Money Management

Dave Ramsey’s Baby Steps: A CFP’s® Pros, Cons and Verdict

steps to cash sign sun background

It’s hard to get where you want to go if you don’t have any goals and plans for how you’re going to get there. That’s why I strongly believe in financial goal setting – it puts you in the driver’s seat. It’s your life – you shouldn’t just be a passenger.

When it comes to financial goal-setting, the most well-known framework is Dave Ramsey’s Baby Steps.

While the Baby Steps have helped tens of thousands of people get out of debt, are they indeed the best path?

This article will:

  • Review Dave Ramsey’s Baby Steps
  • Provide smart tips to get through the Baby Steps faster
  • Offer my own take on each step, as well as other important factors to consider

Let’s dive in…

Baby Step # 1: Save $1,000 to Start an Emergency Fund

Quick Summary

Emergency funds are the cornerstone of any financial plan. They’re your base. You can rely on this money to help you weather life’s storms. This amount is a good goal – it’s enough to give you some peace of mind without feeling overwhelming.

Tips for Success

  • The best way to do this is to focus on saving more first. Cut out any unnecessary expenses. Do a 30-day savings challenge.
  • Give yourself a deadline. You can do it. And if you fall a little short, you’ll at least be better off than you were a month ago. That’s still a victory for you.
  • Get a bit extreme. It’s OK to get a bit extreme here. Remember, it’s only a month and it will pass quickly. This sounds odd, but you may look back and actually enjoy it because you’ll be so proud of yourself. Think about the sense of accomplishment you’re going to have.

Does It Make Sense?

This first step is an important one – start it today. Not living from paycheck to paycheck is a life changer. It allows you to breathe and worry less.

Baby Step # 2: Pay off Debt Using the Debt Snowball Method

Quick Summary

This method, known as the debt snowball method, you’ll pay off your smallest debt first. If you have two credit cards, for example, you’ll pay the one you owe less on first. You’ll do that even if the interest rate is higher on the other one.

The idea behind this is that paying off that first debt quickly will keep you on track and fired up.

Tips for Success

  • Behavior can trump math. Researchers for the Harvard Business Review found it’s best to pay off smallest debt firsts because it is motivating.
  • Sell your way to success. You can make big strides by selling stuff you own. If you have something worth hundreds of dollars that you aren’t using, you could put it to work for you by selling it instead. That will chip away at the interest that is accruing while that item just sits in your home untouched.
  • Pick the low-hanging fruit. Take advantage of quick-saving wins such as trying to find cheaper insurance.
  • Don’t let bad decisions in the past continue to set you back. If you’ve overspent on a car or purchased whole life insurance, undo that damage. Sell the car, and cancel that policy. If you made a mistake, get yourself out of it without beating yourself up.

Does It Make Sense?

I’d definitely pay off any high-interest debt first, especially anything over 10 percent. You can’t get ahead when you’re paying that much interest.

What about low-interest debt? Say, you have student loans at 5% interest. Should you pay that off before investing?

Personally, I’d invest, especially if there’s a 401(k) match. The interest on student loans can also be deducted, so there’s a big opportunity cost.

In the end, do that math and trust your gut. The most important thing is to stick to a plan.

Baby Step # 3: Save 3 to 6 Months of Expenses for Emergencies

Quick Summary

You have your basic emergency fund already saved up from step #1. But this step will protect you more by giving you a bigger cushion for more catastrophic events than your refrigerator conking out or an unexpected doctor’s visit.

Tips for Success

  • Again, make it a challenge. Try to do it fast because it will stop you from giving up. Set a goal and make it aggressive.
  • Take up a side hustle that has some big potential. You can make a lot of progress in a few months. This will be one of the single biggest ways you can make headway on this baby step.
  • Look for a higher paying job. A 10 to 20% bump in salary, means a lot more money going towards your goals.

Does It Make Sense?

I have several thoughts about Baby Step # 3.

  • Six months is a lot of money to have saved up – it may be more than you need. Analyze your situation, risk, and make sure you’re taking everything into consideration.
  • The biggest risk for most of us is losing a job. That is one of the biggest risks you need to analyze by determining how much of a risk is it. Are you in a field where you can easily replace your job if your company has layoffs? Then maybe you can get by with three months of expenses. If you’re married and not working for the same company as your spouse, it’s unlikely you’d both lose your jobs at the same time. If that’s the case, you won’t need to replace all of your expenses – just the portion your paycheck was covering.
  • Open a high-interest savings account. It’s best to put your emergency fund in high-interest savings. That way it’s earning interest, but still is easily accessible.
  • You could also save this money in a Roth IRA and put it all in cash. You can start taking advantage of the contributions by doing so. Then if you have a true emergency, you can take your cash out without penalty.

