, and that dream is to pay for our children’s education. It doesn’t matter if they go to college or vocational school, they will still need to pay for it. Our desire is to leave a legacy and set up our children, grandchildren, and even great-grandchildren for success.
I hope that’s your desire as well. So, begin early! It would be wise to set up some kind of college savings account when your children are born. It doesn’t have to be anything fancy. A 529 or Education Savings Account will be fine.
If you start early and invest the money wisely, it’s entirely possible to provide for your child’s education. If your children are almost to college by this step, now is a good time to talk about making a plan. Believe me, you want your child to graduate debt-free. It will set them up for success for generations to come.
Baby Step 6: Pay off your home early
Imagine what life would be like without a mortgage payment! Now, this is something that takes a good amount of time. It doesn’t necessarily involve the focused intensity of Baby Step 2, because once you’re in steps 4, 5, and 6 you have permission to enjoy your money. However, you should make paying off your home a priority.
You can do this simply by taking whatever is leftover at the end of the month and throwing it at the mortgage. This is after necessary expenses, savings, retirement, and everything else.
The average millionaire paid off their home in 10.2 years. That doesn’t mean those people were millionaires at the time they paid off their homes. But they are millionaires today. Paying off your home early takes discipline, but you can do it.
Baby Step 7: Build wealth and give
“Live like no one else, so later you can live and give like no one else.” – Dave Ramsey. This is where you can truly begin to have fun with your money. And I mean a lot of fun!
Now, you should have been giving all along. But now you can give even more! You now have a lot more freedom regarding where all your money goes. So, what are you going to do with it?
There are three things your extra money should go to: investing, giving, and having fun. It’s up to you to determine the percentages, but it’s always a good idea to continue building wealth, giving some of it away, and enjoying some of it. You’ve worked hard, so do something with it that brings you joy!
Anybody can do Dave Ramsey’s 7 Baby Steps
Here’s the thing with Dave Ramsey’s seven baby steps: anyone can do it! There are few people in America who are in such dire straights that this wouldn’t work for them. If you stay focused and work through the steps, you can do it!
Also, it’s good to note that the baby steps aren’t just for getting out of debt. This is a plan to build wealth so that you can retire as a millionaire. This has worked for millions of people, and it can your for you too!
Is there ever a time when I should stop the baby steps?
Even though anyone can do this, there are times when you would need to press pause on the baby steps. An example would be during COVID-19. A lot of people lost their jobs during the pandemic of 2020. Therefore, the last thing they should be doing is throwing extra money at debt. In situations like that, it’s better to stockpile cash. When ambushed, you need to fight for survival. Afterward, you can plan a counterattack.
Making a plan and sticking to it
Regardless of what you choose to do with your money, it’s important to note that you need a plan. I believe Dave Ramsey’s seven baby steps to be an excellent plan. It’s what I endorse and what I teach.
If you stick to the plan, it will work. On the other hand, if you “kinda sorta” work the plan, you’ll end up going around in circles. Getting out of debt and building wealth requires focused intensity. It’s time to get intense and knock out that debt so you can live like no one else!
To learn more about Dave Ramsey’s seven baby steps, check out Financial Peace University!
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Do you want even more details about Dave Ramsey’s 7 Baby Steps? Check out his book, The Total Money Makeover!