We All Know That Managing Money Can Be Tough.
According to Dave Ramsey and his Baby Steps program, managing money does not have to be so hard. Over the years I have listened to Dave Ramsey a lot. Some things I totally agree with and other things, I think, not so much. Why, because I am a real estate investor. I use debt and leverage to buy real estate and improve it (increase it's value) and then refinance it so I can buy another property. It's how I make my living.
According to Dave Ramsey, you should NOT have any debt. No credit cards, not even if you pay them off at the end of every month. Instead, he thinks you should use a debit card for everything. I have trouble with that. I use special credit cards when I am rehabbing a home. Ones that are 0% interest for 12 to 18 months so I pay $0 for the use of the card. Sometimes there is an annual fee but I'm not paying 28% or more interest on my rehabilitation fees so it's a great deal.
He also thinks you should only have real estate if you can pay cash for it. That is crazy to me. I use leverage and debt so that I can own 20 properties instead of just one. Using leverage allows me to have multiple assets appreciating at a minimum of 3% per year, instead of just one appreciating at the same 3%.
As Dave Ramsey's Baby Steps, he says he offers a simple plan to help anyone take control of their finances. His steps are said to provide you with a clear path toward achieving financial stability and building wealth. It's for anyone who is either starting out or trying to get back on track so that's nice. He does say his Dave Ramsey's Baby Steps can guide you toward a brighter financial future. So I'd like to break down each of the 7 steps and tell you how realistic they are.
So, What Are Dave Ramsey's Baby Steps?
Dave Ramsey's Baby Steps consist of seven specific actions designed to help you manage your money effectively. Apparently, each step builds on the previous one, making it easier to understand and follow. Here’s a quick run down of the 7 Baby Steps and the order you are supposed to follow them in:
According to Dave Ramsey, these steps provide a structured approach to personal finance, making it easier to handle money matters. At first glance, they do look really good to me. But I want to know if Dave Ramsey's baby steps are legit. Here we go:
Why Follow the Baby Steps?
According to Dave Ramsey, the following the Baby Steps comes with many benefits. First, they are simple and easy to understand. Each step is actionable, which means you can start making progress right away. This simplicity can be very motivating, especially for those who feel overwhelmed by their financial situation. I definitely like this about the program.
Additionally, the Baby Steps encourage positive habits. For instance, by saving money first, you learn to prioritize your financial well-being. Paying off debt using the Debt Snowball method also gives you quick wins, which can keep you motivated to continue.
For those of you who don't know what a Debt Snowball is, it simply a debt-reduction strategy that focuses on paying off debts in order from the smallest to the largest balance, regardless of the interest rate. Dave Ramsey says there is psychology to this. Paying off smaller debt is easier to accomplish, quicker, so it provides you with a quick win. This allows you to "snowball" payments from paid-off debts onto the next largest debt.
I agree with the idea of paying off debt. However, I always categorize my debt with the highest interest rates first and tackle the highest interest on the list. I don't need to fool myself with "quick wins." Instead, I prefer to stop paying more interest to my creditors, thereby giving myself more disposable income to pay down the next debt on the list.
Ramsey reports that many people have experienced life-changing results by sticking to these steps. They have found that following the Baby Steps has not only helped them get out of debt but also improved their overall financial health.
Dave Ramsey says all the right things. He says his, "Dave Ramsey's Baby Steps" can offer you a clear and effective plan for managing your money. Furthermore, he says that by following his steps, you can work toward financial stability and a brighter future. Who doesn't want that? So let's discuss them one at a time.
How Many Baby Steps Are There?
There are 7 baby steps. Some will take you much more time than others. The first is designed to take about 30 days. I think that is a good way to start. With a step that is attainable and does not take too long. That way, you can start strong, hit your goal and then move on enthusiastically to the next.
Step 1: Save $1,000 for a Starter Emergency Fund
The first step in Dave Ramsey's Baby Steps is to save $1,000 for a starter emergency fund. This step is crucial because it helps you build a financial safety net. Life is full of surprises, and having money set aside can protect you from unexpected expenses. I completely agree with this. You always need some extra cash in case the car blows up, a unexpected medical bill, vet bill, kid bill. You know the drill, there is just always something.
If you already have $1000 or more in your savings account, you are all set. You can skip to step 2. If not, here are some ideas to get there fast. I'm willing to bet you have more than $1000 worth of items in your home right now that you could sell. Furniture, cars, car parts, jewelry, clothing, kids clothes, cribs, watches, leather goods, etc. Use sites like Facebook Marketplace to sell items quickly.
If not, and you don't make enough money to save, you need to increase your income. Driving for uber eats and grocery delivery is a great way to make extra income. You can do it on your days off, evenings, lunch hour, weekends or whatever time works for you. You can take your dog and kids with you so there is really no excuse not to try.
I know some people say, "but I don't really want anyone in my car," or "my car is not nice enough for that." Trust me, no one gets in your car unless you decide to drive an Uber, which is a great idea too - if you want to do that. With Uber Eats, you pick up their food or groceries or whatever, drop if off at their doorstep, ring the bell and go. Easy peasy. If you do this, you will have your emergency $1000 in no time - hopefully 30 days or less!
Get creative, teach a sewing, beading or sourdough making class. Post it on Facebook Marketplace and sell tickets for $30, $40 or $50 a person and provide some great learning and a fun time for a bunch of students, ladies, kids or whoever and make some extra money. What do you know how to do well? Think about it. Make a list. Post it and just see what happens!
