Dave Ramsey’s Baby Steps Review and Analysis

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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 7 Baby Steps to millions via radio, The Total Money Makeover, Financial Peace University, and DaveRamsey.com. But how practical are these steps? I offer a review and my thoughts about each step in the process so that you can decide whether or not the Baby Steps will work for you.

Dave Ramsey's Baby Steps


Dave Ramsey’s 7 Baby Steps

Dave Ramsey’s financial plan includes seven steps:

  1. Save $1,000 for Your Starter Emergency Fund
  2. Pay Off All Debt (Except the House) Using the Debt Snowball
  3. Save 3-6 Months of Expenses in a Fully Funded Emergency Fund
  4. Invest 15% of Your Household Income in Retirement
  5. Save for Your Children’s College Fund
  6. Pay Off Your Home Early
  7. Build Wealth and Give

The first thing I’d like you to note is that Dave’s plan is NOT the only financial plan — for example, we offer a 12 Steps to Financial Success Plan that helps you achieve similar goals, but in a slightly different way.

Overall, Dave Ramsey’s Baby Steps is an excellent plan, it works, and it has helped a lot of people. It’s an excellent place to start if you’re looking to get out of debt and get your finances in order. Realize that Dave’s plan focuses more on psychology than mathematics, and this is one reason why it works well for so many people.

Baby Step 0

The official Baby Steps jump right into building a $1,000 Emergency Fund. However, there are a few preflight checklist items that must be addressed. Although the Baby Steps do not explicitly list them out, I am sure Dave Ramsey does advocate all the things I am about to list below.

In our 12 Steps to Financial Success Plan, we list out these three items before we get to the $1,000 Emergency Fund Baby Step #1:

Baby Step 1: Save $1,000 for Your Starter Emergency Fund

The first step of Dave Ramsey’s plan 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 setbacks.

What We Do Differently

In the past, I would have advocated paying down debt before starting an emergency fund. I was not alone in this; Suze Orman supports this method in her book: Suze Orman – For the Young, Fabulous & Broke. But over the years, I’ve come to realize the value of having this Starter Emergency Fund in place before tackling your debt.

Our success plan also advocates starting a small emergency fund, see FSP#4: Set Up a $1,000 Mini Emergency Fund. The plan also addresses these points:

  • 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 savings account — it is safe, accessible, and your money still earns some interest.

Articles about Baby Step 1

Baby Step 2: Pay Off All Debt (Except the House) Using the Debt Snowball

The second step is to pay off your debts using the Debt Snowball method, (except for your mortgage). The Debt Snowball method is a technique that focuses on paying off your smallest debt first so that you have a greater ability to pay off the next smallest debt faster.

Dave Ramsey Debt Snowball

What We Do Differently

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. It uses the same framework, but you pay your highest interest debt first. For our version, see FSP#5: Pay Down Your Debt.

Ultimately, 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.

Power Tip: There are circumstances where it is actually better to invest some money first before you pay off your debt. See detailed discussion here: Should You Pay Off Debt or Invest?

Articles about Baby Step 2

Baby Step 3: Save 3-6 Months of Expenses in a Fully Funded Emergency Fund

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.

What We Do Differently

For this step, I feel it is more important to start building your income and do some basic investing before building a fully-funded emergency fund. In our Financial Success Plan, we deviated from Dave’s as follow:

Articles about Baby Step 3

Baby Step 4: Invest 15% of Your Household Income in Retirement

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.

What We Do Differently

TIP: 15% is a good starting number, but this might not be the right number for everyone.

