If you’ve been around the past few years, you’ve probably heard the name Dave Ramsey.
The ups and downs of the economy have helped popularize his teachings about saving, eliminating debt, and sound investing.
Perhaps you’ve been curious about Dave’s Baby Steps, and whether or not you should give them a go.
For those of you who aren’t familiar, here they are listed below:
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Dave Ramsey’s 7 Baby Steps
- Save up $1,000 to start an emergency fund.
- Pay off all non-mortgage debt using the debt snowball.
- Save up 3 to 6 months of expenses to complete your emergency fund.
- Invest 15% of household income into Roth IRAs and pre-tax retirement accounts.
- Work on college funding for children.
- Pay off your mortgage early.
- Build wealth and give!
I remember first watching Dave on Hulu.com and being very skeptical of the people who were screaming “We’re DEBT FREE!”
After all, could people really beat debt – something that our economy lives and breathes? And what was all this talk about paying off your home early? Isn’t a 30-year mortgage normal?
The more I listened to his show, the more I began to understand where my financial plan was falling short.
I was investing in volatile single stocks and thought I could get ahead in life by “smart” day-trading. I was a seeker. I was someone looking for the missing piece of the financial puzzle I’d been trying to solve for years.
After reading Dave’s New York Times bestseller, The Total Money Makeover, everything changed. The book was the piece of the puzzle I was missing.
It has been a little over a year since I’ve started Dave’s Total Money Makeover, and I’ve learned a lot about why the process works in real life. I’m currently on Baby Step 3, and will be finished building the 6-month’s worth of expenses emergency fund within a few months.
Top Three Reasons Why Dave’s Baby Steps Plan Works
There are several reasons why Dave’s 7 Baby Steps plan works.
Dave’s Plan Forces You To Get Gazelle Intense When It Comes To Paying Off Debt
As one who likes to save, starting with only $1,000 in the bank while we were paying off our debt pushed me to pay off debt faster. After all, I wanted to get to Baby Step 3 where we could save up lots of money in an emergency fund.
I’ve seen people get stagnant with with their debt elimination strategy because they have investments or other cash that puts them at ease. Too much money in the bank while you have debt can encourage you to hold onto debt longer, thus paying more interest.
Dave’s plan pushes you to get that debt out of your life.
Dave’s Plan Encourages Behavior Modification
This is a big one.
Many financial gurus claim that the key to wealth is getting the better interest rate, chasing your FICO score, or learning the “secrets” of financial freedom.
Dave, on the other hand, explains that we are responsible to produce a good income through hard work and diligence. He claims that the strongest wealth-building tool we have is our income.
As we were paying off our debt, our income quadrupled because we sought higher paying jobs in order to complete Baby Step 2. If we want to win, we must make serious sacrifices and live like no one else so later, we can live like no one else.
Dave’s Plan Frees You To Focus On One Step At A Time
In a culture where multitasking is often encouraged, Dave has a different strategy: focused intensity.
Baby Steps 1-3 are completed consecutively. Baby Steps 4-7 are completed concurrently in a prioritized order.
All extra money after budgeted expenses goes to whatever step you are currently on. Focusing on one step at a time allows you to dedicate your energies toward learning all you can about the main task at hand.
No distractions, no worrying about other steps. As you get closer to completing each step, you’ll have a burst of intensity to get that step done and out of the way!
Real Financial Peace Can Be Found
I finally understand what Dave means when he talks about financial peace.
Being out of debt helps you breathe easier.
Having a solid emergency fund frees your mind of worry and stress.
You’ll never know what a blessing it is to use a budget and have finances under control until you begin to work your way through Dave’s plan.
I challenge you to adopt Dave’s Baby Steps as a part of your long-term financial strategy. You can start by reading Peter’s fantastic review of Dave’s Baby Steps or the Financial Peace University class.
Then, go out and grab yourself a copy of The Total Money Makeover. Soon, you’ll be on your way to building financial wealth like you can’t imagine.
Have you worked through the Baby Steps Plan or taken the Financial Peace University class? Considering starting? Tell us about it in the comments.
