What Are Dave Ramsey’s Baby Steps?

What Are Dave Ramsey’s Baby Steps?

I can still vividly remember where I was when I first heard the Dave Ramsey show. At the time, I was completing a dental residency in New Orleans. Honestly, I hadn’t given much thought to my accumulating student loan debt ($250K+) because I thought I’d make decent money once I finished.

Unfortunately, things didn’t work out quite like I had planned after graduation (you can read more about that here).

Dave Ramsey opened my eyes to the negative effects that debt, especially student loans and high-interest credit card debt, can have. Many of the show’s callers had financial turmoil, which all stemmed from being laden with debt.

Dave Ramsey’s Baby Steps were prescribed to literally all of the callers. I wasn’t sure what they were, but it intrigued me enough to buy his book, The Total Money Makeover, and become an avid follower.

Dave has helped propel me down the road to financial freedom. I didn’t follow all of his baby steps to a “T,” as I feel each person’s situation is different.

If you don’t know much about Dave Ramsey, let’s start there…

(Make sure you check out the end of the article as I share how my journey has been since becoming debt free and what it’s led for me to invest in now)

Who Is Dave Ramsey?

Dave is known for his popular radio show, The Dave Ramsey Show. He is an author, a TV show host on Fox Business, and frequently teams up with his daughter Rachel Cruze to host live events.

What I like about him is his story. The fact that he once had millions then went bankrupt in his 20s due to real estate debt was eye-opening. He then turned his negative experience into an empire mainly by developing and teaching his seven baby steps.

The Baby Steps form the foundation of his advice he dishes out about money. Once you start having success with one, it’s hard to stop. Just can’t eat one chip! They’re the starting point for those ready to change their financial life from debt to becoming a saver and giver.

Financial Peace University (FPU) is his cornerstone nine-week course that helps others become debt-free and build wealth. Most of the courses are taught at local churches and are also available online.

We’re Debt-Free!!!

Dave’s best known for highlighting people on his show who have become debt-free while using his baby steps.

After they share their story, they can scream, “We’re Debt-Free!”

Check out this video of one such couple:

Start With Finding Your “Why”

In Simon Sinek’s must-read book, “Start With Why,” he discusses the concept of “why” people and organizations guided by this concept will succeed more often than those that don’t.

In it, he talks about his discovery of The Golden Circle.

There are three parts to it:

  • Why
  • How
  • What

Why – Your Purpose

My youngest son is great about asking people, “Why?”

Here’s a recent conversation we had:

Dad: “You want to play hoops?”

Son: “Why?”

Dad: “It’ll give us something fun to do.”

Son: “Why?”

Dad: “I want to get some fresh air outside.”

Son: “Why?”

Dad: “Because the weather’s nice.”

Son: “Why?”

I could carry this much further but I don’t want to bore you to death. Unfortunately, Sinek claims, few people can tell others why they do what they do.

“Why” is all about your purpose.

Pre-Baby Steps

Before starting Dave’s Seven Baby Steps, it’s important to ask yourself why you want what you want. One reason is simply for motivation.

Before I started Step One (which I’ll get to shortly), I listed our student loan debt amount of $250K+ on a dry-erase board in our home office. Watching this number decrease each month was one of my main motivators.

If you are exploring his steps, you’re likely interested in becoming debt-free and financially free.

Once you figure out what you want, list the reasons “why” you want it. Everyone’s “whys” are different.

Maybe you want:

  • more family time
  • to travel more
  • less financial stress
  • to help more people

Again, it doesn’t matter what someone else wants. That’s not going to give you the motivation. Starting with why will be the driving force behind completing the Baby Steps.

Get on the same page

If you’re married or soon-to-be, don’t skip this part. Sit down and talk with your spouse and explain to them that you’ve made a decision to change a part of your financial life.

A little marital advice: Just because you want to change doesn’t mean your spouse wants to. It’s important that you both get on the same page at some point. If not, it’s going to be very difficult.

When Mrs. Debt-Free and I started our journey, we were both on the same page of living frugally while aggressively paying down debt. If one person is trying to save and the other isn’t good luck!

Dave Ramsey’s 7 Baby Steps

On his website, Dave lists his 7 steps to financial freedom:


Here’s a 5-minute video of Dave explaining them (starts at 2:30):

Let’s break down each of them, and I’ll give you my two cents as well…

Baby Step 1: Save $1,000 in an Emergency Fund

I talked about starting an emergency fund in an article titled, Short Term Financial Goals.

In my opinion, starting an emergency fund is the #1 priority because it protects you from the unexpected. It’s even MORE important than paying off debt. Why? If you can’t come out of pocket for an emergency, you’ll likely go into more debt.

Lack of savings is why people get into financial trouble, which can be easily avoided by starting an emergency fund.

According to CNN, 40% of Americans can’t cover a $400 emergency.

Dave recommends starting by saving $1,000 in an account that is earmarked for emergencies only.

