What are Dave Ramsey’s 7 Baby Steps? What is the Dave Ramsey plan? Let me walk you through each step and how to use it to get out of debt and start building wealth.
Dave Ramsey is a personal finance guru and the founder of Ramsey Solutions, a financial planning company. He’s also the host of “The Dave Ramsey Show,” a national radio program and runs “Financial Peace University”.
Dave Ramsey is known for his seven baby steps to get out of debt, though he doesn’t like that term and has said it is counterproductive. He prefers the phrase “debt snowball.” His plan helps people get out of debt by giving them a plan and some steps to follow each month until they’re debt-free. The key to his method is making sure you never borrow more money than you can pay back at the moment so you don’t incur new interest on your old debts, rather than focusing on how much money you owe in total.
Table of Contents
Dave Ramsey’s 7 Baby Steps:
Let’s look at all the 7 steps with specific guidelines on how to execute each one.
Dave Ramsey’s Baby Step 1: Save $1,000 in a “starter” emergency fund
Here is why you should save $1,000 as a started emergency fund.
A low-stress emergency fund is the cornerstone of your financial house, no matter your household income. With a good foundation, you can build wealth. Without it, life will be difficult to manage financially.
This is the first step toward becoming debt free and staying that way! Debt freedom equals peace of mind. And peace of mind means more fun in life for you and your family!
It’s easier to save money when you have less money to save! If you just focus on building an emergency fund with smaller monthly contributions, then big goals like retirement or buying a home could become reality faster than expected!
Most emergencies happen without warning — even job loss. Having some cash stashed away can help soften the blow so you can focus on finding your next great opportunity, instead of panicking about how you’ll make ends meet.
$1,000 might not seem like a lot of money, but it could be the difference between ruin and survival during tough times. And if you don’t need the emergency fund, you can always use it to invest in yourself or your family’s future!
So there you have it: five compelling reasons to save $1,000 for an emergency fund ASAP!
Dave Ramsey’s Baby Step 2: Pay off all debt (except your house) using the debt snowball method
The first step to take when you finally decide that enough is enough, and it’s time that you take control of your money once and for all, is to pick up the phone. *Don’t worry about waking anyone up, every person who owns a Debt Snowball works late into the night plotting their next pay off.*
The Debt Snowball Method was made famous by America’s favorite financial guru Dave Ramsey (surely there’s someone else out there). His book The Total Money Makeover goes into greater detail than mine about this subject (I’m not saying mine isn’t great; I’m just saying read his), but here are some quick facts:
1. Write down your debts in order starting with the smallest balance at the top.
2. Pay the minimum payment on all debts except the one with the smallest balance.
3. Throw every extra penny you have at that smallest debt until it’s gone.
4. Repeat until all your debts are gone.
The Debt Snowball is based on two principles:
1) The psychological power of momentum: When you knock out a small debt, you get motivated to keep going; and
2) The money freed up by knocking out a small debt can be used to attack the next smallest debt even harder.
The beauty of the Debt Snowball Method is that it’s simple and easy to understand, which is probably why it’s so popular. It doesn’t require any complex financial formulas or calculations; you just need to write down your debts and start paying them off one by one.
If you’re not quite sure how to get started, Ramsey offers a free Debt Reduction Calculator on his website that can help you get organized. You enter in all your debts and it will calculate the minimum payments and show you how long it will take to pay them all off using the Debt Snowball Method.
Once you’ve got your debts written down, it’s time to start attacking them! The key is to make extra payments on the smallest debt while still making the minimum payments on the others. This may require some creative budgeting and sacrificing, but it’s definitely worth it when you finally see that first debt disappear.
As you work your way through your list, you’ll probably run into some unexpected expenses that will require you to take on new debt. If this happens, just apply the same principle of the Debt Snowball toward paying it off. For example, if you have extra money left over after paying your smallest debt and you decide to go out for a nice dinner, use that leftover cash to pay down your next smallest debt or any other debts in between!
One of the most satisfying parts about using the Debt Snowball is watching your progress. Your debts are so far apart from each other at first that even though it seems like they’re all getting paid off at once, each one has its own time line. That’s why it’s important not to get discouraged when you finally start seeing results.
It’s also important to realize that there will be times when you’re going to fall off the wagon and get behind. Just pick yourself up, dust yourself off, and keep right on trucking with the Debt Snowball! It may require a few more sacrifices than before, but eventually that snowball is going to gain some serious momentum and start rolling downhill again. When it does, watch out!
