A Review of Dave Ramsey’s Baby Steps to Financial Freedom

A Review of Dave Ramsey’s Baby Steps to Financial Freedom

Dave Ramsey’s Baby Steps is a financial plan designed to help you get your finances in order, get out of debt, and achieve financial freedom. Dave Ramsey has taught these Baby Steps to millions via radio, The Total Money MakeoverFinancial Peace University, and on DaveRamsey.com. But how practical are these steps? I offer a review of each step in the process so that you can decide whether or not Baby Steps will work for you.

Baby steps
Photo by billerr via Flickr

Dave Ramsey’s Baby Steps

Dave Ramsey’s financial plan includes 7 steps:

  1. $1,000 to start an Emergency Fund
  2. Pay off all debt using the Debt Snowball
  3. Three to six months of expenses in savings
  4. Invest 15 percent of household income into retirement savings
  5. College funding for children
  6. Pay off home early
  7. Build wealth and give!

The first thing I’d like you to note that Dave’s plan is NOT the only financial plan. However, it is a good plan and it works for a lot of people. It’s a good place to start if you’re looking to get out of debt and get your finances in order. Realize that Dave’s plan focuses on psychology more than mathematics, and this is one reason why it works better for so many people.

Baby Step 0: The Unlisted Step

I have seen different variations of Baby Step 0, but I think everyone agrees that the most important thing that one must do before embarking on the journey that encompasses the Baby Steps is to make a commitment to change. Some people get into financial trouble due to bad luck, but most get there because they make bad financial decisions and engage in bad money habits. For these folks, the very first step is to change these bad habits and make a commitment to turn things around.

Articles that discuss Baby Step 0

Baby Step 1: $1,000 to start an Emergency Fund

The first official step of Dave Ramsey’s Baby Steps is to start an emergency fund. This even takes precedence over paying down debt. The key reason to start an emergency fund is to prevent you from slipping back into the mindset of borrowing to deal with financial problems.

How to build your emergency fund

This is where making changes to your spending habits will come in handy.  Review your expenses and find ways to save money. And if saving money alone is not good enough, you should figure out how to earn more money.

Where to keep your emergency fund

Despite the current low-rate environment, the best place to keep an emergency fund is in a good online savings account.


Although I believe having an emergency fund is important, I prefer paying down debt to starting an emergency fund. I am not alone on this; Suze Orman supports this method in her book: Suze Orman – For the Young, Fabulous & Broke. In any case, either method should work fine for you.

Articles that discuss Baby Step 1

Baby Step 2: Pay off all debt using the Debt Snowball

debt-snowballThe second step is to pay off your debts using the Debt Snowball method. The only exception is mortgage debt, which shouldn’t be included in your Debt Snowball. The Debt Snowball method is a technique that helps you focus on paying off your smallest debt first, so that you have a greater ability to pay off the next smallest debt (click on the image on the right to see a full explanation of this method).

Baby Step 1.5: Negotiate Interest Rates On Your Debts

Before I talk about where I deviate from Dave Ramsey’s plan, I should note that there’s a worthwhile step to perform before starting your debt snowball. This step is all about lowering the interest rates on your current debts. Here are some ways you can reduce the interest rates on your loans so that more of your payments go to reduce principal amounts:


I’m not a huge fan of the Debt Snowball. I acknowledge that Dave’s method is psychologically powerful, especially when you’re able to eliminate your first debt quickly. However, my preference is for the more mathematically efficient method of paying off your highest interest debt first. You can follow the Debt Snowball technique, but start with your high interest debt rather than the smallest balance.

There is no “right” or “wrong” way to pay down your debt; do what works for you and is most likely to result in your success.

Articles that discuss Baby Step 2

Baby Step 3: Three to six months of expenses in savings

Now that your debts are paid off, Dave Ramsey puts you on the fast track to building your financial security. This is where you add everything you can to your emergency fund so that you’ll have a bigger cushion against emergencies.

