Who is Dave Ramsey?
We will start off by talking a little bit about Dave Ramsey. If you have already heard of him, you can skip this section and keep reading. For those of you who haven’t, he is a financial guru known for his aggressive tactics to get out of debt and live a fulfilling financial life.
He believes that every single dollar in your budget counts and should be allocated somewhere before it starts disappearing. If ever there is a time in your life where you have to live off of beans and rice to get out of debt, then that is what you have to do. He is arguably most well-known for his 7 Baby Steps.
The Dave Ramsey 7 Baby Steps are what he learned when pulling himself and his family out of debt before becoming a financial icon. This plan was made to help you put yourself on track and prioritize things in a specific order for the greatest results. It is a simple idea that anyone can follow to get where they need to be. You don’t need an overwhelming number of books or a plethora of knowledge to have financial stability. You just need to do things one step at a time.
So, what are The 7 Baby Steps?
Baby Step 1 – $1,000 to Start an Emergency Fund
Dave Ramsey recommends putting away $1,000 dollars in an emergency savings fund as the first priority. This is to be used ONLY on unplanned emergencies. Having this account takes the burden of an unplanned expense so that your primary budget doesn’t have to. If you ever tap into this account, the priority will always be to replenish it as soon as possible, no matter what step you are on.
Baby Step 2 – Pay Off Debt Using the Debt Snowball
Next up is to use the debt snowball method to pay off what you owe. The only exception to this would be your mortgage if you have one. Prioritize your debts based off of the LEAST amount owed. As you pay each one off, you take the amount from the previous debt and add it to the next one.
| Debt Name | Total Balance | Minimum Monthly Payment | Interest Rate |
| Credit Card 1 | $2,000 | $100 | 14% |
| Credit Card 2 | $4,000 | $200 | 19% |
| Student Loan | $15,000 | $155 | 4.7% |
Using the debt snowball method, you would start by paying the minimum balance on all your debts. Afterward, you will put every extra dollar to pay off Credit Card 1 with the $2,000 balance, even though its interest rate is lower than your other credit card. The mindset here is to pay one off FAST to keep your head in the game and to stay motivated. (If you want to avoid paying that extra in interest, check out my version of the baby steps here).
After Credit Card 1 is paid off, you will take that $100 you were previously spending and add it to the next debt with the lowest balance. Meaning you are now paying the $200 minimum plus a $100 principal payment on Credit Card 2, totaling $300 each month. After that is paid off, those $300 are going to act as a principal payment on top of your minimum $155 payment on the student loan.
Baby Step 3 – 3 to 6 Months of Expenses in Savings
Once all your consumer debt is paid off, it is time to beef up your emergency savings fund. Pour all your extra money in there to build a safety net that would provide the same standard of living for your family over a 3 to 6 month time period.
Baby Step 4 – Invest 15% of Household Income into Roth IRAs and Pre-Tax Retirement
Dave Ramsey recommends investing 15% of your gross income into Roth IRAs or a different pre-tax retirement account. There are two key concepts here: gross income and pre-tax.
| Income Type | Definition |
| Gross Income | What you earn before taxes and deductions are taken out. |
| Net Income | The amount deposited in your account each month (take-home pay). |
He recommends Roth/pre-tax accounts because they allow you to defer your tax savings. This allows you to pay taxes as your money enters the account so that later in life, when you withdraw the money, you don’t pay taxes! In a Roth IRA, you also get the benefit of growing tax-free on your gains. If you are looking for more information on this, check out this article on Roth vs. Traditional IRAs.
Baby Step 5 – College Funding for Children
Next up, start saving money for your kids’ college fund. The average amount of student loan debt for college graduates is $35,000! You can set them up for success by choosing one of the following investment vehicles:
| Investment Account | Details |
| Education Savings Account (ESA) | Invest up to $2,000 every year. Grows tax-free for educational expenses. |
| 529 Plan | Contribution limits and rules vary by state. A great alternative if you do not qualify for an ESA. Do your research! |
| UTMA/UGMA Account | A Uniform Transfer/Gift to Minors Act account. Can be used for things other than college, but think carefully before choosing this route. |
Baby Step 6 – Pay Off Home Early
Life looks good. You have no consumer debt, money is stacked up in the bank in case of an emergency, and you are taking care of your future as well as your kids’. Now it is time to get rid of your mortgage if you have one.
A little goes a long way here. Try to find ways to save money in other parts of your budget and put any leftover money at the end of the month toward your mortgage. Pick up pennies on the street, roll coins once a year, and put a lump sum toward your mortgage. Don’t go crazy with your taxes and stimulus checks—put them to work! Think of how much freedom you’ll have after you make that last payment and that house becomes your fully-owned home.
If you don’t have a mortgage already and think it’s time to purchase a home, Dave Ramsey recommends you do it with cash money. If that’s just not feasible, then find an affordable home with a 15-year fixed-rate mortgage.
Baby Step 7 – Build Wealth and Give
You and your family have been set up for a bright future, and the time has come to let your money grow. Keep looking for ways to build wealth and give back to others. Many people believe giving to those in need is good for your well-being, and science backs this up. Check out this Harvard study to read more: Money spent on others can buy happiness.
Find a charity that interests you or aligns with your values and start giving. Take a front-row seat to watch the impact, or peek from behind the scenes. I remember reading a story where somebody gave their waitress a $100 tip. He left as soon as he could and watched her reaction through the restaurant’s window from his car. She never had a chance to thank him, but that didn’t matter. What mattered was to give and pass on kindness.
That is an overview of the Baby Steps that Dave Ramsey put together. Again, if you have struggled with where to start on your financial goals, this is your sign to start here! Start now. This is a great way to lay down the foundation of your financial future. If you’ve already read his book “The Total Money Makeover” and are hungry for more, I have a few recommendations here: [Link]. Let us know in the comments below what step you’re on, and be sure to follow us on social media if you need a little bit of a support group!