The most important thing is not to make your debts bigger by missing payments or using your credit cards for spending money. If you give in and go back to old habits even once, you might as well erase all of your hard work and start over from scratch; because once you have one debt hanging over your head it’s so much easier to rack up more.
Once you get that first debt gone, the next one will seem so much easier to tackle and will motivate you even more! Before long, all your debts will be paid off and you’ll be on your way to building a financial legacy for yourself and your family.
That’s pretty much it! The Debt Snowball Method is easy to understand and use, which makes it perfect for people who are just getting started in their efforts towards becoming debt free. If you have any questions or need some help along the way, don’t hesitate to ask. I can definitely help out since my family has been using this method ever since I was little!
Dave Ramsey’s Baby Step 3: Save 3-6 months of expenses in an emergency fund
Now that you have your budget in place and you are living on a written plan, it’s time to save for a fully funded emergency fund. This is the third step of Dave Ramsey’s Baby Steps.
An emergency fund is exactly what it sounds like: money set aside for emergencies. It should be enough to cover expenses for 3-6 months. This could be a rainy day fund for when you lose your job, have unexpected medical bills, or need to fix your car.
The best way to save for an emergency fund is to do it gradually. Try to save 10% of your income each month. If that’s too much, start with 5% and work your way up. You can also use windfalls, such as tax refunds or bonuses, to help boost your savings.
It’s important to keep your emergency fund in a safe place. You don’t want it to be too accessible, because you may be tempted to spend it on unnecessary things. A good option is a high-yield savings account or a money market account.
When you have saved enough for a fully funded emergency fund , you can move on to Baby Step 4.
If you’re not quite ready for that step, don’t worry. Just keep following the Baby Steps and you’ll get there eventually.
Financial peace of mind is within reach.
Dave Ramsey’s Baby Step 4: Invest 15% of your household income for retirement
If you’re following Dave Ramsey’s baby steps, then you know that step four is to invest 15% of your household income for retirement. This may seem like a lot, but if you start early, it can be easy to accomplish.
There are a few different ways to invest your money for retirement. The best way will depend on your unique situation. One option is to invest in stocks and bonds in a retirement fund. This can be a good choice if you want the potential for high returns, but you also risk losing money if the market drops.
Another option is to invest in mutual funds or target date funds. These types of investments are less risky than stocks and bonds, but they usually don’t offer the same potential. The upside is that they are typically managed by fund managers so you won’t have to worry about doing your own research or making trades.
It’s best to speak with a financial planner if you want more information on investing for retirement. A good one should look at your whole situation, including your age, income, and current investments, before giving advice. Your financial planner can also help you figure out the amount of money that you should be saving for retirement each month. You may not be able to save 15% right now but even starting with .5 or 1% is better than nothing!
Dave offers “Financial Peace University”, that helps people plan for their financial independence and retirement.
Dave Ramsey’s Baby Step 5: Save for your children’s college fund
Of course, you can’t get around step five of the baby steps until you have finished step four. Make sure that your retirement accounts are funded before you think about saving for college or other goals. You will be able to use any matching funds from your employer and the money in your 401k if it is not already earmarked for another purpose.
If you don’t have a 401k through work then open an IRA at one of many providers. Note that this does NOT replace funding your 401k through work; make sure to save in both places if possible! The maximum amount that can go into an IRA each year is $5,500 (or $6,500 for those 50 and older). If you have children, it is important to save for their college education.
529 Plans
One way to save for your children’s college is through a 529 plan. This is a tax advantaged account that allows you to save money for college expenses, so your kids don’t need to get student loan debt, a massive problem in our country right now.
The money in the account can be withdrawn tax-free as long as it is used for qualified education expenses. There are limits to how much you can contribute each year, and there are also gross household income restrictions, so check with your financial advisor to see if this is the best option for you.
Coverdell ESA
Another option for saving for college is a Coverdell Education Savings Account (ESA). This account allows you to save up to $2,000 per year for each child’s education expenses. The money in the account can be used for any type of education, including primary and secondary school, as well as college.
One disadvantage of a Coverdell ESA is that the money in the account must be used by the time the child turns 30 years old. Another downside is that there are income restrictions, so you may not be able to contribute if your income is too high.