I agree with Dave here — with two reservations. First, I think a bigger emergency fund is necessary because it could take a long time to find a new job. Second, my preference is to keep money in a high interest savings account as opposed to a money market account, since many money market accounts come with inconvenient minimum balance requirements that can result in fees if not met.

Articles that discuss Baby Step 3

Baby Step 4: Invest 15 percent of household income into retirement savings

At this point in the Baby Steps financial plan, you have no debt except for the house (if you own one) and a large enough emergency fund to cover 3 to 6 months of your living expenses.

Step 4 is the first step in your journey toward active wealth building.  As you read steps 5 and 6, you’ll notice that Dave Ramsey advocates a balanced approach to wealth building. He suggests that you divide your money among investing, paying off your home early, and saving for college.


I offer several key counterpoints for Baby Step 4:

  • 15% depends on your age — I think 15% is a good guideline. However, you’ll need to save considerably more if you have less than 35 years to invest for your retirement. Conversely, you need to set aside less if you start young. Why does age matter? Because you need time for compound growth to work. If you need more proof, I offer an article that shows you the effect 10 years has on compound growth.
  • Traditional 401k versus Roth IRA — If you don’t have the option of investing in a Roth IRA, don’t overlook the traditional 401k. At minimum, invest enough in your 401k to fully capture your company’s matching contribution. Once you do this, the Roth IRA is the next best thing.

Articles that discuss Baby Step 4

Baby Step 5: College funding for children

If you have children that will be going to college (or if you want to go back to college yourself), Dave’s plan encourages you to put some of your income toward college savings. Dave doesn’t want you to save for college using insurance, savings bonds, zero-coupon bonds, or pre-paid college tuition. Instead, he recommends Education Savings Account (ESAs) and 529 plans.

How much to save

As always, the answer to this personal finance question depends on many factors in your individual situation. Like Dave, I want to emphasize that saving for your retirement takes precedence over saving for your children’s college expenses. As a guideline, I think it’s fair if you can help your children fund 2 years of public college; 4 years at a public university is good, and 4 years of a private college education is more than necessary. Here’s a good article that discusses whether or not you should pay for your children’s college education or make them work for it.

To figure out the right amount for your situation, use the guidelines in this article to determine how much to save college. However, I plan to modify the advice given in the article in three ways:

  • It’s safer to assume 6-8% return rate at this point. I don’t think we will see the 10-12% return rate we have seen in the past.
  • The plan should account for increasing bond-to-equity ratio as your child approaches college age, with the portfolio composed entirely of fixed-income investments by the time your student is a senior in high school. Shifting the asset allocation of the college plan can protect the portfolio against catastrophic loss in the event of another stock market crash just before your child heads to college.
  • Account for a lower return rate as the years progress to account for greater bond-to-equity ratio.


I’ve discussed Dave Ramsey’s college advice in the past. Although the argument against Dave is less relevant now, the article still serves as a good starting point to understand the differences between an Education Savings Account (ESAs) and a 529 plan.

Articles that discuss Baby Step 5

Baby Step 6: Pay off home early

If you are able to do everything described so far, Dave wants you to think about paying off your home mortgage sooner (as opposed to increasing your investment contribution or adding more to college savings for your children).

Key points that Dave makes regarding this step includes:

  • When selling a home, think like a retailer.
  • When buying a home, think like an investor.
  • Never get more than a 15-year fixed mortgage.
  • Don’t tie up more than 25% of your income in house payments.


I think this step works well for many people. It’s certainly a good and balanced approach if you’re also investing and saving for college at the same time. I would not advocate paying off your home early if you have to sacrifice the other two.

However, I want to encourage you to look at all the pluses and minuses of paying off your home early before you dive into this step — especially if you are an experienced investor. Also, I believe that prepaying your home mortgage is NOT the best option in this economy.

Articles that discuss Baby Step 6

Baby Step 7: Build wealth and give!

At this point, you’re in better financial shape than you’ve ever experienced before. And it’s up to you to continue to build on the momentum and grow your wealth. Also, you are now in a position to give — whether it’s your money or your knowledge. Giving is a good thing.

