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Dave Ramsey’s 7 Baby Steps

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The Total Money MakeoverOne of the most well-known personal finance gurus is Dave Ramsey. He often talks about how he pulled himself out of debt, and now lives debt-free. He also develops products and sells books designed to help his followers lead debt-free lives.

Among the ideas that Ramsey has developed is The Seven Baby Steps. These are steps that, if used in order, can help you get your financial house in order, and start down the path to financial freedom. The idea is to follow the steps in order so that the steps build on each other.
Here are Ramsey’s 7 baby steps:

1. Start an Emergency Fund with $1,000

The idea is that you can’t get started on your journey to financial success without something to help you pay unexpected expenses. Before you do anything else, Ramsey recommends that you start an emergency fund with $1,000. Before you proceed, you should save up $1,000 in a fund. It might take two or three months to get this point, but it’s a start. One unexpected expense can throw you off the rest of the program, so that $1,000 can be a real help. (Although it’s important to note that eventually you’ll have to expand your fund; $1,000 won’t help that much if you lose your job or suffer some other major catastrophe.

2. Use the Debt Snowball to Pay Off Debt

Ramsey’s debt snowball method is very popular. You list all your debts (except your mortgage), and pay them off one by one. You start with the lowest balance, and work up to the highest balance. Some insist that it’s better to order your balances by interest rate, but Ramsey looks at things in terms of what is likely to have the highest psychological impact — and paying off a balance is encouraging and will keep you on track.

3. Build Your Savings to 3 to 6 Months

Now that your debt is paid off, it’s time to boost your emergency fund. Ramsey suggests that you add to your emergency fund with the money you are no longer spending on debt payments. When you have three to six months’ worth of expenses, it’s time to move on to the next step.

4. Invest 15% of Your Household Income

With no consumer debt payments, and with a solid emergency fund, Ramsey suggests that you start investing in tax-advantaged retirement accounts. He likes Roth IRAs (and I do, too). He suggest 15% of your income should go toward investments that will help you prepare for the future. If 15% overruns the limit for Roths, you can open other accounts to contribute to as well.

5. College for Your Kids

Once you are taken care of, it’s time to help your kids. You can help your children save up up for college. This can be important, since college costs can really put the pressure on later. This can prepare you for the future.

6. Pay Off the Home Early

With regular contributions going to your investment accounts, and to college accounts, it’s time to add extra home payments. You should continue investing, and saving for college, through this period. The idea, once you have a solid emergency fund, is to assign your cash different jobs that it will be doing each month instead of making debt payments. Paying off your home early can free you up later.

7. Build Wealth and Give

Finally, once you are on track to pay off your mortgage early, you should remember to build wealth and give to others. Ramsey believes that giving is an important part of finances, and once you are secure, you should help others as well.

(Photo: marklarson)

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17 Responses to “Dave Ramsey’s 7 Baby Steps”

  1. Matt says:

    I wouldn’t take financial advice from Dave Ramsey seriously. Sure he understands the simple things, like saving and paying off debt, but his advice and knowledge of investing is horrendous.

    • Seasongs says:

      Dave appears to be a man of integrity. I attended his Financial Peace University, and was impressed with the content as well as the man. We have implemented some of his steps, and they work great if you stick to the plan. Debt is ruining so many people, and I’m so grateful for his concepts.

      • Matt says:

        I don’t know what Financial Piece University is but it sounds like a scam. His “concepts” are more like common sense and I can’t believe anyone would pay money to hear them.
        The most important thing to becoming debt free is increasing your income.

        • Jesse says:

          If you’ve never heard of FPU that means you haven’t done any research on the subject. So maybe you should do that before you comment. :twocents:

        • DH says:

          “The most important thing to becoming debt free is increasing your income.” I disagree.

          I paid off nearly $16,000 in credit card debt (Double that when you include the car note I had) doing exactly steps 1 and 2 (and contributing to my employer’s 401k plan to get the company match) without increasing my income. Of course, I DID work to increase my income all the while I was paying my debt and succeeded such that when I was in the last stretch of debt repayment, I earned enough money to make it go really fast. But, even if I didn’t have that additional income, I still would have paid off the debt, saved and invested.

