Dave Ramsey’s Baby Steps Explained

I used to be one of those people who believed that debt was forever. The evidence was everywhere. Credit cards, car loans, student loans, personal loans, mortgages, etc. Everybody I knew had debt, it was normal. And so, for a long time, I thought that credit was the path to a prosperous life. That was true until I learned about Dave Ramsey’s Baby Steps.

Although only buying what you can afford in cash is not the norm, I have come to find out it is what wealthy people do. Perhaps the most passionate promoter in the United States of living debt-free is radio personality, Dave Ramsey. As he says, he teaches God’s and grandma’s ways of handling money.

His method, called Dave Ramsey’s Baby Steps, will empower you to transform your finances. But before I go over the steps, I must warn you. Following this process is going to make you feel uncomfortable. His advice on handling money runs counter to what many of us have believed for so long. But I can guarantee you something, if you follow this process with fidelity, you will see extraordinary results.

My Mission as a Ramsey Solutions Master Financial Coach

Since I started practicing Dave Ramsey’s Baby Steps, our finances have taken a considerable turn for the best. I believe in these principles so much that I became a Ramsey Solutions Master Financial Coach. I strive every day to empower others with knowledge. In this blog, I share practical tips to help you take control of your income, pay off debt, and improve your quality of life.

Now that you know that I am super Dave Ramsey fan let’s get into the nitty-gritty of the seven Baby Steps. You must follow these seven steps in this specific order to get the best results. Ramsey has been teaching this system for almost thirty years. It works! So, let’s get started.

Dave Ramsey’s Baby Steps Explained

1. Save $1,000 for your starter emergency fund
2. Pay off all your debt except for your mortgage
3. Build up 3-6 months of expenses in your emergency fund
4. Invest 15% of your income in retirement
5. Save for your children’s college fund
6. Pay off your mortgage early
7. Build wealth and be generous

1. Save $1,000 Emergency Fund

Baby Step 1, your first goal, is to save $1,000 emergency fund. If your annual salary is less than $30,000, then aim at saving $500.

Now, let’s be honest. When you are broke, saving $1,000 seems like a mission impossible. Not only that, every unexpected expense seems like an emergency. A flat tire becomes a $150 emergency. That $400 doctor bill becomes an emergency. Being able to pay the rent on time after they decreased your hours at work, definitely an emergency.

Many people have credit cards to cover emergencies, but the last thing you need in an emergency is to get deeper into debt. If you are really struggling with completing step one, chances are that you are not living on a budget.

Do I Really Need a Budget?

Totally! You should track your income and expenses every single month on paper and on purpose. Using an app or a computer program like Excel is fine as well. Whatever works, as long as you do it consistently. One thing is for sure, to save money, you need to control your spending. And you can’t control what you don’t track.

If you are not budgeting now, make sure to download my Free 3-Step Budgeting Guide. It will teach you how to do a budget, organize, and track your expenses.

Download your FREE 3 Steps Budgeting Workbook

The foundation for healthy finances is knowing how much money you make and where you are really spending it. A monthly budget or cash flow plan allows you to register your income and to make a plan on how to spend it.

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2. Pay All Your Debts Except for the Mortgage

After you save $1,000 emergency fund, Baby Step 2 is paying off all your debt. This step does not include your mortgage. Use the debt snowball method for the best results. It is the most effective strategy to achieve Baby Step two.

The Debt Snowball Method

There are many ways to pay off your debt. Some people try to tackle all their debt at the same time. They pay a little bit extra every month on everything, even the house, but gain no traction. Other people focus on targeting the highest interest rate debt first. However, in my opinion, the best way to get out of debt ASAP is the debt snowball.

To get the ball rolling, make a list of all your debts, from the smallest balance to the largest. Continue making minimum payments on all your debts. Then, focus on eliminating them one at a time, starting with the smallest one.

Once you have eliminated the first debt on the list, move on to the second one. You must focus on reducing one debt at a time as you continue making minimum payments on everything else.

3. Save 3 to 6 Months of Expenses

Once you finish paying all your debt, except for the house, you are ready to move on. Baby Step 3 is to build up your emergency fund. You should save enough money to cover 3-6 months of expenses. Notice that I said expenses and not income.

When you did your budget using my Free 3-Step Budgeting Guide, you figured out how much it costs you to live on every month. Multiply that for three and six. Save enough money within that range.

The goal of completing your emergency fund is to be prepared for the worst-case scenario. This money will help you survive if you, for any reason, stop making an income. This is especially important if you have a variable income, or work in an industry or company that has high turnover, or work for the Government and have to deal with their infamous shutdowns and furloughs.

Your fully-funded emergency fund should be kept accessible in a savings account. It will not earn much in interest, but remember, this is not an investment account. This is your rainy day fund.

When Should you Use your Emergency Fund?

An emergency fund should never be used to buy Christmas presents, go on vacation or go crazy on a shopping spree. Believe me, I would love to go crazy with my emergency fund at the mall!

This fund is only to be used to replace your income in case of a loss of income, an accident, or a health condition. Ideally, you should be putting money aside every month as part of your budget to cover expenses related to your car or home maintenance. So, unless something crazy happens, you should keep your emergency fund safe in the bank.

Do You Want To Improve Your Finances On The Go?

4. Invest 15% of Your Income in Retirement

You may have noticed that during Baby Steps 1, 2, and 3, we didn’t talk much about retirement. That’s because you should focus on becoming debt-free and building a fully-funded emergency fund before you start investing.