Articles that discuss Baby Step 7

Additional Dave Ramsey’s Baby Steps Resources

So there you have it: Dave Ramsey’s Baby Steps in a nutshell. With this plan as a template, you’re ready to beat credit card debt, build your emergency fund, invest for your retirement, save for your children’s college education, and build wealth. You may also want to check out this article on Dave Ramsey’s Financial Peace University.

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A Review of Dave Ramsey's Baby Steps to Financial Freedom 1

44 thoughts on “A Review of Dave Ramsey’s Baby Steps to Financial Freedom”

  1. My biggest beef with step 4 is the expected return Dave touts for investing. He says you can expect to make 10-12% every year. Once you subtract fees, there is no mutual fund that averages 12% returns every year. So when he throws that into his calculations, he gets optimistic returns. Dave is great for debt reduction, but I really wish he’d adjust his investment numbers.

  2. heh… he claims to have a few funds that average 18% over time. And I don’t think he’s claiming that he gets that much of a return…he’s just stating the fund itself has that rate over a 10+ year period.

  3. Nice summation. I have been reading Total Money Makeover. Like any advice, I think you should take what will work and use it and discard the rest. I personally have a baby step 1 without knowing it. It has saved me from using credit cards and paying interest. I would not skip that step ever again.

  4. As you might guess, I love hearing about Ramsey’s Baby Steps… I simply can’t get enough of them! Even if folks disagree with some elements or pieces of his approach, the overall concept is both brilliant and simple.

    Thanks for sharing!

  5. @Weakonomist – I agree, his numbers tend to be very optimistic. I was watching Dave Ramsey’s Free Car Video and the numbers are not realistic at all.

    @Jim – Yes, that’s the logic behind his $1,000 emergency fund; however, I prefer to save some finance charges using the $1,000.

    @Dave – No, really? 😉

  6. I don’t agree with two points: The so-called debt snowball and the 15-year mortgage or less. The debt snowball will help you lose money by not paying the higher interest payments, as was mentioned in the counterpoints. Also, if you are stuck in a 15-year mortgage and fall on hard times, you can’t pay less. With a 30-year mortgage, you can always pay more.

  7. Dave is good for debt reduction, but I could never give up my credit cards, they provide so much freedom and I love the rewards.


  8. Not a bad summary. I’ve never read Dave Ramsey’s books, but it seems like a logical, if occasionally flawed plan for success. I think the second step as Ramsey describes it is better for those who need a quick(er) psychological boost, while paying according to the interest that’s charged makes more sense for the logically minded among us.

    I’ll also second the sentiments about investing 15%; while it might be enough for someone with three decades or more before retirement, if you’re starting later in life, increasing the savings rate to account for the shorter time period is your best bet.

  9. Even though they’re a great way to teach people a process for financial success, I think the biggest thing flaw of the Baby Steps is that it doesn’t account for short-term savings.

    When are you supposed to save the money to buy a house? How about for a new car?

    His advice is good for people who are in financial turmoil, but for someone just starting out, it’s not entirely realistic.

  10. @Jason – Nice catch regarding saving to buy a house. As far as a new car, Dave Ramsey advocates buying with cash. There’s a good video that explains Dave Ramsey’s Free Car For Life method. But if you’re good with money, you’ll notice a few inaccuracies. For example, ROI is too high, not accounting for taxes, registration, insurance, etc. However, it does convey the concept nicely.

  11. Great article. I love the “build wealth and give” step. For my wife and I, that’s our ultimate goal. To have enough that we feel like we can really make a difference. I’m not sure how I feel about paying off your house early though. If you bought a house at current interest rates (below 5%), you could be saving money in accounts that yield more than your mortgage rate. Hopefully HSBC, ING, and the rest of those online savings accounts will get back up to 6% and up where they belong.

    Actually, reading further it looks like you do mention that this step doesn’t necessarily apply to this economy. Hats off Dave – you nailed it.