Dave Ramsey’s Baby Step 6: Pay off your home early
Now that you have your emergency fund in place, it’s time to start attacking your mortgage. Dave Ramsey recommends paying off your home as quickly as possible. This will save you money on interest and help you build equity in your home.
There are a few different ways to pay off your home early. You can make extra payments each month, or you can use a bi-weekly payment plan to accelerate the process. Another option is to refinance your mortgage and use the proceeds to pay off the loan faster.
No matter which method you choose, be sure to stay focused on your goal of becoming debt free. Don’t get sidetracked by other expenses or unexpected bills. Stay motivated and disciplined, and you’ll be able to pay off your home in no time.
When it comes to mortgages, Dave Ramsey knows what he’s talking about. By following his steps, you can get rid of your debt and build a solid financial foundation for the future. So don’t wait any longer – start paying off your home today!
Dave Ramsey’s Baby Step 7: Build wealth and give
Once you’ve paid off your mortgage, it’s time to start building wealth. One of the best ways to do this is by investing in mutual funds or other types of securities. You can also save money by creating a budget and sticking to it.
The final step is to give back. Once you’ve achieved financial stability, it’s important to give back to those who are less fortunate. There are several ways to do this, so find one that resonates with you and get started.
Debt Avalanche vs. Debt Snowball: What’s the Difference?
Not everyone agrees with Dave’s “Debt Snowball” approach.
There are two main schools of thought when it comes to tackling your debt: the Debt Avalanche and the Debt Snowball.
The Debt Avalanche is all about order and logic. You list your debts from the highest interest rate to the lowest, and you pay them off in that order. This approach is often seen as more efficient, since you’re paying off the debts with the highest interest rates first.
The Debt Snowball, on the other hand, is about momentum. You list your debts from the smallest to the largest, and you pay them off in that order. The idea is that by knocking out small debts first, you’ll build up enough momentum to keep going and eventually pay off your larger debts.
Which approach is right for you?
There’s no right or wrong answer – it all depends on your individual situation. If you have a lot of high-interest debt, the Debt Avalanche is probably the better approach. But if you have a lot of smaller debts, the Debt Snowball may be more motivating.
Ultimately, the best way to tackle your debt is to come up with a plan and stick to it. Whether you choose the Debt Avalanche or the Debt Snowball, make sure to set specific goals and track your progress along the way. And most importantly, don’t give up – debt payoff is a marathon, not a sprint!
Who is Dave Ramsey? What is his past?
Dave Ramsey is a business man and radio show host. He has authored several books on personal finance, debt management and other related topics.
He’s been in the financial industry for many years and he continues to do what he does because of his passion towards excellence.
His views on accumulating wealth are like no other which is why people love him so much because he tells it how it is instead of sugar coating everything that we want to hear.
However; there are some things about Dave that people should know and one of them I will be sharing with you here today.
Dave Ramsey’s Financial Meltdown
Dave Ramsey has built a huge business by telling Americans how to get out of debt. He is, in fact, the nation’s best-selling financial author. However, in recent years he has been raked over the coals by critics who have charged that he often misses the mark when it comes to his own money management.
The controversy surrounding Ramsey started back in 2009 when he filed for Chapter 7 bankruptcy protection. At the time, he claimed that he and his wife had racked up more than $1 million in debt on a variety of things, including their home, cars, and various investments.
Critics were quick to jump on Ramsey’s apparent hypocrisy, noting that the same man who preaches against debt had gone deeply into it himself. They also pointed out that many of Ramsey’s fans are working-class people who can’t afford to follow his advice exactly.
Ramsey has since tried to make amends, selling off some of his prized possessions and vowing to live a more modest lifestyle. He has also written about his experience in the hope of helping others avoid making the same mistakes.
While Ramsey’s bankruptcy was a personal failure, it doesn’t change the fact that he has helped millions of people get their finances in order.
He is still a powerful voice in the world of personal finance and his advice should be taken with a grain of salt. If you’re looking to get out of debt, his teachings can certainly be useful, but you should also consult with an expert to make sure you’re doing everything possible to improve your financial situation.
Dave Ramsey’s Baby Steps – In Summary
Dave’s baby steps have helped countless people get out of debt. They are not perfect, but they are made for regular, working class people to have an easy roadmap to follow when they find themselves sinking under their debt.
While Dave gets some flak from his critics, all in all the man is a force for good.