Dave Ramsey’s Baby Steps To Financial Success

by Guest Blogger on 2009-03-0920

I’d love to be in a place where debt is dumb, cash is king, and the paid off home mortgage (instead of the BMW) is the status symbol of choice. Can you imagine living with a FICO score of 0? It’s all possible.

Dave Ramsey, Yet Another Financial Guru?

I’ve actually been following best-selling author and radio and television personality Dave Ramsey for some time now. He tells us that we can live this way, and he shows us how.

I’ve heard Ramsey’s story: he was one of those early accumulators who ended up losing his net worth as fast as he had built it. He had $4 million by the age of 26 but then declared bankruptcy after banks called all of his loans. Then less than ten years later, Ramsey was a millionaire again — but this time, he made his millions helping people out of the same jams he’s experienced. Interesting, how this riches-to-rags-to-riches story is such a familiar thread among many financial gurus (Robert Kiyosaki, anyone?).

Ramsey’s road to wealth does not use get rich quick schemes (he’s nixed those ideas that were responsible for his quick millions). Instead, his new path to wealth is based on seven simple, common sense “Baby Steps”.

Learn To Budget First!

Dave Ramsey, total money makeover

But before starting the Baby Steps, Ramsey teaches that you first need to have a budget — you need to tell YOUR money what it’s supposed to do. The first things on the budget should be food, housing, utilities, transportation (car payment, gas, tune ups, oil changes, etc.) and clothing. Any leftover money can be used to pay down debt.

If you’re serious about budgeting you can consider a software program that works for you. There are free systems out there, but the one I found most effective was this highly rated budgeting tool called YNAB or “You Need A Budget” for short (you can also visit the YNAB store on their site for other budgeting resources). It’s built on a savings paradigm intended to get rid of your debt quickly. It differentiates itself from most standard budgeting tools with its unique premise of providing you with a “forward-thinking” budget, one that keeps you aware of your saving and spending activities in advance (a month ahead).

Find out how to create an effective budget by checking out our YNAB personal budget software review. For Dave Ramsey’s Total Money Makeover book, here’s where to go.

In addition, here are some posts we wrote on how to make a budget and the Dave Ramsey budget.

Now after you develop your budget, you can start the Baby Steps program!

Dave Ramsey’s Baby Steps To Financial Success

1. Save up for a small emergency fund.

Save $1000 in a high yield savings account (not CD). Ramsey has found that when people resolve to pay off credit card debt, that is the week the car breaks down, or the refrigerator dies, or another emergency comes to tear down the perfectly-balanced budget. Having that small emergency fund can help keep Murphy’s Laws at bay.

2. Pay off your debts with the debt snowball strategy.

What follows are some great debt elimination tips. When you have your $1000 in the bank, it’s time to start attacking your debt. Baby Step 2 starts with a list of your debts (include your credit cards, car loans, student loans and everything except your mortgage) from smallest to largest regardless of interest rate. While making the minimum payments on all the rest, attack your smallest debt first. Throw every extra penny you have at it until it is gone. When the smallest is paid off, work on the next one, then the next, with all the extra money you can.

Baby Step 2 also encourages us to aggressively save everything we can, and to earn extra income to get things paid off as soon as possible. Some suggestions: Only go out to eat on very special occasions. Use shopping coupons. Resist the temptation to drive a “nice car”. Start an online business. Deliver pizzas at night. Get a paper route in the mornings. Sell on Craigslist. Earn and save money on used items. Have a yard sale and cash in on clutter.

Sell all that you can, such that — as Ramsey says often — “the kids think they’re next and the dog is hiding.” As the debts are paid off, close all revolving accounts (HELOCs, lines of credit, everything) and cut up all your credit cards, and try not to use them again.

3. Grow (or extend) your emergency fund.

After all of the debts except the house mortgage are paid off, quickly stash three to six months of expenses into an emergency fund and put the money into a money market account. This should only take a few months since you’re living on an established budget and have no more payments.

4. Save and invest for your retirement.

Baby Step 4 requires us to start saving for a dignified retirement. Put 15% (not including any employer matching) — and only 15% — of your household income into Roth IRAs, traditional IRAs and your company’s 401k plan. The money should be diversified into Growth Stock, Growth and Income, Aggressive Growth and International mutual funds with at least a 10-year track record.

