In general, we’re big fans of Dave Ramsey and his tips and teachings, and many people look to him as a personal finance guru.
He has created his very own paying-off debt strategies for the masses- taking his own personal finance plans and encouraging you to achieve the same success!
They are called the Dave Ramsey Baby Steps, and many people have demonstrated that they’re the way to get out of debt.
And that may be for some, but times have changed a lot since the 90s, and I have some suggested changes to get you more up to speed.
Who is Dave Ramsey?
Dave Ramsey is basically every drowning-in-debt person’s hero – a real “Cinderella story,” if you will.
Well, not really a Cinderella story because there was no magic involved in his results. It was his own diligent work and dedication, which may as well be his superpower as a personal finance expert!
You can read all about his journey and his epiphanies throughout his journey in any one of the many Ramsey books.
He also uses these books to share inspirational stories from others, advice to live a more frugal lifestyle, and how to save money in general.
Those all tie into Dave Rmasey’s 7 Baby Steps that we’re discussing now. Let’s dig into what they are and what savvy updates they need!
Dave Ramsey Baby Steps & Our Savvy Updates
Baby Step 1: Save A Fully Funded Emergency Fund
Let’s face it, life happens. “Fit hits the shan” and it can become a mess real quick!
The last thing you want to do when trying to get out of debt is to get into more debt. It’s an endless and chaotic cycle, robbing Peter to pay Paul when you hit hard times.
Ramsey says you should aim for $1,000 in your emergency fund should give you a good cushion for the problems you run into.
Baby Step 1 UPDATE: Save $2,000+ In Emergency Funds
I 100% think you need a starter emergency fund, too, because it can save you from racking up credit card and loan debts when something big happens.
However, is saving $1,000 today really enough to help you next year?
The savings definitely will help, but $1,000 now won’t be the same amount of money later on because of inflation!
I say you need to at least double that to $2,000 or more in order to fight off the inflation costs that will happen year to yaer
Baby Step 2: Pay Off ALL Of Your Debts (except your mortgage, it’ll come later)
This is the longest and hardest step, for sure, and sometimes the hardest for people who have a lot of debt to dig themselves out of.
You’re going to put EVERY PENNY you have towards what you owe other people and get them off your back. You want to pay off debts 100% and be in the clear.
Dave Ramsey actually created a famous debt payment plan called the debt snowball method. You pay off the debts from smallest to largest, not taking into account interest rates.
You simply list out the debt from smaller to largest and start paying off the little guy. For example, you would pay off your credit card debt of $1,200, then your $4,000 car loan, and finally your $13,000 student loan.
Baby Step 2 UPDATE: Use The Debt Repayment Plan That Works Best
Now I personally think the debt snowball method makes sense, but it’s not for everybody, and it may not save you on interest.
However, my preferred method is the debt avalanche method, where you pay off the loans wth the highest interest first.
Higher interests over time can really hit you where it hurts, and taking them out first can save you a lot of money over time.
Baby Step 3: Save 3-6 Months Of Expenses In An Emergency Fund
Here you’ll capitalize on that by stashing away enough money to be able to pay all of your monthly bills in full, for 3-6 months. This will help soften the blow if you experience a big blow, like the loss of a job or a medical event.
It can be a difficult step, but you will certainly need a fully funded emergency fund as things happen around you.
Better to have it and not need it, than need it and not have it. Just like umbrellas and coats!
Baby Step 3 UPDATE: Save 6 Months Of Expenses- Minimum!
At this step, you’ve supposedly set aside $1,000 (hopefully well over for inflation!) and paid off all your debts.
So isn’t it reasonable that you shouldn’t only save for 3 months?
In today’s job market, there are a lot of online jobs available and even low-cost businesses that you can start from home to earn money.
But a safety net of only 3 months may just not cut it. What if it really does take you 6 months to find a job that suits you?
If you’ve only saved for 3 months, then those other 3 months are going to send you into debt since you have no paycheck!
I recommend at least saving enough money to cover 6 months of expenses; that way, you don’t risk putting yourself back into debt without a job.
Baby Step 4: Invest 15% Of Your Household Income Into Saving For Retirement
Once you’re done with the first 3 /7 Baby Steps, you’ll have paid off your debts, and you’re feeling ready in case of catastrophe with a fully funded emergency fund.
Now you need to think of your future and plan for it- and you’ll never be any younger than you are now, so it’s time to start!