Some people want to start investing even as they are dealing with tons of debt. They have bought into the idea that the sooner you start investing, the better. In theory, that concept is correct. But in practice, it doesn’t work. Because to invest, you need money! Say what?

Listen, how are you going to have money to invest when all your income is committed to paying your bills? The reality is that when you are drowning in debt, there is no cash left to put aside for retirement!

Other people who are already investing think that if they stop, they will miss out on their employer’s 401k match. But we are talking about a temporary stop on new contributions. Your hopes for retirement will not vanish if you stop adding to your 401k for a few months, or even a couple of years, depending on what your debt snowball timeline looks like.

Stay focused for the best results

In the long run, you will have more money if you focus. When you try to invest, get out of debt, and save, all at the same time, you dilute your efforts. You gain no traction. By concentrating on one thing at a time, you will get the best results.

Dave Ramsey’s Baby Steps have been used by millions of people for almost 30 years to get out of debt and create wealth. Believe me, this method, as unconventional as it may seem, works!

5. Save for Your Kids’ College Fund

In Baby Step 5, you are totally debt-free except for your mortgage. Yay! You are also putting away fifteen percent of your income in retirement. Well done! You should keep doing this consistently, staying out of debt and stashing away 15 percent of your income in retirement, every single month, forever and ever. If you have any children, it is time to start saving for college.

My dad started working at age seventeen when his father passed away. I am not even sure my dad finished high school. He had to help support the household. First, he worked really hard for others, then he started his own business. He was an entrepreneur for over sixty years.

Giving us the best education he could afford was a top priority. From pre-K to college, my parents put my sister, my brother, and myself in private schools and paid cash for it. My sister and I also studied abroad.

Dad didn’t leave us an inheritance, but he gave us an education. My goal is to also pay for my children’s college. I want them to graduate debt-free. As parents, I feel like we have the responsibility to help break the student loan debt cycle for the next generation.

College savings plans

But we all know how insanely expensive college is. I realized a few years ago that if my husband and I wanted to pay for our kids’ education, we needed to start saving ASAP.

We set up a 529 College savings plan for each of our kids. Every month, we add money to their accounts. The contributions are after-tax dollars, but the investments grow tax-free. In other words, when we use this money in the future to pay for their college expenses, we won’t owe taxes on that money.

If you have children, I recommend that you get familiar with college savings plans such as the 529 Plan, Education Savings Account (ESA), or Education IRA. I do believe that sending our kids to college is an excellent investment. If you don’t have kids, you can skip this step.

Do You Want To Improve Your Finances On The Go?

6. Pay Off Your House Early

Baby Step 6 is all about becoming 100% debt-free, house and everything! At this stage of the game, you are debt-free except for your mortgage. You also have saved a healthy emergency fund, are investing for retirement and kid’s college. You live comfortably and have learned to control expenses and live below your means. Now it is the time to kick it up a notch and start paying extra on your mortgage.

What would you do if you didn’t have a mortgage payment? What could you do with all that extra cash every month? If that doesn’t get you excited, I don’t know what would! I can tell you that I would be doing a bunch of traveling. I want to see and show my kids this fantastic world.

Focus on making extra payments to your mortgage balance every single month. Getting rid of your mortgage sooner will also save you a ton of interest. Ultimately, having no debt at all is the fastest way to grow your net worth and build wealth!

7. Build Wealth, Enjoy it, and Be Generous

Becoming totally debt-free is my ultimate goal. I don’t have to worry about money, payments, the loss of a job. Forget about money worries or drama! I want to enjoy life and share my blessings with others. I am also not into lavish lifestyles. Instead, I like to keep it simple and feel at peace.

Every person’s idea of the dream lifestyle is different. When you are on Baby Step 7, you can afford to live it, and you should enjoy fine things and fun experiences. You deserve it! But you also have the means to make an impact in this world.

Some people start nonprofit organizations, other fund scholarships, and there is always that anonymous donor that buys Christmas presents for children in need. Whether you want to impact the lives of strangers or of your own family members, Baby Step 7 is all about generosity. Make a positive contribution to humanity. Go at it, have fun, enjoy your financial freedom!

In Conclusion: Dave Ramsey’s Baby Steps Explained

Dave Ramsey’s Baby Steps are the proven method that has helped over five million people get out of debt and thrive financially. I know that some of these recommendations may contradict many of our society’s norms. Many people cannot fathom the idea of living better debt-free. But, what is the alternative? Living trapped in the debt cycle with no path to financial independence?

Honestly, I would like to have learned about these Baby Steps over twenty years ago. Following this process right after I graduated college would have saved me a lot of money, stress, and pain. But it is never too late!

Start today and follow the baby steps in order:
1. Save $1,000 for your starter emergency fund
2. Pay off all your debt except for your mortgage
3. Build up 3-6 months of expenses in your emergency fund
4. Invest 15% of your income for retirement
5. Invest in your children’s college fund
6. Pay off your mortgage
7. Build wealth and be generous

The journey starts now!

The journey will not be comfortable. That is to say, it may take a while to finish paying off your debts. You will face challenges, and you will celebrate many wins. However, I am sure that when you achieve absolute financial freedom in your life, you will not regret it.

I would love to know what you think about Dave Ramsey’s Baby Steps. Please leave me a comment at the bottom of this post. I answer them all personally! Also, if you enjoyed reading this article, you can show your support by pinning it or sharing it on social media!

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Dave Ramsey’s Baby Steps Explained