This amount is a good goal for most as it gives some peace of mind without feeling overwhelmed.

There are two reasons he recommends an initial low amount:

  1. Psychological – It shouldn’t take too long for the average person to save $1,000. Hitting this short-term goal is a positive step in the right direction.
  2. Creating a habit – The initial $1,000 emergency fund serves as a training ground for paying for emergencies without relying on credit.

My Thoughts

I feel that $1000 is low. For most high-income earners, saving $3,000 – $5,000 shouldn’t be unreasonable.

Most common emergencies, such as a car repair or replacing an AC unit, are going to cost well north of $1,000.

If you’re not disciplined enough to save each month, automate it. We did this with a Vanguard money market account.

Once you’ve saved the money, it’s time to move on to the next step.

Baby Step 2: Pay Off All Consumer Debt Using the Debt Snowball

If you’re familiar with Dave Ramsey, you know he hates debt. Many of the callers he helps typically involve getting them out from under a mound of debt. He does this by recommending the “Debt Snowball” method.

Debt Snowball

He recommends that you:

  • List your debts from smallest to largest.
  • Make the minimum payment on all debts except the smallest one.
  • Put all the extra money toward the smallest debt until it’s paid off.
  • Once that one is done, start with the next on the list.
  • Use the money you were already paying on this debt plus the amount you were throwing at the first one and add the two together.

Keep the snowball rolling until you are consumer debt-free.

As momentum builds and the first debt is paid off, things start to “snowball” quickly.

Why the smallest debt first?

Many people argue that paying off the smallest debt first doesn’t make mathematical sense if you have another with a higher interest rate.

Dave’s reasoning is this, “You need some quick wins to stay pumped up about getting out of debt!”

Similar to building up the $1,000 emergency fund, it creates a positive psychological experience.

Dave says, “Paying off debt is not always about math. It’s about motivation. Personal finance is 20% head knowledge and 80% behavior. When you start knocking off the easier debts, you will see results, and you will stay motivated to dump your debt.”

My Thoughts

As I was completing Baby Step #2, I made the decision to start with the lowest student loan balance, even though it didn’t have the highest interest rate. Paying that couple thousand dollars off allowed me to see that I was taking a step toward financial freedom.

My higher-interest student loan had a large 5-figure balance. Tackling something that large initially could have potentially stalled the process if something came up along the way (emergency) and the snowball had to be paused.

Baby Step 3: Save 3-6 Months of Expenses in Emergency Fund

Once you make it to Step 3, congratulations! You’re consumer debt-free. It’s at this point where Dave stirs up controversy…again.

Save or invest?

Many financial experts claim that Ramsey’s approach of saving more for a rainy day is nonsense when, for instance, that extra money could be invested in a company-sponsored 401k.

They feel that his “Baby Steps” are too rigid and that he pushes them as a one-size-fits-all. It all boils down to personal preference. If you’re more of a risk taker, then by all means, start to invest.

If you want to stick to Dave’s plan, then it really shouldn’t take too long to save up using all the extra money you were throwing at the last debt on your snowball list.

For us, we were throwing a high four-figure monthly amount at our last one. It only took six to seven months to fund our emergency fund fully. Think about it. Is a few more months worth the risk?

How would you handle emergencies if you skipped this step and started investing for retirement?

None of these are good ideas.

Having 3-6 months of expenses at your disposal will make handling an extended emergency such as a job layoff or injury much easier. Having this money gives you freedom from worrying about slipping back into debt and starting the process all over again.

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

Once you arrive at Baby Step 4, you’ll have no payments except the house and a fully funded emergency fund. Trust me, this is a GREAT feeling to have.

Dave suggests investing 15% of your household income into Roth IRAs, pre-tax retirement plans, or at least enough to get an employer match. Some think 15% is not enough, but you have to realize who his target audience is.

These people represent the typical US household, which, according to Chris Hogan’s book “Everyday Millionaires,” makes roughly $60,000 a year.

By the way, the “everyday US millionaire” makes less than $100,000 a year. If you want inspiration, read Hogan’s book.

The order Dave suggests saving for retirement is:

  • Employer-sponsored 401k up to the match
  • Roth IRA for you and your spouse
  • Finish funding the 401k

How much can you invest?

The IRS recently increased the amount that can be contributed to retirement accounts. That maximum is $23,000 a year for 401(k)’s and $7,000 a year for both Traditional and Roth IRAs.

Baby Step 5: College Funding For Children

According to CNBC, over 44 million Americans collectively hold nearly $1.5 trillion in student debt. That means roughly one in four American adults are paying off student loans. When they graduate, the average student loan borrower has $37,172 in student loans, a $20,000 increase from 13 years ago. Yikes!

As a parent, we want to do what’s best for our kids (most of the time. 🙂 I can’t tell you how many patients have told me, “Doc, I’m ready to fix my mouth now. It took me so long because I had to pay for my kid’s braces and college.”

Ramsey stresses that we must put ourselves first, which means saving for OUR retirement before the kid’s college.

