Dave Ramsey's Baby Steps

Dave Ramsey’s Baby Steps to Financial Freedom

Today, we’re going to be taking a look at Dave Ramsey’s baby steps to financial freedom from his best-selling book The Total Money Makeover.

Now this book goes over Dave Ramsey’s seven Baby Steps that are so famous and that’s what we’re going to be covering in this post. We’re going to cover the seven baby steps as well as a couple of things that you should know as you’re going through each one.

1. The first step in Dave Ramsey’s Baby Steps is to Save $1,000

The first Baby Step is actually, probably the hardest baby step to get through and it’s to save $1,000 in cash as fast as humanly possible for your starter emergency fund.

Now the reason I say this is because the first step is probably the hardest step even though baby step 2 is probably going to take a lot longer for most of us is because it’s in this step that you finally make the decision to change your life, to finally take control of your finances and that itself can be extremely difficult

Because you have to get to the point where emotionally you’ve had it! you’re sick of being in debt, you’re sick of living paycheck-to-paycheck, you’re sick of being broke,  and you’re finally truly ready to make a lasting change to your financial life.

I also want you to take note of the fact that I said a starter emergency fund because this $1,000 is not going to be enough to catch all of the major catastrophes that life may throw out at you.

For example, if you get laid off at your job this probably wouldn’t be enough to sustain you for very long but it’ll sustain you for most of those smaller emergencies that come up.

Basically, it’ll create a barrier between you and Murphy, you know Murphy! He’s that guy with all those really negative laws like the one that says “if it can go wrong it will”, really a negative guy but a lot of us have seen them around our houses so often that it feels like he’s a first cousin. We don’t want that anymore.

In this starter emergency fund will hope to keep Murphy at bay. For some of us, it’ll also give us a sense of hope because money, for a lot of people, has become an enemy in their lives but a funny thing happens when you start saving for this starter emergency fund.

You realize that maybe even for the first time in your life you have tamed your money; you’re in control of it instead of it being in control of you.

It’s kind of a hard sensation to explain but the effect is Monumental.

So for the next month focus on just getting a $1,000 in cash as fast as you can for that starter emergency fund, If you have to get a part-time job or start selling so many things from your garage that the kids think they’re next, or if you do have the option work some overtime.

Whatever you have to do to get that $1,000 in cash as fast as humanly possible do it and then make sure to put it in a place that you cannot spend it easily.


I think the best example that I’ve heard of someone doing this has got to be from a lady who bought a frame and put ten $100 bills inside the frame then hung it behind her coats in her closet and wrote a note that said “in case of emergency break glass!” and let me tell you to this day I don’t think that glass is broken.

And the last thing that I want to say on this first baby step is I keep mentioning how you want a thousand dollars in cash and I mean that you want it in CASH. It must be liquid.

This is not money that’s supposed to be making you money (that will come later). This is money that’s meant to protect the money that makes you money.

So you don’t need to have this invested in CDs, you don’t need to have this invested in mutual funds, or anywhere else for that matter you want it in CASH and again in someplace that will be difficult for you to spend.

That being said let’s turn our focus on baby step 2 which is the debt snowball.

2. The Debt Snowball

Now, this is probably the concept that Dave is most famous for and this concept is mentioned in Dave Ramsey’s Baby Steps.

The debt snowball is where you take any debt that you have except for your house and you list it in order from smallest to largest balance and then you make minimum payments on all the debts except for the one that has the smallest balance and attack that one with a vengeance and pay it off as quickly as you possibly can using that same focus and intensity that you used in order to get that $1,000 starter emergency fund.

  1. List your debts from smallest to largest regardless of the interest rate.
  2. Make minimum payments on all your debts except the smallest.
  3. Pay as much as possible on your smallest debt.
  4. Repeat until each debt is paid in full.

Now, a couple of questions that you might have with this step would be: should you stop contributing to your 401k while paying off debts? And the answer might be a little bit shocking “YES”

Now that might seem counterintuitive because especially if your company matches part of your 401k contributions you’re basically throwing away free money and that is true however Dave believes, and based on my experience I would say that I agree with him, that the power of focus and quick wins are more important in the long-term to your Financial health than getting the match on a few 401k contributions.

When doing something as difficult and emotionally draining as paying off debt can be, we need that emotional reinvigoration that comes from seeing progress as we pay off those smaller debts. It gives as the hope and the will to fight on and continue to climb our way out of debt.

