Dave Ramsey’s Baby Steps Review

by The Happy Rock on November 17, 2008

baby-steps-literallyI have stated before that I am huge Dave Ramsey fan.  I think his approach to debt destruction is the simpliest and most straightforward approach.  It has broad application across all income levels and focuses on motivating people and changing their behavior.  I used the baby steps and the and free access to Dave’s radio show to eliminate $70,000 in 4 years.

There are officially 7 baby steps(1-7), but there is an unofficial pre-requisite that I like to put in there.

Step 0 – Stop going into debt : If you don’t stop the leak you will never be able to repair the damage.  Simple as that.

Step 1 – Save a baby emergency fund : Pay minimums on your debt until you save $1,000.   The purpose is to keep you out of debt when unexpected costs arise.  If you deplete this fund for anything, halt the baby steps and start at step 1 again.

Step 2 – Pay off all debts, except for a first mortgage : Do this using the ‘Debt Snowball’ which is paying minimums on all of your debt except the smallest regardless of interest rate. When that debt is gone, snowball all available money into the next smallest debt.  The point here is that small victories create confidence and motivation.  It changes your relationship with money and spurs you on to attack the rest of the debts.  This step is designed to be a full out frontal assault not a leisurely stroll through the park.  Sell everything that isn’t nailed down, cut cable, movies, eating out and use the extra money for to grow the snowball.

Step 3 – 3 to 6 Emergency Fund : Relish in being debt free except for a house while using the money to quickly store 6 months of expenses.  The purpose here is to shield you from major catastrophes which do happen like job loss, disabilities, fire, theft, etc.  Personally, accomplishing this was the single greatest feeling, even better than paying off our consumer debt.

Step 4 – Invest 15% of your income into your retirement : Use Roth IRA’s and pre-tax retirement accounts to purchase good solid mutual funds with solid track records.

Step 5 – Fund College Savings : Skip this step if it isn’t applicable or you aren’t planning helping the children financially.  Education Savings Account and 529 plans are good options.

Step 6 – Pay off the house. Use all extra money to pay off the house what will most likely only take a few years.

Step 7 – Build Wealth and Give.

I know that sounds simple and obviosuly there are nuiances to each step which aren’t covered like budgeting, insurance, and picking good mutual funds, but once you develop the discpline, control your spending habits, and change your money behavior during step 2 you will most likely have the energy and behaviors that will make all the rest seem like a cake walk.

{ 6 comments… read them below or add one }

Trevor November 17, 2008 at 1:39 am

Great tips.

Pretty much covers everything. I don’t think there’s anything that isn’t covered. When you’re in debt, you just supposed to save until you get out of debt again.


Frugal Dad November 17, 2008 at 10:32 pm

I’m a huge Dave Ramsey fan and have been equally inspired to eliminate debt (at nearly the same pace, though we’ve added a bit to the snowball payments as blogging income begins to materialize).


CreditZebra November 18, 2008 at 4:54 pm

great points. step 2 is indeed a great approach to motivate yourself.


TRCoach November 19, 2008 at 8:18 pm

Excellent post. I like the “Debt Snowball” – I have used it to clear my debt. “Build wealth and give” is important also. Although you can give and build wealth (versus waiting until you accumulate to give.)
Thanks, Tom (TRCoach)


Natururlaub November 30, 2008 at 1:25 am

Nice pointers you have here. I like how you use the “baby steps” to explain further. We must keep ourselves out of debt and the very basic thing we have to do is to stop going into debt…it’s as simple as that.


Jonathan@Friends&Money November 20, 2012 at 6:00 pm

Emergency funds are sooooooo important no matter what your income. If you can afford to save even a tiny amount it will really assist when you are presented with a substantial bill for car repairs, a boiler or other household emergencies. Like you I still love Dave Ramsey :)


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