Dave Ramsey is one of the most popular personal finance gurus. He offers books, courses, and programs like Financial Peace University. His Baby Steps plan furthers his mission to help people achieve financial freedom.
You’ve likely heard of these seven baby steps, which are basic money principles and actions. Whether you follow all of them or only the first few, you can get back on track financially and improve your financial health.
Table of Contents
What are Dave Ramsey’s Baby Steps?
There are many good ideas in this Dave Ramsey plan. Here is each baby step that he argues you should take successively.
| Step | Action |
|---|---|
| 1 | Build a $1,000 emergency fund |
| 2 | Use the debt snowball to pay off your debt |
| 3 | Save 3 to 6 months of expenses in your emergency fund |
| 4 | Invest 15 percent of your income in a Roth IRA |
| 5 | Save for your kids' college needs |
| 6 | Pay off your mortgage early |
| 7 | Build wealth and give |
This list requires a lot of work, so taking it one step at a time is essential.
Most households struggle to pay off debt since they don’t know how to make a plan. While this particular plan isn’t perfect for everyone, these steps have helped millions of people find a way to get out of debt and save money.
Following these baby steps takes work, but they’re straightforward. You can start at the first step and advance to the next steps as you achieve the various milestones.
Keep in mind that you may need to personalize these steps for your unique money goals.
Step 1: Save $1,000 to Start an Emergency Fund
Being able to pay for emergencies is the first step. To be successful, you must build a starter emergency fund with a $1,000 balance.
This first step is important because the average American doesn’t have an emergency fund. Lack of savings is a big reason why people get themselves into financial trouble.
Even if you’re struggling to get by or have a lot of debt, it’s important to save some money to cover unexpected expenses. If you don’t have any savings, you’ll rely on credit cards and loans to bail you out of an emergency.
*Related: Budgeting apps are a great way to manage your money. Read our guide here on how they can help you see all of your accounts in one place and find opportunities to save.
Credit cards and loans have excessive interest rates, making it harder for you to get out of debt.
While $1,000 may not cover several emergencies in a short period of time, it’s better than nothing. It also lets you focus on paying off your debt quickly.
Many people think it’s impossible to save at least $1,000. It’s not. The key is to start saving as much as you can and automate regular transfers.
Pick a bank that lets you automate transfers, has a low minimum balance requirement, and pays a good rate.
CIT Bank is one option worth reviewing since they pay .55 percent in their Money Market account if you start with a $100 minimum balance.
This account has the same FDIC coverage as a savings account and is liquid.
If the minimum balance requirement is too high, Chime Bank is another terrific option. Read our review of the bank here to learn more.
If you have no money left at the end of the month, look for opportunities to change this. There are countless ways to cut costs or make money to increase savings.
Step 2: Use the Debt Snowball to Pay Off Debt
This step involves paying off all your non-mortgage debt. Dave Ramsey hates debt, but he is okay with people keeping their mortgage debt until later on in the process since home loans have low interest rates.
Focus on paying these obligations first:
- Credit cards
- Student loans
- Car loans
- Personal loans
- Medical bills
- Any other type of non-mortgage debt
Consumer debt tends to have the highest interest rates. Paying off these accounts first can reduce your overall cost.
But how can you eliminate your debt? Here are a couple of options.
Debt Snowball
The debt snowball method is one the most popular debt repayment options, and Dave Ramsey recommends this method in his baby steps plan. With this strategy, you pay off your debt with the smallest balance first.
Here is how to implement the debt snowball method:
| Step | Action |
|---|---|
| 1 | List your debts by balance size |
| 2 | Make extra payments on the smallest balance |
| 3 | Pay off the smallest balance |
| 4 | Apply extra payments to the next smallest balance |
| 5 | Repeat the process until you become debt-free |
If two balances are the same, pay off the one with the higher interest rate first. Also, continue to make the minimum monthly payment on your other balances to keep your accounts in good standing.
The snowball method can be the better option if you want “small victories” to keep your debt payoff momentum.
However, you may pay more total interest than other strategies because the smallest balance may not have the highest interest rate.
Debt Avalanche
The debt snowball isn’t the only debt repayment option. A more aggressive strategy for getting out of debt is the debt avalanche.
You apply your extra debt payments to the highest interest rate first with this strategy. All other debts should receive minimum payments until the higher rate balance is paid off.
In most cases, credit card balances are the first debts you pay off even if their balance is higher than other loans with a lower interest rate.
How to Choose a Debt Repayment Method
Which method you choose doesn’t really matter. If you are committed and consistent, you will get the desired result of becoming debt-free.