  12. Wonderful and very informative, thorough post! I like Dave Ramsey’s idea of baby steps for investing — kind of reminds me of a presentation I recently saw on a book called The Power of Small — but I agree with some of your objections to his strategy, particularly your point on paying off your debt before building your emergency fund. After all, as long as we owe money to someone else, the money we save isn’t really ours — it’s the lender’s.

  13. The question seems more an issue of how much to put into an emergency fund before reshifting focus back onto paying down debt. I think it depends on how much someone’s self-assessment of job security is, as well as the type of lifestyle they lead – it they are out drinking, playing high-risk sports, and traveling a lot, then a biggest emergency fund should be set up. But for the modest, a three-month emergency fund is a good bare-bones minimum.

  14. @SavvyMoney – Good point. It’s similar to investing in a way. You have to understand your ability, willingness and need to take risk, then make adjustment accordingly. It’s not one size fit all.

  15. Just becoming aware of Dave Ramsey, seen a presentation, just picked up the book. He is a great presenter, I like what he says. This article is also great to point out variations. I guess I got some thinking to do, but regardless of what path, or alterations I make, Dave has me motivated to attack debt and begin building wealth ‘ full force’ or Gazelle intense’ as he calls it.

  16. @Rob – welcome to Moolanomy. Dave Ramsey is very popular debt reduction guru. Although his methods are not always the best mathematically, they works well for many people. In the end, you’ll have to find alternatives that work best for you.

  17. Baby steps could really mean a lot, especially in striving for financial freedom. It gives us specific goals to strive for and prevents us from being too overwhelmed by loftier goals. 🙂

  18. I’m trying to follow Dave’s guidelines. However, a few things don’t apply to me. I rent an apartment and I have about $45,000 in student loans. So I’m not sure where I fit in in all of this. Do I concentrate on step 2 and don’t do any of the other steps until $45,000 is paid off? That’s the only debt I have. Do I not contribute 15% to my Roth IRA until I pay the $45,000, do I not save for a home and continue to rent while I pay off the student loan? $15,000 of it is in private loans. Any advice?

  19. I just joined SavvyMoney since I like how it gives me a visual of my goal. I’m already a fan of Dave. I wish they would make his steps a part of every high school education. It’s very hard for me to not beat myself up b/c of the mistakes I’ve made in the past.

    I just wanted to add my 2 cents to the order of the steps: I returned to work in 2008 after being home w/my kids for 7 years & therin grew the debt. So I started off paying down the debt but lost track b/c it was so nice to have 2 incomes again (dumb, dumb). Fast forward to tax time, & we got slammed. $8K. So in order to prevent the same thing next year, hubby & I are maxing our pre-tax 401k/403b payroll deductions. I was thinking I should pay off the debt 1st, but there’s no way that would make sense for us.

    I should point out that we don’t have a house (yet), another needed source of tax deductions………….!!

  20. I’m following Dave Ramsey, and my financial house is getting into order, finally. I have a question for those of you who are more better at this than I am: I am working on Step 3, but I’ve already completed Step 4. I did them out of order. Should I now change things around, take the money I have that’s being directed into retirement and direct it instead into my 6 Months Savings step? I am 50 years old, just out of a 27 year marriage with zero savings besides my emergency fund. When I got my job two years ago I put the maximum allowable into all the retirement savings options I could because I am so far behind saving for the future. I am open to all advice. Thanks so much.

    • @Kathleen – Step #3 is a build on step #1 where you increase your emergency savings from $1,000 to 3-6 months worth of living expenses. If you don’t have one yet, I highly recommend that you start putting some money toward your emergency fund. As pointed out in the article, a high interest savings account is the perfect place for stashing your emergency fund.

  21. I should have been more clear. I have completed Steps #1, 2 and 4. Should I go back and complete Step 3 before going on to Step #4 even though I’m age 50? Maybe take half of what I’m putting into retirement and apply it to the 3-6 months Savings?

