Dave Ramsey’s Baby Steps and Why They Work


I am a huge fan of Dave Ramsey’s baby steps. He outlines the steps in his book, The Total Money Makeover. The baby steps helped us get rid of $52,000 in consumer debt in just 18 months. And we’re not alone.

Millions of people have taken his course and used them as well. This means you can be confident that the baby steps will help you. If you use them right, you will build a strong financial foundation for you and your family.

Today we’re going to go over each step in detail. We’ll explain how they are vital to speeding up your path to financial freedom.

Dave Ramsey’s Baby Steps

  • Baby Step 1 – $1,000 in an Emergency Fund
  • Baby Step 2 – Pay off all non-mortgage debt using the Debt Snowball
  • Baby Step 3 – 3 to 6 months of expenses in savings
  • Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
  • Baby Step 5 – Fund College for children
  • Baby Step 6 – Pay off your home early
  • Baby Step 7 – Build wealth and give a bunch away

Sounds doable, right? It is. But first I’m going to suggest an activity.

Determine Your “Why”

One way to motivate yourself to do the Baby Steps is to write down your “whys.” Your “whys” are the reasons you want financial peace. Everyone’s “whys” are different.

Maybe you want more time with family. Or you want to travel the world. Maybe you want to become a missionary and help people. Or maybe you want to start your own business.

The nature of the why doesn’t matter. However, it’s important to choose whys that are important to you. Why is this important? Because they’ll be the driving force behind completing the Baby Steps.

Use Your “Whys” for Motivation

Completing the Baby Step system won’t happen overnight. Ramsey says everyone can do it in seven years or less.

But seven years is a long time. Things happen. The furnace goes out. You need to replace a car. Sometimes you’ll get bored and spend extra cash. You might get stir crazy and take an unplanned vacation.

These types of life circumstances cost money. And you’ll need to take from your savings to pay for them.

That means the baby steps get put on hold. You might find that discouraging. If you get discouraged, you might want to give up. It’s easy halfway during the process to stop. You think “I’m doing better than most people.”

The temptation to give up can get strong. When that happens, revert to your list of whys. Post them on the wall in your office. Add pictures for inspiration. Look at that picture of your kids when you want to give up. Remind yourself why completing the Baby Steps matters. Then, get back on track.

If you have a setback, don’t give up. Instead, get up. Brush yourself off, get up and resume course. Use your whys to get yourself back on track. Keep them in the forefront of your mind at all times.

After you’ve got your list of whys, you can move on to the steps. I’ve listed them all and explained them well.

The Breakdown of Each Step

We’re going to help you figure out where you are in the process. This is important. Let’s start with a breakdown of what each baby step entails. See where you’re at and jump in on the step from there.

1. Save $1,000

Dave calls this step the “baby emergency fund.” It might seem silly to start by socking a grand in the bank. After all, you could be putting that money toward reducing debt. But Dave has some good logic behind this first baby step:

“Unexpected expenses happen to everyone. And for some reason, they tend to happen more when you’ve just committed to getting out of debt. In order to avoid being tempted to use your credit cards to handle these unexpected costs, save a quick $1,000 and put it aside as a buffer from those emergencies.”

So what happens if you’re paying off debt and you have an emergency? Use some of the money in your starter emergency fund. Stop paying extra on your debt for now. Pay cash for your emergency from the fund. Then, put any extra money into your starter emergency fund until it reaches $1,000 again.

After it’s at $1,000 again, you can resume the debt snowball. Handling emergencies this way will help ensure that your credit card balances continue to go down. They won’t go up due to emergencies.

Bonus: The starter emergency fund serves as training ground for paying for emergencies in cash. It helps you develop a habit of saving money too. At some point, you’ll grow your emergency fund to a higher balance. After you do that, you can start making your money work for you. How? Just open an interest-bearing savings account, like the CIT Bank Savings Account. They pay up to 2.15% interest on savings accounts.

2. The Debt Snowball

The debt avalanche (paying off debts according to the highest interest rate) will save money in the long run. However, the debt snowball is often a better choice for debt payoff. Why? Because it keeps people motivated. Getting debt free is a long journey for many. The debt snowball gives you quick wins from the start. The quick wins can motivate you to stay the course.

What is the debt snowball method? You start by listing your debts from smallest to largest. Make the minimum payment on all debts, except the smallest one. Put any extra funds toward the smallest debt until it’s paid in full.

Then, you tackle the next smallest debt on your list. Pay the minimum payment on that debt. Add in the minimum payment you were paying on the smallest debt too. Next, take any extra funds and put that money toward the next biggest debt. Do this until it too is paid off.

Keep using this method with all debts. Pay the minimum on them. Then add the minimum payments from the debts you’ve paid off. You’ve already been paying those payments. This means you won’t have any extra cash outlay. The extra money you have during the month are bonus payments. However, they add up quickly.

It’s easy to coast with the smaller amount of payments due. However, keeping your payments the same means you will pay off your debt at a faster rate.

Bonus: Being able to mark those smaller debts as “Paid in Full” faster will motivate you. It’ll give you faith that you can indeed win the battle against debt.

Download the Debt Snowball form below:


Debt Snowball Form

Debt snowball form

Where would you like me to send your Debt Snowball Form?


3. Finish the Emergency Fund

Ramsey’s next suggested baby step is to increase your emergency fund. You’ll save until it contains 3 to 6 months’ worth of household expenses.  It might seem daunting to save that much money.