Baby Step # 4: Invest 15% of Your Household Income Into Roth IRAs and Pre-Tax Retirement Funds

Quick Summary

Here you’re saving 15% of your income for the specific purpose of retirement.

Tips for Success

  • Start with your 401(k) employer match. That’s free money, and you should always take any free money that’s available to you.
  • Keep an eye on fees though. Not all plans have equal fees and high fees can cut into your long-term growth.
  • Know the alternative options. If your employer doesn’t offer a match and has high fees, consider an IRA.
  • Start with where you’re at. If you can only save a few percent, do it. Strive to start with at least enough to get your full company match so you aren’t leaving money on the table. Then reevaluate your savings percentage every three months or so and challenge yourself to add another percent. It might take you two, three, or even four years to build your way up to 15 percent, and that’s ok.

Does It Make Sense?

I think 15 percent is a good target to reach. Invest 15 percent for 30 or more years and you’ll have enough to retire.

Plan to retire early though or if you’re starting later in life, and you’ll need to invest more.

Don’t limit yourself here. Think about what you want in life and figure out how much money it will take to reach those goals, whether it’s traveling the globe or retiring early.

If you’re not the savviest investor out there, don’t be intimidated. It really can be as simple as throwing it all in a Vanguard Target Date Fund or, for really hands-off investors, choose Betterment.

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

Quick Summary

Having enough money to send a child to college weighs heavily on most parents’ minds. Everyone wants to see their kids succeed and college can be a big step toward a secure future.

But don’t feel pressured to derail your future to put a child through college. It can be a big relief to children having a parent who is financially secure enough to take care of themselves in their golden years.

Tips for Success

Does It Make Sense?

A common mistake here is skipping over step # 4 to start saving for college.

But don’t.

You must remember to put yourself first. That may seem to be the opposite of what you think a good parent should do, but it isn’t. A cash-strapped elderly parent can be a huge burden for an adult child to bear.

Keep that in mind when figuring out how much to save for college. You can borrow money for college, but not for retirement.

Step # 6: Pay off Your Home Early

Quick Summary

For most people, a mortgage is the biggest financial commitment they have. It can be incredibly freeing to pay that off.

Tips for Success

  • Increase it little by little. One year, my goal was to add an extra $100 to my mortgage payment each month and it worked.
  • Don’t be afraid to make an extra payment in the middle of the month. That can cut years off a 30-year mortgage when you do it on a semi-regular basis.
  • Take advantage of bonuses. When you come across a large sum of money, like a tax refund or bonus at work, put it toward your mortgage.

Does It Make Sense?

There’s nothing wrong with paying your house down early. It’s certainly the right move for many. But as always, realize the opportunity cost – you might be losing more money long-term by not investing more and paying your mortgage instead. Is paying off your house early indeed the best use of your money? Only you can tell that.

One other thing to keep in mind is that this isn’t mutually exclusive – you don’t have to choose between paying off your mortgage early and investing more. Say you have $500 left over at the end of the month, consider investing $250 of it and putting $250 toward paying off debt.

Baby Step # 7: Build Wealth and Give

Quick Summary

While money isn’t the most important thing, building wealth does give you freedom and open up opportunities for you. And if you’re smart with your money and you decide to share it, it can benefit other people as well.

My Take

You’re going to make a lot of decisions in your life based on money. You might as well give yourself the freedom to make decisions that are truly best for you by being in control of your finances.

Even if you determine these steps aren’t all going to work for you, implementing some of them will help secure your financial future.

Dave Ramsey’s Baby Steps Pros, Cons, & Verdict

What’s to like about Dave Ramsey’s Baby Steps?

  • They are easy to follow
  • They focus wisely on behavior over math
  • They offer a sensible path towards reaching financial freedom

What’s not to like?

  • They are very rigid, which may make them a suboptimal path for some
  • A six-month emergency fund can take years to build up
  • They don’t put enough focus on your own goals or situations, e.g. someone in their 50s who hasn’t started saving for retirement will need to save a lot more than 15%

I think it’s important to understand how and why the Baby Steps work. They’re certainly a great starting point for many.

However, don’t stop your financial education with these seven steps. Read more good personal finance books.

Set your own financial goals.

And continue to invest in yourself.

You’ll find a path that’s right for you.



R.J. Weiss
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner™, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.

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