This is the same reason why we pay off the smallest balance first and not the debt that has the highest interest rate even though, mathematically speaking, paying off the highest interest rate is best.

But when you’re only looking at the math you’re ignoring half of The Human Condition. Humans are not machines, emotions play a big part in our decision-making and again we are much more likely to finish getting out debt if we see progress early on just like we’re much more likely to continue a workout routine if we see ourselves losing weight in the first few weeks.

The last thing that I want to mention on baby step 2 is what happens if Murphy happens to come back and drink some or even all of your starter emergency fund?

If this does happen you should stop paying off your debts go back get that emergency fund back up to a $1,000 in cash as fast as possible.

The reason for this is because if you don’t, Murphy may come again and since you no longer have an emergency fund in place to protect yourself you’re likely going to have to use a credit card to pay for that emergency and just picture the emotional and psychological effect this has on you when you’re trying to pay off debt and you’re actually making some progress but all of a sudden you’re moving backward.

You realize that because of this emergency you actually went deeper into debt then you were in originally and in a way, it was a waste of time.

That just kills any momentum that you might have built up to that point and puts you right back at square one and I like I said maybe even behind that.

We don’t want that to happen so if something does happen to your emergency fund, according to Dave Ramsey’s Baby Steps, you have to make sure you refill it and then go back to attacking that debt with a vengeance.

3. Get a full 3 to 6 months emergency fund

Baby step 3 is where you kick Murphy out for good because here is where you’re going to be building up a full emergency fund.

The rule of thumb is to always have 3 to 6 months worth of expenses in your emergency fund.

Now, the one thing that I never hear answered is how do you know if you should save 3 months or 6 months worth of expenses?

Well, the way I see is the purpose of an emergency fund is to protect yourself from risk. So the riskier your situation is the closer you should be to that 6-month under the scale.

For example, if you earn all of your money based on commissions or you’re self-employed you should probably have 6 months worth of your expenses in your emergency fund because if you lose your job it’s a 100% cut in your income.

This would also be the case if you have had some chronic medical problems in your family just because, again, your risk is higher so you want to be better protected.

But if you have a steady and secure job and you’ve been in the company for many years and everyone is healthy you could probably lean more towards that three months end of the scale.

And just like the other baby steps you attack this baby step with your full Focus, nothing else happens, you still haven’t invested a dime into your 401k or anything else, you’re just getting the emergency fund right now.

This leads us to baby step 4 of Dave Ramsey’s 7 Baby Steps which is where you can finally start investing for retirement.

4. Save 15% of your income toward retirement

I know it seems like it’s been quite a while, I mean you’ve gotten out of debt except for your house, you’ve gotten a fully emergency fund, and now you can start saving and investing.


I also want you to know that while baby steps 1, 2, and 3 are each done separately and one at a time, baby steps 4, 5, and 6 are actually going to be done at the same time. So just keep that in mind as we move along.

Now, baby step 4 doesn’t really cover any new ground. It’s basically what every other financial advisor has said, not that there’s anything wrong with that it’s still good advice, and baby step 4 says to invest 15% of your income toward retirement but since this is something that most of us have already heard before I want to take a moment and look back and see if it’s from a mathematical sense How much of a difference waiting to invest makes in the long run?


We’re going to use the examples of John and Jane, both make $48,000 a year.

John will be investing for his retirement from the age of 25 to 65 and he won’t be following the baby steps we covered so far he’ll just be investing the entire time.

Jane will be following Dave Ramsey’s Baby Steps so she won’t be investing right at 25 because she’ll be spending some of her time getting her emergency fund funded and her debt paid off.

Just to keep this simple I’m going to say that Jane’s only debts are $5,000 on her credit card which is charging her 18% interest and an $8,000 left on a car loan, her car payment is $500 a month.

And for the record John has the exact same debts, and again, he’ll just be making minimum payments on them instead of trying to pay them off quickly like the baby steps would have done.

 I’m going to assume that both of their living expenses are around $2,000 a month not including their car payment or the credit card payments. So how much of a difference would the two strategies end up making?

Jane’s case

Well, Jane makes $48,000 that’s $4,000 a month and we’ll say that she sold some stuff and gets that $1,000 starter emergency fund funded by the end of the first month. She is done with baby step 1 and can now begin to focus on her debts.