Ramsey wants you to pop 15% of household income into Roth IRAs and pre-tax accounts, whatever best suits your needs and interests.
Baby Step 4 UPDATE: Invest AT THE START
One of the things about investing is that it’s never too late to start. BUT starting later means you have less money down the road.
And investing in your retirement is one way to always get 100% of your money’s worth down the road.
If you can start investing $5 a week, your investment money can start growing faster right away. But I sincerely think you can bump up your investments to 20% and get more from this cash!
There are even robo-advisors and online investment trackers like Betterment and Empower to get you started quickly and give you help with proper retirement investments.
You can also see about your work investment options and see if your employer offers contribution matching- so if you invest 3% of your pay, so will they! More money for you without any extra work.
Baby Step 5: Save For Your Children’s College Fund
Are you the type of parent that plans to help your child cover college tuition costs?
Well, college is incredibly expensive, and you’ll need to plan well to get your children’s college fund off the ground.
After your finances are in order and your retirement looks bright, you’ll start setting aside money for them.
Baby Step 5 UPDATE: Save Or Don’t
I know many people who don’t plan on having kids or whose kids straight up aren’t going to college, so what’s the point of having a fund that’s only usable for college?
I say, if you want to save money for them in general, then you should make it a general investment account for your kids, not just a college fund that can’t be used on a car or house down payment.
Many couples also can’t earn enough for retirement and future education, plus pay off debts, and that’s totally understandable! Do what you can, and support your child when it comes to going to college.
My parents couldn’t pay for college, but they helped pay for food and room and board and co-signed loans so that I could get better rates. Other things still help college students out!
Baby Step 6: Pay Off Your Home Early- Goodbye Mortgage Payments!
Now you can truly pay off all debts- let’s get rid of that last tiny loose end!
Ramsey feels you should reduce all debts to start clean before increasing your wealth, and that includes working on paying off your mortgage early, as quickly as possible.
Some people go back and forth on this step- mostly because they don’t know whether to use their extra money to pay off their mortgage or invest to make more money.
Baby Step 6 UPDATE: Pick Investing OR Paying Off Your House
Paying off your house and living with no mortgage can be life-changing- but how realistic is it that people can pay off a house in 15 years?
And even more realistically, young people aren’t buying houses in their 20s- most people are in their mid-30s when they buy their first house!
I suggest taking your money and growing your investments quicker, but many people are more focused on paying off their houses because their interest rates are bad.
In that case, I totally support tampering down the biggest debt you have and then live with no mortgage.
Baby Step 7: Build Wealth And Give Wealth
The final step of Dave Ramsey’s Baby Steps is to keep on going. You’re free and clear of your financial loose ends and able to live how you want!
Build wealth and give wealth sounds pretty clear, doesn’t it? You can grow your income, maintain that wealth, and give wealth to those in need.
You can keep investing, start new business endeavors, work part-time and vacation more, and whatever else- as long as you’re keeping yourself out of debt.
You can also donate money to charities and be more generous in many aspects of your life, with your time and your money.
Baby Step 7 UPDATE: Keep Managing Your Money
I don’t have much to add onto Ramsey’s last step, because you really should keep building wealth as you go and donate money whenever possible.
But I feel like he doesn’t stress how much you want to create strong spending habits and learn how to invest wisely.
In one thing I read, he also mentions how people should stick with mutual fund investments to get 12% returns every year, but my research found that you really won’t earn more than 8% on average.
Mutual funds are still a good pick, but I suggest you aim to diversify your portfolio as much as you can to maximize returns.
For use, once we got a starter emergency fund set and knocked out $40k+ in debts, we used Fundrise to start investing in real estate.
It’s a great platform to start investing in real estate because you only need $10 to get into fractional shares.
Final Thoughts
I think that Dave Ramsey’s 7 Baby Steps can give you the kick start you need to get our of debt and start investing, but you need a bit more to get it going!
Most people have some debt (whether it’s credit cards, student loans, or a mortgage), and many people could use help with balancing out all the other aspects of a good financial portfolio, such as retirement savings or an emergency fund.
We have seen it for ourselves that even when we thought we had things under control, there was still room to learn from others and improve our efforts.
If it wasn’t obvious to you yet, Dave Ramsey’s Baby Steps aren’t perfect, but they can overall give you an idea of how to do better with your money.
They could help someone who wants to achieve financial freedom- but there needs to be some changes to help more people achieve that independence!