5. Save for your child’s college fund.

Save for your kid’s college fund (in a 529 account like College Advantage, Ohio 529 savings plan) but put no more than $2000 a year, the maximum for a tax-free Educational Savings Account IRA, into each college fund. Depending on the age of your children, you may want to suggest that they help out financially, by having them work their way through college.

6. Pay off your home mortgage early.

When you reach this step, it’s time to put every extra penny toward your house payments in order to retire your mortgage as quickly as possible. Not only will this strategy open up tens of thousands of dollars a year in funds that no longer need to go toward your mortgage payments, it will also save you hundreds of thousands of dollars in interest payments over the life of the loan.

7. Continue saving, build your wealth, invest and give. Rinse and repeat.

After the house is paid off and everything else is taken care of, you’ll have so much less to worry about, even if pink slips are being handed out like candy. So sit back, save piles and piles of money, work on building your net worth and give some of it away.

Ramsey’s book, “The Total Money Makeover”, is — once again — on the New York Times Bestseller list. He hosts a call-in radio show (check local listings) as well as a call-in television show on the Fox Business Network during weekdays. His “Financial Peace University” offers in-depth, 13-week courses which teach time-tested and proven ways to manage money. Read more about him on DaveRamsey.com.

Contributing Writer: Rachel Strong

Copyright © 2009 The Digerati Life. All Rights Reserved.

{ 20 comments… read them below or add one }

TaxRacal March 9, 2009 at 3:40 pm

Paying off your low-balance debt first might be good psychologically, but it’s a very bad financial decision. Instead, you should pay off your highest-interest debt (probably credit cards) first. That way, they aren’t compounding while you pay off other kinds of debt.

It also doesn’t make all that much sense to have an emergency fund in the bank, as long as you have access to the money you’ll need.

I think Ramsey is coming up with very simple rules of thumb (the stuff that can be summed up in a soundbite that makes other people say “Hey! I could do that!”) but that isn’t the best advice possible. With a little tweak and a little more willpower, his suggestions could be changed in order to be much more rewarding.

Silicon Valley Blogger March 9, 2009 at 3:53 pm


I agree to some extent. I’ve read some criticisms that other financial bloggers have of Dave Ramsey. Though his steps may come across as somewhat simplistic to some, they’re still a good starting point and provide great guidelines for becoming financially successful. I prefer the “pay off the highest interest debt first” strategy as well, but there are many, many more people who love the idea of rapidly retiring existing debt — one loan at a time. And yes, the psychological boost may be what they need, even if it costs more.

As for emergency funds in the bank — find a place that’s liquid with easy access. These days, you can address an emergency with a credit card as well, but only do so if you can pay off the balance immediately within the month (and before the grace period is up). To many people, this idea may be a stretch, but it’s something I’d do. My high yield accounts may take longer to access, but I have them linked to my checking account for the quick cash turnaround.

al March 9, 2009 at 5:57 pm

Why only 15% of salary into retirement? I understand pay debt down first, but if you don’t have debt, why not put more in retirement, especially if you qualify for the tax benefits of a traditional IRA or savers credit.

Manshu March 9, 2009 at 6:11 pm

Personally, even though I know the math doesn’t work out in Ramsey’s method — I favor that one over the financially sound one. But that may just be because I am weak willed.

Ken March 10, 2009 at 3:03 am

I coordinate Financial Peace University at our church and it is a great program. Dave’s principles and steps are great. I can’t find anything out there that matches it. Anybody serious about managing money better has to know about him.

Dana March 10, 2009 at 4:22 am

I see the phrases “save” and “pay off” used repeatedly. Simple but true.

Sam March 10, 2009 at 7:07 am

Wow that is really good advice, no wonder he has made back his money with sound sensible advice. It is generally the unexpected stuff that catches us offguard. I have a full time job and although I earn good money I also work part time to bring in the extra money I save. I have an affiliate program which helps me with the extra cash and as I work on that I am not tempted to spend. Baby steps make all the difference.

Goran Web Design March 10, 2009 at 7:17 am

I like the opening piece of advice aimed at keeping Murphy’s Law at bay! I’ve lived my life pretty much debt-free for the past 7 years, and have even learned how to grow my own food, so I really see great value in this post. Shaking the debt is not easy, but the rewards sure are worth it!

Neal Frankle March 10, 2009 at 7:47 am

I respectfully take exception with some of the comments here.