*Related: If you have student loans, you may want to consider consolidating or refinancing. Read our review of SoFi student loans to see why they may be a good option.
The key, like saving money, is to start. There are many ways to pay off debt fast once you get started.
Dave Ramsey calls for gazelle-like speed when paying off debt. By following some of the ways to pay off debt fast, you can kill it faster than you think.
If your debt is high-interest and overwhelming, consolidation might be a good choice. Credible is an excellent option as they allow you to compare multiple lenders at once to find the best fit and rate.
Read our Credible review to learn more about refinancing debt at lower rates.
Step 3: Save 3 to 6 Months of Expenses
After paying off debt, you return to building your emergency fund. Instead of making extra debt payments, you can stash more money in a savings account.
In this step, you focus on saving between three and six months of expenses to reach a fully funded emergency fund.
For example, if your monthly expenses are around $3,000, that means you’ll need to save between $9,000 and $18,000.
Many personal finance experts suggest having at least three to six months of living expenses in case you lose your job. In time, you might save more than six months to cover large expenses or have more financial freedom.
That amount can be overwhelming, but don’t let it keep you from saving. There are many money-saving ideas that can give you a head start at building your savings.
*Related: Want to cut the cord? Read our review of the Amazon Fire Stick to see how it can help you save $50+ per month on cable.*
You can achieve the third baby step sooner by reducing your monthly expenses. The less you spend, the longer your emergency savings will last. Canceling unnecessary subscriptions you no longer use is a good start.
Truebill can help cancel services and negotiate lower rates on bills for you. The service keeps 40 percent of the savings for successfully lowering bills and cancelling subscriptions.
Reducing your spending can also give you more confidence and build momentum for getting your finances in order. Of course, don’t forget to have some fun along the way.
Read our Truebill review to learn more about effortlessly reducing monthly bills.
Step 4: Invest 15 Percent in Retirement Accounts
Saving for retirement should be one of your first priorities after paying off debt and accumulating several months of cash reserves. Investing at least 15 percent of your income can help you afford retirement.
Once you reach this step, make sure you are taking full advantage of employer-sponsored retirement plans.
Also, consider opening an individual retirement account (IRA) or a 401(k) for tax-advantaged retirement investing.
You will need to decide if you want to open a traditional or Roth retirement account. It’s possible to open both types.
Traditional IRA and 401(k) contributions reduce your taxable income dollar-for-dollar in the current tax year. The funds grow tax-deferred, and you only pay taxes once you make a withdrawal.
Roth retirement accounts come from post-tax dollars. You pay income taxes on the contribution amount upfront but don’t pay taxes again, even on the withdrawals.
Many brokers have low investment minimums and let you open a retirement account with $0.
Betterment is one of the best options as they recommend a model portfolio of low-fee stock and bond index funds matching your investing goals.
It’s also possible to purchase one-time financial planner sessions to review your progress.
Read our Betterment review to learn how the platform works.
Step 5: Save For Your Children’s College Fund
Some people want to pay for their child’s college education, so it’s terrific that this is one of the baby steps.
Once your retirement planning is under control, you can look at saving for your children’s college needs. If they’re younger, a 529 plan offers significant benefits.
With a 529 plan, you can put the funds in a variety of investment choices. It’s also possible to have family members gift money into this kind of education savings account.
When your child prepares for college, they can withdraw the funds, tax-free, for qualified education expenses. Depending on where you live, you may receive some tax benefits for the contributions.
As your child gets closer to attending college, look for ways to reduce costs. Some examples include:
- Attending a community college for the first year or two
- Consider a trade school if a four-year university doesn’t fit their goals.
If they pair that with looking for ways to make money in college, your child should be on solid ground and avoid excessive student loan debt.
Step 6: Pay Off Your Mortgage Early
Paying off your mortgage early is the American dream to be truly debt-free. Not having a mortgage is one of the final steps for several reasons.
Many mortgages have up to 30 years to repay, meaning you have more time to pay off the balance if you only have a small amount of extra income.
House payments also have lower interest rates than consumer debt. However, they are a large monthly expense that prevents you from saving or investing as much money as possible.
Making extra mortgage payments is not easy, but there are a couple of ways to achieve this goal.
One option is to get a side hustle and apply the extra income to your mortgage. You can deliver meals with DoorDash and get paid $23 per hour while on a delivery. This delivery app lets you set your schedule and work in your free time.
A second option is refinancing your mortgage to find a lower interest rate and pay it off sooner. Don’t forget to calculate closing costs to determine your potential savings.