She’s making $4,000 a month and spending $2,000 a month to live, having the $500 a month car payment and the minimum payment on her credit card debt which let’s just say for this example is $150 a month.

That means that her total living expenses are $2,650 a month. This leaves her with $1,350 a month to put towards paying off her debts.

Now, because her credit card debt happens to have the lowest balance she will be paying that off first, it’ll take her about 4 months to pay off her credit card.

Next, she only has a car payment meaning that her monthly expenses are $2,500. So she has $1,500 extra a month to throw at her car loan and she’ll be debt-free in about 6 months.

After this, she has to start building that emergency fund. Let’s say that she decides to go for the full six-month emergency fund which, for her, will be $12,000.

And because she’s debt-free she has $2,000 leftover after expenses to build that emergency fund and let’s not forget the $1,000 that she already saved in baby step 1.

This means that in 5 and 1/2 months she will have a fully-funded six-month emergency fund.

So after about a year-and-a-half she is debt-free and has a fully-funded emergency fund, and she can now start investing $2,000 a month.

This gives 38 and a half years to invest and assuming that she puts in $2,000 a month and averages an 8% rate of return, she will end up with a net worth of $5,749,665.62

John’s case

Now let’s go back to John.

John started investing right at 25 as I said but because of the fact that he is not paying off his debts, he’s only able to invest $1,350 a month. If he does that for the full 40 years, again at an 8% rate of return he would have at age 65 an net worth of $4,378,577.98

That is a difference of almost 1.4 million dollars and I don’t know about you but to me, that’s quite a lot of money.

5. Save for College

Dave recommends using ESA or 529 Plans to save for college. now, ESA plans are the ones that he recommends most because as long as your income is under $220,000 a year at the time the book was written you could invest $2,000 a year from the day your child is born to the time he reaches age 18 and that would purchase you a pretty good chunk of tuition.

Especially when you consider that you can invest it in any mix of mutual funds and let that money grow tax-free.

529 Plans are a secondary option if you either need to save more money to pay off tuition or if you make too much money to be allowed to ESA plans. I should also note that most of the time your options are a little bit more limited using this plan.

6. Pay your home off early

This is very self-explanatory but there is one myth surrounding paying off your home early that I want to talk about.

The myth is that it’s wiser to keep your home mortgage in order to get the tax deduction however if you do the math you see just how wrong that is

For example: if you had a mortgage of $900 a month and of that payment $830 was going to interest.

That means you would have to pay about $10,000 in interest that year which creates quite a good tax deduction, and if you’re in the 30% tax bracket that means that you have saved yourself 30% of $10,000 or $3,000 in taxes.

However, how much were you paying in interest?

That’s right $10,000, so the logic here is that in order to save $3,000 in taxes we must spend $10,000 in interest payments. Now, is it just me or this just doesn’t make any sense.

Would you pay $10,000 in order to save $3,000? I wouldn’t either.

7. The last one in Dave Ramsey’s Baby Steps is to Build wealth

You saw how much money Jane ended up with earlier in the example. This is the step where you build that kind of stupid amount of wealth.

This is why you’ve been going through the baby steps this whole time and making all the sacrifices along the way in order to get out of debt, build up your emergency fund, and invest.

It’s so that you can live and give like nobody else because when it comes right down to it money is just a tool and there are probably a grand total of three things you can do with it:

  • Have fun with it
  • Invest it
  • Give it away

Now, you should do all of them, you should have fun with your money whatever that means for you because you did a lot of work and you sacrificed a lot to get here. This is your reward so have fun with your money.

You also need to continue to invest because it’s going to continue to grow the money that you have and that’s how you continue to win with money.

And you should give some of your money away. Honestly, once you get there you may very well realize that giving it away is the most satisfying thing you can ever do with your money just because it feels so great to help someone else who is truly in need whether they know it was you or not.

So that was The Total Money Makeover by Dave Ramsey and if you’re interested in this financial plan I do highly recommend that you check out the book for yourself because there are a lot of tools and other tips to help you figure out what to do with your own personal situation that I just can’t cover in this general summary.

Thanks for your time

This was my summary to Dave Ramsey’s Baby Steps that he covers in his book The Total Money Makeover. I hope you liked it and if you did then I recommend you to join my newsletter I post about money management and how to make money online.

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