    • Step #4 is an ongoing thing, so completed is a relative term. In any case, I assume your retirement savings is in some sort of an IRA account. If that’s the case, you can’t go back and withdraw your money prior to 59 1/2. If you do, you’ll have to pay the early withdrawal penalty and potentially taxes.

      In any case, you should have an emergency fund. The way to accomplish this now is by saving a little bit of money each month and put it toward your emergency savings as opposed to retirement savings. For example, if you have extra $100 at the end of each month and you were putting that toward your retirement savings, you could instead put it toward emergency fund savings until you have 3-6 months worth of living expenses — after which you could resume your retirement savings.

  22. I have read Dave Ramsey’s book. I agree with most of it. I dont agree with putting 15% of your income into a roth IRA right now. We are in a recession. We are going to do a double dip soon. All those people including me who trusted the government put $ into our IRA’s and 401K. Look what happened gone. So I am leary to trust banking institutions ever again.

  23. What I feel is we should have a savings. not touchable except emergencies. We should live within our means. Not what we want but what we need. We should buy cash as much as possible. And we should ultimately own a home somewhere. Even in a crappy town thats cheap. There will be no social security when we get old. There will be no help at all. Due to trusting our government, our president, our state governers. Even our employers we the tax payers have been screwed. So apply dave ramsey. I will skip step four. I already own a home I couldnt pay off in 3 lifetimes so I will sell it when I get equity again and buy cash where ever I can. This horrific recession taught me alot. sadly our country let us down. Big Time.

  24. Baby step 0… the most important of all. You can make a heck of a lot of mistakes, and recover from all of them stronger and smarter as long as you make a real commitment to yourself, your family, and your future.

  25. Great overview, and I love the comment about Baby Step 0. In my mind, commitment is key, and you have to believe you can do it first. Once you make that decision, it is honestly not that hard. Make your plan/roadmap, and then stick with it! Keep up the great posts!

  26. Basically, one should try to save as much as possible, without being completely miserly and without it affecting your health.

    A simple tip to grow your savings is to simply spend less than you earn.

  27. We agree 100% with baby Step 0. The commitment to change and following through with it would accelerate the other steps. Most of us have a financial blueprint from our parents economy, things are different now. How many people have parents that can’t retire due to the state of their 401K? What about self-directing IRA’s? Instead of paying down a mortgage use the money to build assets? Enjoyed reading Moolanomy’s counterpoints! Financial Education is the key to all of the steps, commit to increasing it!

  28. I enjoyed reading your overview. My husband and I are currently on step 2. I have to admit that if you are not committed to change like you mention in step 0, then you will probably never get past step 2. I was a bit stubborn in embracing Dave Ramsey’s plan. But now that I am on board, we are full throttle in step 2 and should move to step 3 next year. It is so fulfilling to pay off each debt and to know that we are on the track to financial freedom. Great post and website!

  29. Gotta add a note to step 0. Dave recommends getting current on your bills before beginning step 1. We’ve been on his plan 3.5 years, have paid off $45K and are now on step 3.

  30. The people looking at this in a mathmatical standpoint completely miss the purpose. If you could do the math you wouldnt be in debt in the first place so there would be no need for you to read Dave’s book. Dave’s teaching are for those who have bad Money managment issues. At one time i was one of those. But I am currently about to be one of those debt free stories you read about. Dave’s plan is to make you think diffrently about money. I was 19 when i bout my first house and have paid alot of stupid tax along the way. I now am about a month from having no credit card debt and about 4 months from having no car payment….

    If you read with an open mind and see that what you are currently doing is not helping you build wealth but only debt then maybe you sould follow the steps laid out to you by a millionare.

    Id rather not take advise from a broke guy. Ive been broke but ill never be poor again…

    Thanks Dave for showing me they are not the same.
    When your poor your poor. but when your broke your just visting the poor side with no intention of staying.
    at 25 was about 130k in debt. at 26 im about 101k and at 27 will only be at about 88 and thats the house.

    so the basic 18 months to being debt free except the house isnt a smoke and mirriors. Im living proof.