          It should be common sense, but it’s not. Many people — responsible, intelligent people — don’t inherently know something so simple. Why and how would they? Now it seems so simple as to be stupid to me, but it wasn’t always like that. I had to learn the hard way, as many people do. Don’t be so high and mighty. Ramsey’s Baby Steps advice is simple and sound — which makes it good advice, because it means people won’t be intimidated by it and, thus, they’ll actually do it.

        • Seth says:

          I’m not sure how you can say that Dave Ramsey has horrible advice if you have never even heard of his primary teaching program.

          Yes, most of the things he recommends are common sense, but if everyone were using common sense, we wouldn’t have people drowning in debt. Ramsey’s advice is spot on for its intended audience: people struggling to get a handle on their finances or looking for a basic game plan. If he were teaching to more advanced investors, it would go way over the heads of most other people.

    • Jesse says:

      Ramsey will be the first to tell you that he’s not an investing expert. He would also tell you that once you get to the investing Baby Step, you should find a good investing professional. And it’s also why he has a list endorsed local providers for investing available on his website.

      In that regard, his investing advice is anything but “horrendous”.

    • Steve says:

      He didn’t tell you where to put the 15% investment.

  2. Gab says:

    All his advice (except for investing) is excellent. He help us get out of debt in 19 months and we were able to pay off about $80K including the house in that period of time. A year later we were able to save enough to put 20% down on a bigger house and be able to keep the old house as rental income. Besides that, we did all the retirement and college investment amount he recommends.
    Investing?, we used Bogle’s teaching and Bogleheads forums to get advice and invest in simple index mutual funds. Nothing fancy, being average is OK (read books by Bogle and Solin).
    The reason I don’t follow Ramsey’s investment advice is because there is a lot of conflict on interest recommending his ELPs so I just don’t do that. Besides that, he is still a blessing for us and I can’t thank him enough. He really changed my family tree forever and I will never forget that.

    • Jesse says:

      Bogle is great. Indexing is a phenomenal investment strategy. Buy and hold is where it’s at.

      • Steve says:

        Bogle, founder of Vanguard, is great, indeed. But buy and hold only works in a balanced ‘permanent’ portfolio, e.g., Harry Browne’s: 25% stocks, 25% bonds, 25% gold and 25% cash. (FYI, he was the Libertarian candidate for President a couple of times.)

  3. Anonymous says:

    For the record, increasing your income (by itself) will NEVER get you out of debt. Living within or below your means in the key, and that is income independent. You can earn $1,000,000 a year and still not get out of debt.

    • govenar says:

      But getting out of debt just for the sake of being out of debt might not matter much. If you’re making millions of dollars each year, you might have more money than you could ever spend anyway, so you might not care that you’re in debt. And the debt might be used as leverage to earn you even more money.

      • Jeff says:

        Going in debt as an investment plan is not good financial advise. Anyone who is telling you this is probably trying to sell you something

        Take Dave Ramsey’s FPU class if you want solid advise. He has changed my way of thinking about debt and maybe he can do the same for you.

  4. Jim says:

    As an FPU registered facilitator, Dave Ramsey’s advice is truly based on the use of good common-sense which he admits up front and over and over. The key he brings is a genuine heart bent on following biblical principles. If these are not comfortable to some folks then there are plenty of other “programs” based on similar good common sense.
    Unfortunately, it’s the good ‘ol fashioned “common sense” that we often overlook for making meaningful progress. Also, one best way to gauge something’s effectiveness is to look at the results. FPU graduates with life-changing stories are now into the many, many thousands if not millions. As a facilitator I’ve enjoyed many of these life-changing stories unfold right before my eyes.

  5. ChimChim says:

    Read the ‘The Richest Man In Babylon’ – everything you need to know about living below your means and wealth creation. Also, 3 to 6 months emergency fund is a JOKE!! In today’s financial climate – 12 months MIN – not a penny lower. My wife and I agreed to have 24 months and now we have 48.

    Live below your means folks, thats the true key to happiness. Of course, chocolate, cheese, wine and sex make your happy as well.


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