He states that your child will have other options to help fund their education if they need to, including:

  • scholarships
  • grants
  • working part-time

Where to save for kid’s college?

Dave suggests two ways to save for our kid’s college:

  • Education Savings Account (ESA)
  • 529 Plan

I discuss both in detail in this article, “Coverdell ESA vs 529

It made more sense for our kids to open 529s when they were born.

These contributions are made with after-tax dollars and aren’t taxed when the money is withdrawn as long as it is spent on educational expenses.

529 Plans can be purchased directly or through an adviser. Many high-income earners may have to choose a 529 due to the ESA income limits – ($220,000 married or $110,000 single).

Baby Step 6: Pay Off Home Early

Once you start funding the kid’s college, it’s time to do something really weird…pay off your house early.

Peter, over at Bible Money Matters, lists these reasons to pay off the house:

  • Less Risk: With no house payment and a fully funded emergency fund, there aren’t many things that can happen (like a job loss) that can threaten your well-being.
  • Peace Of Mind: With no house payment, you’ll be free to do a lot of things with your time and money that you might not have been able to otherwise.
  • Interest Savings: By paying off the house early, you’ll save thousands in interest. The earlier in life you pay the mortgage off, the better you’ll do!
  • Less Stress: With no worries about losing a house, paying off debt, or small expenses coming up, you can live a more stress-free life!


The mortgage debate

Once you get to this step, you may get some pushback from others.

Strong arguments exist on whether it is better to prepay mortgage debt early.

Those against it

People that advise to hold off putting extra money towards a home state that, for most people:

  • Mortgage debt is generally inexpensive debt
  • Mortgage interest is a tax deduction.

Their other thinking involves investing the extra money you would have put towards the mortgage. They argue it’s better to put that money in something, such as an index fund, that will provide a better long-term return than paying off a home mortgage.

Those for it

On the other hand, the other camp for paying the home off early is with Dave. They realize that debt is debt no matter if it’s credit cards, student loans or a home mortgage.

Their argument revolves around cash flow. Once the mortgage is paid off, there’ll be a much larger gap between your income and your bills.

Their other revolves around risk. They state that if you invest in something with a bigger return than your mortgage, you could be taking on significant risk.

On the other hand, if you’re making extra payments on a 5% mortgage, you know you will get that 5% return on your money. If you invest in something hoping to get a 7% long-term return, you might not get that at all, particularly over the short term.

My thoughts

I can tell you from first-hand experience that there’s no feeling better than having no payments – including a mortgage.

Without a mortgage payment, one of our main monthly financial obligations suddenly becomes a thing of the past. I realize that we have to continue paying for taxes, insurance, and upkeep, but you still are responsible for it with a mortgage, too.

With fewer bills comes less stress. Instead of worrying over money, we can relish the time that we have left with our kids still under our roof. This involves traveling with them and spending our time doing whatever we want.

Being 100% debt-free allows you to make decisions to live the life you want, not live the life you’re forced to live just to repay debt.

Baby Step 7: Build Wealth and Give


The Bible states that God loves a cheerful giver.

As a Christian, I feel called to give to others. I tell my boys often, “The more money you make, the more people you can help.”

Imagine the position you’d be in to help out others once you reach Baby Step 7.

Giving to others:

  • Makes us less selfish people.
  • Makes us better in every aspect of our lives.

I don’t know about you, but for me, I find more pleasure and enjoyment when I can help someone in need out versus spending money on stuff.


Dave’s Baby Steps has helped get millions of people out of debt, including my wife and me. It doesn’t matter how old or young you are; starting the baby steps can help anyone.

Once you get to Baby Step 7, you can live how Dave says:

Live like no one else today so that tomorrow you can live like no one else!


Since publishing this article, I’ve had some changes in my life. After becoming debt-free using Dave’s 7 Baby Steps, a wrist injury while snow skiing made me realize that I couldn’t provide for my family without the use of my hands (I’m a dentist). 

After months of research and networking, it seemed that the wealthy people in the U.S. had two main characteristics:

#1. 90% invest in real estate

#2. They had an average of 6-9 streams of income.

This led me to begin investing (passively) in real estate syndications.

The cool thing about this blog is that I began sharing my experience + the new terminology needed to become a real estate investor. 

Most real estate investors started reading Rich Dad Poor Dad by Robert Kiyosaki. 

The book opened my eyes to HOW I was making money (trading time for money) versus having my money work for you.

Here are the differences between Robert Kiyosaki and Dave Ramsey’s teachings:

Another area I lacked knowledge in was taxes. I’m NOT a CPA, but I realized the importance of having basic knowledge of how taxes work (I didn’t get that in dental school).

I can’t stress the importance of getting a financial plan in place as early as possible which includes cleaning up debt and creating multiple income streams.

If you’re an accredited investor and want to start the process of learning about how to invest in passive real estate offerings, join my group (free) below):

Join the Passive Investors Circle