They work over time. Not over night like most people want. It’s not an easy button…. stick to it and they work. Think years not months. If you want a quick fix to years of financial problems, good luck finding that.
I haven’t worked through the Baby Steps Plan other than mentally right now. But my friend is taking the Financial Peace University class now and loves it. I definitely hope to take it soon.
You can see an overview of the FPU class here: Financial Peace University
Thanks Peter!
my pleasure. :)
i think from a religious perspective, they work because they are grounded in some bible laws like giving to the needy, being good stewards for resources that God has given us, prudence etc
I couldn’t agree with you guys more. The Baby Steps definitely are grounded in the Bible. They do take time – it is not a get-rich-quick plan.
Good John, that is a great blog post
I keep telling people that savings is so important not just for you personally but for the country. Your own savings create liquidity in the market, which creates jobs, which means you can earn and save again. Its a wonderful cycle
Paying off my non-mortgage debt took me years. I think its a misnomer to call it a baby step. And it is misleading.
I also disagree with the premise behind the debt snowball.
Had I used it, it would have taken me longer to get out of debt.
These all make sense, but they are mis-labeled, and misleading.
I disagree. I don’t think it's misleading. I think they're labeled the baby steps because it breaks down debt reduction and growing wealth into 7 simple steps that are easy to understand. Because it simplifies things so that everyone can understand it is a much more successful program for people than those who don't have an easy plan to follow. I do agree that some of the steps will take longer than others for most people, but I'm not sure the "baby steps" is referring to how long each step takes.
I’m not sure I know why you disagree with the debt snowball, unless it is because you would rather pay off the debts with the highest interest first? In any event, there is something to be said for many debt reduction methods. What does the debt snowball have going for it? It gives you quick wins which help you stay motivated. And it will give you a bigger increase in cash flow due to less minimum payments, which can give you a better cushion – just in case.
The Debt avalanche (highest interest first) does have the mathematical advantage because you’ll end up paying less… if you can stay motivated. Either way – if you’re getting out of debt you can’t go wrong.
Here’s a look at the benefits of each: To Debt Snowball or Debt Avalanche, That Is The Question.
I recently discovered that Dave Ramsey is on a local AM radio station during my commute home from work. I have not listened to the news or conservative talk radio since I discovered this. His approach to financial management has helped millions.
I’m also curious David, what was your method of paying down debt that was quicker than a debt snowball. Before I started listening to Dave Ramsey I was implementing the debt snowball – and this was after my own analysis of my financial situation. I find it to be extremely successful.
Life is much sweeter after using the baby steps. Along the way being debt free i had a major stroke. By using the baby steps for years my family is not homeless. Follow the baby steps. Control your own life.
I just moved to baby step 3. Having the initial $1,000 in the bank and a zero balance budget while I paid off my credit card was an overnight weight lifted from my shoulders. Dave talks about the peace aspect of managing money and he is right.
The great thing about Dave Ramsey’s method is that it is based on real-world experience and testimonies, not mathematics (only) and theories. Sure, people may argue the merits of the debt avalanche (and in some cases, a hybrid approach may be ideal), but in the REAL WORLD, people need motivation to keep going strong. They need to see results. Remember, part of the reason many of us fall into financial ruin in the first place is lack of discipline, so that’s why the debt snowball is superior. Even Harvard Business studies confirm this method has the higher probability of success over the avalanche due to psychological reasons. As Dave openly admits, 80% of getting out of debt is behavior. Only 20% is math.
I have made a list of creditor debts and canceled my credit cards, except for my bank card, a debit card.
Am now paying off my card debt via the Snowball approach. However, I have one account that is billing me at 25%. I must concentrate on eliminating this larger debt before I return to the smaller ones.
Please advise
25% is really high. If you can I would try to get that debt into something with a lower rate if you can. Depending on what kind of debt it is, there may be loans or cards you can transfer that debt to. With that said, paying it off as quickly as you can is key. The snowball method will help you to have the quick wins you need to stick with it, and I personally am not against doing some hybrid method of the snowball when there is a debt that is at such a high rate – doing that one first.