However, Ramsey has a method for doing it quickly. If you’ve finished Baby Step 2, you are free of consumer debt. The only debt you have left should be mortgage debt.

Next, you’ll take the money you were using to pay down debt. Don’t coast on your new, smaller payments. Instead, take the money and make a “payment” to yourself. Use the money that you were putting toward your debt snowball. Make regular savings account deposits with it. Doing so should help you finish your emergency fund faster.

A 3 to 6 month emergency fund will keep you and your family protected. You’ll have a nice buffer against major financial emergencies. Troubles such as job layoffs and major home repairs won’t require credit cards. Instead, you’ll pay for them with cash.

Bonus: Developing a habit of saving BIG money will make you into a rock star saver.  It’ll make it easier for you to save for big things. We put money into a separate countdown fund for expected major expenses.

Then we can pay cash for things like cars and vacations. Learning how to save big money helped us do that.

4. Maximize Retirement Investing

Look at you now! Your consumer debt is gone. You have an emergency fund that’s fully funded. It contains 3 to 6 months’ worth of expenses. Next, Ramsey suggests maxing out your retirement investing.

For 2018 this means contributing up to the legal maximum allowed by the IRS. That maximum is $18,500 a year for 401(k)’s and $5,500 a year for IRAs. Ramsey suggests saving 15% of your income.

If you can do that without going over the IRS limits, go for it. Note that those 50 and over can add more cash to retirement accounts.

  • $6,000 to their 401(k)
  • $1,000 to their IRA holdings.

These are called “catch-up” contributions. If you can make them, do it. Maxing out your retirement investing helps ensure your golden years will be secure. The more you save, the more comfortable you’ll be.

5. Prepare the Kids’ College Funds

There’s one thing I like about the college section of the Total Money Makeover book. Ramsey is clear that college doesn’t guarantee career success for your kids. He goes into great detail about how important it is to calculate the cost vs. the benefit of college. Do this before you send your kid out to spend $25,000 a year on schooling.

It’s important during this step to talk with your spouse. Decide how much money you can afford to set aside for your kids’ education.

The dollar amount is up to you. Be sure you research the different college saving options too. Make sure what you plan to contribute to your kids’ college educations is affordable for your family.

In addition, make your plan clear to your kids. They should know what to expect from you where college financing help is concerned.

As a final tip, consider college alternatives. You may end up saving big money in the process. Here are some ideas:

Consider Trade School

Your child may be happier in a trade school. He or she might be better suited for a trade. There is a shortage of workers in fields like:

  • electrical
  • plumbing
  • heating, ventilation and air conditioning
  • construction

And other trades. Because of the shortage, trade schools are often cheap. And they’re paying large salaries to those working in trade industries. Talk to your child regarding their interests. They might prefer a trade over a desk job.

Take Some Classes at a Community College

Your child may be able to complete general classes at a community school. Community colleges are cheaper than universities. See if your child can take some classes at a community college. But check with his/her university to ensure the credits will be able to transfer.

Research Scholarships

Foundations and companies everywhere offer scholarships. In fact, Well Kept Wallet has started its own scholarship program. Get the details on the Well Kept Wallet Scholarship here.

Your local college financial aid office can help too. Scholarships can go a long way toward paying for college costs.

Using these tips can help you minimize college debt. Or you may be able to avoid it altogether.

6. Pay off the Home Mortgage

So you’ve paid off all of your consumer debt. You’ve got a fully funded emergency fund. You’re contributing at least 15 percent of your income toward retirement. In addition, you have a plan for contributing to your kids’ college educations. What’s next? It’s time to dump the mortgage.

Can you imagine being mortgage free? Not owing anybody anything? They say the grass feels different under your feet when you own your home. Now it’s time to find out.

You’ve created a solid budget so that you know where your money goes. Now take all of your extra funds. This includes funds that were going toward your debt snowball. And the amount you were putting in your emergency fund.

Put it all toward that mortgage loan. Get it paid off in full as soon as possible. Put any extra money toward the mortgage loan too. Extra money could include:

  • gifts
  • tax refunds
  • work bonuses
  • overtime pay

And any other money you don’t usually get. Since it’s unexpected money, you won’t miss it. Don’t spend it on other stuff. Instead, use it to get that mortgage gone.

The less interest you pay to the bank, the more money you have. You can give it to worthy causes and use it to fulfill your dreams. It’s your job to find out what those dreams are. Which leads to Baby Step #7.

7. Build Wealth and Give a Bunch Away

Here’s the best step! At least in my humble opinion. You don’t owe money to anyone. And you’ve got a nice stockpile of savings. What does that mean? It’s time to start building some serious wealth.

That wealth-building can come in a variety of forms. You can invest in mutual funds. Or, you can invest in real estate. If you want, you can sock the money away in a high-interest earning bank.

The goal is to put as much money as possible toward whatever your financial goals are. That might mean traveling the world. Or it might mean building your dream home. Maybe you want to live life as a philanthropist.

You’re completely debt free. Now you’re working at having amassed a serious amount of wealth. The world is your oyster, and your dreams are unlimited. How does that sound? Good?

Start working the baby steps in your life today. Work toward achieving all of your life’s goals.

Have you started working Dave Ramsey’s Baby Steps? If so, what was your experience like? Leave us a comment on our Facebook page. Feel free to share this post on your social media accounts too. Let’s help others get financially free. 

Great reminder of exactly what Dave Ramsey's Baby Steps are! (Plus a free debt snowball form, AND an explanation of why each of them work.)


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