  31. I have just started reading Dave Ramsey’s Total Money Makeover and am finally excited about our future prospects. Reading these posts and hearing all the success stories gives me inspiration and hope that we can and will be debt free in the foreseeable future! Congrats to everyone who is working through their debt and those who have made it through and are now saying they are debt-free!

  32. Brenda and everyone else, I would also highly recommend reading “Your Money or Your Life”. I think it is very complimentary to Dave’s program but I loved that it goes deeper into your relationship with money and the why and how to build wealth.

  33. Great article, I’ll have to check out his book. These bullet points make financial freedom actually seem possible! Thanks.

  34. To me the first 3 steps make absolute sense. Thereafter, adjust this plan if you can work out a better one tailored for your circumstances. If you prefer not to do that just implement the rest of the steps. You should be better than not having any plan at all. But being at step 3 is necessary and essential in life, it’s a life basic.

  35. Step 1: If you pay down your debt and neglect saving for emergencies, an emergency may arise (car breaks down, health problems, whatever) that will force further debt. $1000 in debt is worth at least $1100 when paying $60 a month. Imagine what you could have done with that extra $60 a month and $100 lost to a credit card (with a really good interest rate, btw). A $3000 emergency will cost almost $4500, and it get’s worse the higher it goes.
    Step 2: If I had $14,000 in credit card debt with three identical 13% interest rates and I paid off high to low, $10,000 first, $3,000 second, and $1000 third, I would bay almost $4200 in interest. The minimum payment on the $10,000 is $200, $3,000 80, and $1000 $50. I figure this by saying I can pay an extra $50 toward my debt, so high to low I pay $250, $80, and $50 respectively. I then pay almost $4200 in interest and it took me 4.5 years to do it. Now, if I had paid low to high I would have paid $100 on $1000, snowballing into going from $80 minimum payment to $180 payment on the $3000 at month 13 snowballing into going from minimum payment of $200 to $380 on $10,000 at month 27, and finishing debt after only 4 years. The mathematical difference on interest $4000 verses $4200 in low to high vs high to low. With these numbers there is no snowballing high to low because the high payment is still being paid off last. Now, if you raise the $3000 to $6000 you can snowball, but you will still pay $400 more in interest to pay high to low. Mathematically, your recommendation doesn’t work.
    Step 3: If you save up your 3-6 months worth of your salary I would hope a minimum starting balance wouldn’t be prohibitive and a 1.5% money market mutual fund beats your .9% any day.
    Step 4: This step has to do with more than age. Do you have pre-college age kids? Is your home paid of? If you answered “yes” to either of those hopefully you have more than 35 years to save. If you answered “no” to either of those, you can certainly save more than 15%.
    Step 5: Dave covers his bases on 529 vs ESA, that’s why he promotes 529 as an alternative, he just says to be careful with it. Alternatively, ESAs have higher potential in the open market.
    Step 6: It’s never a bad idea to make the effort to pay your house off early. Pay as much over as you can. Remember, you freed up all that money you were paying down your debt with every month? It can be done and should be done, whether it’s a month early or years early.

  36. I love ALMOST everything about Dave Ramsey. I would love to sit down and chat with him about many things, as he seems like such a great man. One area in which I find a bit of a divide is in paying off a home early in some cases. As a Financial Advisor and now a Financial Writer, many clients and followers have reached out to me asking me if they should pay off their home. I had a 28 year old that was running a business and had already paid off his mortgage of $350,000… His interest rate was right around 3.5%, far below the interest rate which a business loan would be if he wanted to expand his business. And at the age of 28, considering the fact that he had plenty of money and a successful business, why tie up so much cash? My personal recommendation is that it depends upon the age of the individual, if they have guaranteed income coming in to cover the mortgage (annuity, pension, etc.) and they have such a low interest rate, they can likely put their money into even a diversified group of bonds or very boring dividend paying stocks and likely make much more money, rather than tying up their money in their home.

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