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Does the name Dave Ramsey ring a bell? If you’re interested in personal finance, you’ve probably heard of Ramsey, one of the most famous personal finance “gurus” around. Ramsey is most well-known for his step-by-step advice. Specifically on how to save, pay off debt, and build wealth, which he calls the “7 Baby Steps.”
Personal finance can feel a bit overwhelming and even daunting at times. Paying off your debt? Saving for your kids’ college education? Building enough wealth to give it away? You might be thinking, “I just want to make it until the next paycheck. Those goals are for someone else."
If that’s you, you might want to look into the 7 Baby Steps and see how they can change your life. The 7 Baby Steps is not necessarily the plan for everyone, and certainly not the only financial plan or advice out there. However following these steps is a great place to start if you want to get your finances on track, and are ready to commit to the process.
In this article, I’ll go over the 7 Baby Steps, the benefits of implementing them, and some tips to help you get started. I'll also hopefully, help you answer the question – should you follow the Dave Ramsey 7 Baby Steps? Let's get into it.
What are the Dave Ramsey 7 Baby Steps?
Once you’ve committed to getting your finances in order, it’s time to get to work. But first, you need to understand what the Dave Ramsey baby steps entail so you can decide if it’s right for you. Here they are:
Step 1: Save $1,000 for your emergency fund
An emergency fund is so crucial to your overall financial security and success that it’s the very first thing you should tackle. There are countless reasons why you should have an emergency fund, the main one being you never know what expenses will come up in life.
Instead of having to rely on credit or borrowing from another source, setting aside at least $1,000 in a liquid fund (such as a savings account) will serve as insurance for life’s unexpected events. Remember, this is just the start. You’ll see in a couple of steps that the goal is to build up that emergency fund even more, but $1,000 is a great start.
Step 2: Pay off all debt (other than your house) using the debt snowball method
Probably the most famous step among the Dave Ramsey baby steps is the debt snowball method. Using this method, you pay off all of your debt (aside from your mortgage), including credit cards, car payments, and student loans, in a strategic way.
To tackle this step, first, you list out all of your debts and order them from the smallest balance to the largest balance. With the debt snowball method, you ignore the interest rates of the debt, so just look at the amount you owe. Using this method, you will pay off the smallest balance first while paying the minimum payments on the larger debts. As each small balance is paid off, move on to the next smallest balance (while always making minimum payments on all debt), until every single debt is paid off. Imagine how amazing that will feel!
Step 3: Save 3-6 months of expenses in your emergency fund
Now it’s time to get back to increasing your emergency fund. With all of your debt paid off, you’ll likely have extra income to put toward your emergency fund. Increase your savings so that you have three to six months’ worth of expenses in your liquid emergency fund. This way, you’ll be prepared for almost any surprise that comes your way. For instance a job loss, illness, or major home repairs.
Step 4: Invest 15% of your income in retirement
There are many different investment vehicles to choose from when it comes to investing for your retirement. For this baby step, it doesn’t matter what type of fund you invest in. It could be a Roth IRA, 401(k), or something else. You just want to make sure you put 15% of your household income into that investment.
Step 5: Save for your children’s college fund (if applicable)
If you have children or are even thinking about having them one day, it’s never too early to start planning for college. At this point in your financial journey, you will be in the position to focus not just on your future (retirement) but on your children’s futures as well. Custodial accounts, Education Savings Accounts (ESAs), and 529 plans are all great options to look into to help save for college.
Step 6: Pay off your home early
By this step, you will have long since paid off most of your debt, and all that will be left is your mortgage. There are key factors to take into consideration when paying off your mortgage early. For instance, being aware of possible prepayment penalties. However, if you are in the position to free yourself from house payments earlier than expected, imagine what kind of freedom that would bring? For an easy way to estimate how much more you owe on your mortgage and how paying it back early will save you on interest, check out this handy calculator.
Step 7: Build wealth and give
With no debt, robust emergency savings, a funded retirement, and savings for your kids’ education, you’ll be in the envious position of building wealth. You'll also be in the position to give to causes that are meaningful to you. With no financial burdens left to tie you down, you can live life exactly as you wish without worrying about money.
Should you follow the Dave Ramsey 7 Baby Steps?
These steps might sound like a lot of work, and, in truth, they are. But they are also worth it. Some of the many benefits of following Dave Ramsey’s baby steps include:
It’s easy to follow
Even if you are new to the world of personal finance, the baby steps are straightforward. There are also online communities dedicated to the baby steps that you can find with a quick Google search. This is a great way to find like-minded people on your journey and stay accountable. There are also plenty of resources out there that can help you along the way, so there’s no reason not to give it a try.
It’s free (or almost free) to follow
You don’t have to pay anyone to teach you the 7 Baby Steps method. And you also don’t have to buy tons of resources in order to get started. You might want to start your journey by picking up a copy of Ramsey’s bestselling book, “The Total Money Makeover,”. But this is optional as the steps are well documented online including in this article!
It actually works!
This is perhaps the best motivation of all – this process actually works! There are countless stories of people following the method and successfully freeing themselves of their debt. If you need some inspiration, check out Naseema’s story. She followed the baby steps and managed to pay off $300,000 of debt in just twenty-one months!
How to get started with the Dave Ramsey 7 Baby Steps
Has reading this overview of the 7 baby steps helped you decide? Well, if you’re ready to get started on step #1, you should:
Decide why you want to achieve financial freedom
Even before you begin looking at your financial numbers or trying to figure out where you can save, ask yourself why you want to do this work. Why now? What is your motivation for financial freedom? Are you overwhelmed and want to calm your mind? Do you want to buckle down and free yourself of your debt years before you thought was even possible? Whatever your reason, think of what it is. This will serve as your motivation on days where your progress might be slow or you might be tempted to give up.
Pick up a copy of Ramsey’s book (your library probably has a copy you can borrow for free!). You can also read through his website to get a good understanding of the entire process and the work it’s going to take. By going into it with a good idea in mind of what the 7 baby steps actually involve, you’ll be more likely to stick to the program and succeed.
Make the time
Once you get going, the beauty of the baby steps is that it doesn’t really take any time to keep the process humming along. You should, however, schedule some time for yourself to read and implement the lessons learned. Starting by tackling and understanding baby step #1 and how you’ll plan to complete that step, and moving on from there.
Commit to change
Paying down your debt and investing in your future will involve lifestyle changes (such as budgeting and cutting back on expenses), so prepare yourself for this. For some, it might even involve an entire overhaul of your spending and savings. If you can, try to get your partner and other family members on board with the process, too (especially the big spenders!). This is because while you can certainly spearhead the journey, it will be much easier to achieve your financial goals if everyone in your household is just as committed as you are.
This might be the most challenging part, but it’s crucial to your success, and that is, have patience! This journey takes time (a lifetime, actually), but as many can attest who have completed the Dave Ramsey 7 Baby Steps over the last couple of decades, it is well worth it!
Ready to take some baby steps of your own?
The question we asked in the beginning was, should you follow Dave Ramsey’s 7 Baby Steps? The answer, hopefully, is clear if you want to get out of debt, plan for your future, and build wealth. Committing to and implementing this method will certainly help you reach that goal.