Ramsey suggests these steps. Once you’ve taken them and achieved success, feel free to improve on them.

I’ve seen so many smart folks “outthink’ simple ideas that could really help. Just because something is straight forward doesn’t mean it isn’t useful.

Paul March 10, 2009 at 9:58 am

I’m actually taking Dave’s course at my church (week 5). He’s an entertaining speaker. Are his ideas anything that I didn’t know? No, I am aware of them all. They are not complicated, but they are difficult to implement (especially if you are married).
My wife is enjoying Dave and for the first time we are getting on the same financial page. So, don’t dismiss this, especially if you live with someone.

jim March 10, 2009 at 3:19 pm

So many people want to talk numbers whenever you bring up Dave Ramsey, but the point is personal finance, as much as you may disagree, isn’t about numbers… it’s about psychology. Everyone knows credit card debt is bad, but they get into anyway. Everyone knows spending more than you earn is bad, but they do it anyway. It’s because it’s about psychology and Ramsey knows it.

Do You Dave Ramsey? March 10, 2009 at 3:20 pm

As you might guess, I love hearing about Ramsey’s Baby Steps… I simply can’t get enough of them! Even if folks disagree with some elements or pieces of his approach, the overall concept is both brilliant and simple.

Thanks for sharing!

BobV March 11, 2009 at 9:17 am

I have to jump on the Dave Ramsey bandwagon as well. While I used a different approach to becoming debt free, I have seen for myself, many examples of people who have followed his plan and are doing incredibly well. I too have seen the arguments and critics of Dave Ramsey’s plan but it boils down to the KISS principle (keep it simple stupid). In particular, the snowball debt baby step works because of the psychological benefit of knocking those small debts first. In my Financial Peace courses, I encourage people to celebrate those accomplishments and then tackle the next one.

Alister March 13, 2009 at 5:11 am

If you can afford to be putting money in to your pension early, and paying off debts soon, it rarely makes sense to avoid doing so.

Ramsey has a few good pointers but it’s all mainly common sense really. Something a lot of people lack financially!

Stephanie March 15, 2009 at 10:12 am

My husband and I took the full 13-week Dave Ramsey University class at a local church last year. Is it the end-all, be-all financial program? I have no idea. Is having a plan and prioritizing debt elimination better than what we were doing (pretty much lost and goal-less)? You bet.

It dramatically improved our finances, our stress levels, and our marriage. If I’m leaving a little on the table financially, I’m fine with that.

Meaghan March 21, 2009 at 10:41 am

Great post!

Greg April 2, 2009 at 9:53 am

The reason Dave suggest doing it from smallest debt to largest debt is to give the debtor a sense of almost immediate relief, therefore encouraging him to continue to stick to the plan of paying off his debts. We realize that with a little more willpower you can save a few bucks and attack the higher interest rate debts first and it will save money in the long run and its what we “should” do, but lets face it, if the debtor really had the willpower to do that, they wouldnt be in such a mess to start with. The baby steps work and any plan that can be sustained is better than the best plan that can’t. In theory attacking the higher rates first is the ideal and for the people clearly ready to make the changes, it’s the way to go. I sure wish I’d been on his bandwagon 10 years ago, can you imagine all the great deals on cars, homes, vacations, etc, you can take advantage of because of our current global economic situation?

James Sanson January 3, 2010 at 12:19 pm

I saw a point made where you can use credit cards as an emergency fund. Right you can use a log floating in the ocean as a possible life saver, but a boat or raft, or a lift jack are better choices, right? Never ever plan your emergency around a credit card. I see so many of my contacts having their limits lowered or cards canceled — does that sound like a great emergency. Also the idea of an emergency fund is not to go negative, and using credit cards as an emergency fund means you are riding the edge of death, and so quickly able to go negative.

Jennifer_Miller June 2, 2010 at 12:40 am

Great idea to sell off second hand items in point two. As a new Mom it is a really worthwhile activity since baby items, toys and equipment are expensive but are only used for a short amount of time until the baby grows out of them. They might as well be sold on to others, so you can then use that money to buy more toys for the next stage in development.

Sharla June 12, 2011 at 6:40 am

Dave Ramsey’s book has completely changed our lives. We are on the road to paying off our debt and working those baby steps!!! We have gotten creative and are now paying things off faster than ever. You’ve written a great summary here.

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