FSP#7 helps you customize your Personal Financial Plan, so we diverge from Baby Steps even more. For our version:

  • FSP#8: Invest Your Money. While we think 15% is a good starting number, but this might not be the right number for everyone. For example, someone in their 20s needs to invest a lot less than 15% vs. someone in their 50s need to invest far more. And depending on your other goals, you may not want to save 15% into your retirement accounts.
  • FSP#9: Buy a House. Dave Ramsey’s Baby Steps assume you already own a home (see BS#6). Our plan doesn’t make that assumption and explicitly added this as a step in your Financial Success Plan. At some point in time, you might be investing less for retirement to save money for a home purchase. Since homeownership is such a vital wealth building block, I felt it is important to call this out in a separate step.
  • FSP#10: Manage Your Risks. Various risk management actions are discussed to make sure everything you’ve done so far is protected. Basically, this is the emergency plan for your financial plan.

Articles about Baby Step 4

Baby Step 5: Save for Your Children’s College Fund

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 an Education Savings Account (ESAs) and 529 plans.

For many people, this is a very important financial goal and we have a complete guide on this: Saving for College Education Guide.

What We Do Differently

For our plan, we prioritize things differently, so saving for college doesn’t have its own step, but it is a part of all the future planning. See FSP#11: Plan for the Future.

Articles about Baby Step 5

Baby Step 6: Pay Off Your Home Early

If you can do everything described so far, Dave wants you to think about paying off your home mortgage sooner (as opposed to increasing your investment contribution).

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.

What We Do Differently

I think this step works well for many people. It’s undoubtedly 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. Personally, I believe that prepaying your home mortgage is NOT the best financial option. If you don’t have the best mortgage, you should consider refinancing instead.

Articles about 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.

We like to give as well! Here is our FSP#12: Pay It Forward

Articles about Baby Step 7

Side-By-Side Comparison

Like I said above, there is no right or wrong plan, as long as you can use the plan to help you improve your finances. Here is a side-by-side comparison between the two plans.

12 Steps Financial Success PlanDave Ramsey’s 7 Baby Steps
#1 – Commit to a Plan

#2 – Track Your Income and Expenses

#3 – Score Financial Quick Wins

  • Reduce Your Expenses
  • Implement Easy Passive Income Ideas
  • Complete Easy Money Hacks
  • Contribute to 401(k) to Get All the Employer’s Match
#4 – Set Up a $1,000 Mini Emergency Fund#1 – Save $1,000 for Your Starter Emergency Fund
#5 – Pay Off All Debt, Except the House#2 – Pay Off All Debt (Except the House) Using the Debt Snowball
#6 – Increase Your Income and Begin Investing

  • Invest in a Roth IRA
  • Contribute to Health Savings Account (HSA)
  • Contribute to Flexible Spending Account (FSA)
#7 – Complete Your Emergency Fund and Personal Financial Plan#3 – Save 3-6 Months of Expenses in a Fully Funded Emergency Fund
#8 – Invest Your Money#4 – Invest 15% of Your Household Income in Retirement
#9 – Buy a House

#10 – Manage Your Risks

#11 – Plan for the Future

  • Save for Your Children’s College Education
  • Retirement Planning
  • Long-Term Care Insurance
  • Estate Planning
#5 – Save for Your Children’s College Fund

#6 – Pay Off Your Home Early

#12 – Pay It Forward#7 – Build Wealth and Give

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.

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the weakonomist
the weakonomist
15 years ago

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.

Christopher J.
Christopher J.
15 years ago

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.

15 years ago

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.

15 years ago

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!

15 years ago

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.

15 years ago

This is really an excellent list. I am beginning to plan my finances and your post served as a guide. Thanks!

15 years ago

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.


15 years ago

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… Read more »

Jason Unger
15 years ago

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.

15 years ago

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… Read more »

15 years ago

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.

15 years ago

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.

15 years ago

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.

15 years ago

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. 🙂

15 years ago

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… Read more »

James Parker
James Parker
14 years ago

Great and nice post this is fully all rounder post covering all sides! Good work

14 years ago

For all those that did not follow this plan at least they still have a reverse mortgage as an option.

14 years ago

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… Read more »

14 years ago

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… Read more »

14 years ago

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?

13 years ago

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.

Dave Ramsey’s Baby Steps Review and Analysis

by Pinyo Bhulipongsanon time to read: 9 min
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