Dave is also a fan of 15-year mortgages as they have lower interest rates than a 30-year mortgage, and you’re debt-free sooner.
While 15-year home loans come with a higher payment, they allow you to pay off your mortgage faster and save significant money.
Step 7: Build Wealth and Give
Building wealth and helping others is the final baby step. If you reach this point, you’re in pretty good shape financially. You’ll have no debt, a solid retirement fund, a paid-off home, and some college savings for your kids.
You may have invested small amounts of money in non-retirement accounts or helped your favorite charities while paying off debt. But now, since you’re on the last step, you can use most of your cash for these goals.
It’s important to diversify your investments to reduce the risk of losing your hard-earned wealth.
In addition to investing in stocks, consider real estate to earn passive income from rent payments and selling properties for a profit.
Fundrise invests in properties across the United States, earns quarterly dividends, and has a minimum $10 investment.
Giving back to others can be a reward of wealth building. These baby steps can change your life, and now you can help others have a better life.
Since you’re likely more financially well-off in this step, you’re in a better position to give to charity and support causes you care about.
Read our Fundrise review to learn more about crowdfunded real estate investing.
How to Start on the Baby Steps
Beginning this plan may seem difficult if you have financial struggles. Here are some tips for success.
Decide on Your Why
Knowing your “why” can motivate you to start and continue pursuing each step.
Some reasons for wanting to pay off debt and save money include:
- Not worrying about money
- Sleeping peacefully
- Improving your credit score
- Affording long-term goals
- Leaving a financial legacy for your children
- Retiring on time
- Moving into a better neighborhood
Everyone has different goals. Pick one or two dreams you want to accomplish to keep your motivation high.
Educate Yourself
You don’t need to know a lot about how money works or how to manage it. There are many free resources that can help you gain experience as you progress through the steps.
The important thing to remember is to start and learn from any mistakes you make along the way.
Give Yourself Time
Achieving a single step can take months or years to accomplish. Not achieving all seven baby steps in a matter of weeks may be frustrating.
Celebrate the progress you make each month as you move closer to getting your finances in order.
Commit to Change
Reducing debt and pursuing financial freedom can require a lifestyle change like losing weight.
When cleaning up your finances, you may have to learn to defer purchases or avoid impulse buys. Instead, you can use the money to make extra debt payments, save for emergencies, or invest.
These new money habits may seem boring but may prevent future money stress and help you stay out of debt.
They also help you avoid things like cash advance apps when short on funds. Change takes time, but it’s simpler when you commit to a long-term goal.
Downsides of the Baby Steps
Overall, Dave Ramsey’s Baby Steps are a uniform example of how to become financially stable, pay off debt, and grow wealth. However, they do have their shortcomings.
One downside is how this process often markets itself as a one-size-fits-all solution that will help everyone.
The first few steps make the most sense as they can help almost anyone avoid debt and afford paying for emergencies. After that, people might have different goals or aspirations.
For example, some might want to invest and build their emergency fund at the same time. Others may want to start a business or invest in the stock market instead of using their extra money to pay their home off early.
Some of the advanced steps might not be practical for everyone. For example, you may not have children going to college. Or, you might prefer to rent instead of own a home.
Ultimately, there are lots of questions and variables. While this plan isn’t going to appeal to everyone, the steps do work for certain people. There are millions of people who have benefited from following them.
As you start going through the steps, make sure to adjust them to your unique situation as needed.
How Long Does Dave Ramsey’s Baby Steps Take?
There is no set timetable for the Dave Ramsey plan as it depends on your particular situation. Some of the steps will take less time than others.
For example, you may be able to build the $1,000 starter emergency fund within several months. However, if you have $10,000 in debt, it may take you a couple of years to erase.
The more you’re able to intensify your efforts, the sooner you will finish the plan.
Bottom Line
Whether you love or hate Dave or agree or disagree with the order of the steps, he is consistent in what he says. He makes it clear that you do better when you focus on one step at a time.
The baby steps are best for people who want to live a debt-free life long-term. If you’re okay with certain types of debt, have different goals, or are not willing to make sacrifices, the seven baby steps may not be for you.
But if you are willing to do the work and are debt-averse, following the steps will put you on a course towards financial security.
What do you think of the plan? Do you think there is such a thing as good debt?
*Actual earnings may differ and depend on factors like number of deliveries completed, time of day, location, and expenses. Hourly pay is calculated using average Dasher payouts while on a delivery (from the time you accept an order until the time you drop it off) over a 90 day period and includes compensation from peak pay, tips, and other incentives.
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