Check my summary of Dave Ramsey baby steps, a system that helps people get out of debt, start saving money, and achieve financial freedom.
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Dave Ramsey is a financial guru, a finance coach, a best-selling writer, and the creator of Dave Ramsey Baby Steps. His book, Dave Ramsey Total Money Makeover, is a New-York Times best-seller with more than 5 million copies sold should be in the library of everyone who aims for a better financial future. His famous Baby Steps helped a lot of people to take control of their finances.
Dave Ramsey’s baby steps are a money management system with several milestones, and that leads to financial stability. They seem to help a lot of people to take control of their finances. Therefore, I feel it is important to share Dave Ramsey baby steps here so that more people can improve their finances.
Dave Ramsey’s Baby Steps
Here are the famous Dave Ramsey Baby steps that will lead you to financial success:
- Step 1: $1,000 in an emergency fund.
- Step 2: Pay off all debt.
- Step 3: Three to six months of expenses in savings.
- Step 4: Invest 15% of income into pre-tax retirement plans.
- Step 5: College Funding for your kids (529 plan).
- Step 6: Pay off home early.
- Step 7: Build wealth and give.
Implementing these steps will help anyone lead a full life without debt burden and retire and help kids. In general, a smart way that will help you to figure out how to manage your personal and your household finances, keep the right priorities, and secure the emergencies.
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Some people feel that Dave Ramsay baby steps are outdated or can’t be a solution to fit everyone. No doubt that there is no one solution for all. But in my opinion, these milestones are very valuable, effective and practical. In fact, I use all of these steps (except for step#5, because I don’t have kids. Yet), and I’m prepared for unexpected expenses, and feel secure about my future.
Step 1: Keep $1,000 in an emergency fund.
The first Dave Ramsey baby step is to set aside some funds for emergencies and unexpected expenses. Sometimes out of the blue things happen, and it is easy to overcome difficulties when you have an emergency fund. Of course, some emergencies may cost a lot more than $1,000. But having at least some amount set aside will keep you safe and be a huge help. Moreover, you may adjust this amount to your needs and understanding, but make sure it is at least $1,000.
Step 2: Pay off all debt.
The second baby step from Dave Ramsey is to pay off all debt except mortgage (it will be a separate step). A lot of people spend way too much and find themselves with a huge debt. Moreover, a lot of people think that once they pay off the debt, they are good. Partially it is true, but we need to take more actions to find ourselves in a better position, and paying off the debt is one of them.
Dave Ramsey offers to pay off the debt using the snowball method. The snowball method means listing all debts by dollar amount, lowest to highest, and paying them off in that order. This is not the smartest way to pay off the debt, comparing to the stacking method (when you pay off the debts with the biggest interest rates first).
Why Dave Ramsey chooses the snowball method, in my opinion, is because it is the best way to motivate yourself to pay off debts. Think of this: you start small and pay off your way up. It is nice to see that you’ve paid off several credit cards, even though the amount may be small.
Anyway, choose whatever way you like, just make sure to get rid of debt. A huge help in paying off the debt sooner can be reducing expenses and incorporating frugal living tips.
Step 3: Keep 3-6 months of expenses in savings.
Number three says to keep separate from the emergency fund another safety amount to cover up to six months of expenses. This amount will help you cover basic expenses, such as rent, utilities, groceries, etc. in an event when you lose your job or will decide to leave it and look for better opportunities. Actually, Dave Ramsey says to have 3 to 6 months’ expenses, but from my personal experience, three months is too short to find a decent new job and actually start making money. Therefore speaking from my personal experience, I’d suggest you have an amount that can cover at least six months of your expenses set aside in a separate account.
If you have no idea how much you need, try Mint, a budgeting tool. It will show you how much you spend on a monthly basis, help budget the expenses, and keep track of it.
Step 4: Invest 15% of your household income into pre-tax retirement plans.
Once you’ve paid off the debt and set up emergency funds and savings for 3-6 months of expenses (please aim to have six months of expenses set aside), it is time to secure your future. Dave Ramsey step number four says to start saving for retirement with pre-tax retirement plans.
This step is very important and has to have an individual approach for everyone. Research retirement plans, talk with your employer, and find a financial adviser to make the best decision on what retirement plan to choose.
One thing I can recommend is the book The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement by David McKnight.
This book turned upside down my understanding of retirement plans and options one can have. It will give you a pretty good understanding of what you can do to prepare for retirement financially.
Step 5: College Funding for your kids (529 plan).
Skip this step if you don’t have kids. That’s easy. But for all of you lucky parents, after taking steps towards securing your financial situation, it is time to help your kids with education.
If you wonder why investing in your kids’ future go after investing in your retirement plan, check my post about how it is important to invest in yourself. Invest in yourself first because if you are in a bad position, how can you help anyone else?
Moreover, it is nice to have some motivation for your children to work hard and learn how to take responsibility for their own life.
Step 6: Pay off home early.
Pay off your mortgage as early as you can. No matter what interest rate you have, you still pay money to the bank and not only towards the principal. Therefore payoff your home as early as possible to avoid paying extra to the bank.
Step 7: Build wealth and give.
The last Dave Ramsey’ Baby step encourages to make money work towards building wealth and help others who are in need. There are tons of investment opportunities and smart ways to make extra cash in terms of building wealth. As for helping others, I think it is a great thing to do so. Share your blessings with less lucky guys to show them that the world is a kind place with opportunities for anyone.
Final thoughts on Dave Ramsey Baby Steps
Think of Dave Ramsey’s baby steps as a road map that will definitely lead you to a secure financial situation. You may and probably should adjust the steps to your life situation as there is no one-solution-fits-all. But following these steps is a smart way for anyone who wants to find themselves in a better financial position.