Ask for a raise at work. I know it's a tough thing to do but if you have been working really hard, and doing a great job, chances are your boss already knows it. It can't hurt to ask. Be polite and set up a quite time to speak to them. Be courteous and genuine and explain how hard you've been working and how much a pay increase would help you out. The worst they can say is no. And if they say yes, boom, you just got yourself a pay raise.
Importance of an Emergency Fund
Having an emergency fund really is like having a shield against financial stress. We can all imagine a sudden car repair or medical bill. Without any savings, you might have to rely on credit cards or high interest pay day loans; which just leads to more debt. So, having an emergency fund gives you gives you peace of mind. It really just ensures that when life throws a curveball, you can handle it without panic.
I agree with Dave Ramsey's Baby Steps on this one. You really do need to have a minimum $1000 emergency fund. I've given you a bunch of ideas for how to generate the cash to add to your savings account so there is not reason to avoid doing step #1.
This one is really not just about the money; it's about feeling secure and prepared! Step 1 is a go.
Other Ways to Save for This Fund
I gave you some creative ways above to generate the income for this fund. And now that you understand why an emergency fund is important, let's talk about a few more ways on how to save for it. Here are some practical tips that can help you reach your goal of $1,000:
It doesn't matter if you use creative or practical ways, or a combination of both, to generate your emergency funds. The trick is to just do it. By following any of my tips, you can build your starter emergency fund in no time at all.
Remember, having this fund is a key part of being prepared for whatever life throws your way. It is your first step to take control of your money so you can achieve financial freedom. Start to save money today, build up your savings account and you'll be on your way to a more secure financial future!
Step 2: Pay Off All Debt (Except the House) Using the Debt Snowball
According to the Ramsey Baby Steps, once you have your starter emergency fund in place, it’s time to tackle your debts. Step 2 in Dave Ramsey's Baby Steps is all about paying off all your debt, except for your mortgage. The method he recommends is called the Debt Snowball, and it can be a powerful way to gain control over your financial situation.
Understanding the Dave Ramsey Debt Snowball Method
The Debt Snowball method is simple and effective. Here’s how it works according to the Ramsey program:
When you control money, it can't control you. I will say, using this debt management plan, the beauty of the Debt Snowball is that it can help you build build momentum. No matter if you pay off the smallest debt first, or the one with the highest interest rate, the end result is that you are paying off debt and that feels really good. By focusing on one debt at a time, you will see progress quickly, which will keep you motivated to continue.
Benefits of the Debt Snowball
The Debt Snowball method has several benefits, especially when it comes to motivation. Here are a few reasons why this method works so well:
Overall, the Debt Snowball method is not just about numbers; it’s about changing your mindset. By following this method, you can take control of your finances and work toward a debt-free life. Remember, every small step counts, and with each debt you pay off, you’re getting closer to your financial goals!
I do agree with step 2, just not the method with which the Dave Ramsey baby steps tell you to do it. But as long as you list your debts, make a plan to pay them off, and work at it every month, I think step 2 is also a winner.
Step 3: Save 3–6 Months of Expenses in a Fully Funded Emergency Fund
After you've paid off your debts using the Debt Snowball method, it's time to take the next big step: saving for a fully funded emergency fund. This step is crucial for ensuring your financial security and peace of mind. While the initial $1,000 emergency fund was a great start, now you need to build a more substantial safety net to cover 3 to 6 months of your living expenses.
I like how the steps tell you to pay off your debts first, before attempting to build a savings account of 3-6 months of expenses. Otherwise, it would just be too daunting. But once you do have your $1,000 emergency fund, and your debts are paid off, saving a large nest egg is an excellent plan of action. So, how do we do it? First, we need to know how much money you need.
How to Calculate Your Needs
Calculating how much you need to save for your emergency fund is simpler than it sounds. Here’s how to do it:
For example, if your essential monthly expenses total $2,000, you would need between $6,000 (for 3 months) and $12,000 (for 6 months) saved in your emergency fund.
Choosing the Right Savings Account
Once you know how much you need to save, the next step is to choose the right savings account for your emergency fund. Here are some options to consider:
When choosing a savings account, look for one with no monthly fees and easy access to your funds. This way, you can ensure that your emergency fund is both safe and growing. Don't be afraid to make an appointment with a banker at your bank. Go in and talk to them a bit. Get to know them. Tell them what you are looking for. Let them suggest a few account types for you and have them help you get all set up. Don't be afraid of the banker - that's what they are there for.
By saving 3 to 6 months of expenses in a fully funded emergency fund, you will have a solid financial cushion. This step not only protects you from unexpected expenses but also gives you the confidence to face any financial challenges that come your way. Remember, building this fund is a vital part of your journey to financial stability!
I agree with step 3 whole heartedly. I realize most people live check to check and that is a very scary place to be financially. One misstep and it can mean financial ruin for you and your loved ones. Skip the restaurants for 3 months, sell an expensive car you don't need to have, pick up a weekend delivery job or sell some furniture or jewelry you never use. Do whatever it takes to get that 3-6 month nest egg and you will feeling really good about your financial future.
Step 4: Invest 15% of Your Household Income in Retirement
According to the Dave Ramsey Baby Steps, now that you've built a solid emergency fund and paid off your debts, it's time to focus on your future. Step 4 is to invest 15% of your household income into retirement accounts. Dave says this step is crucial for ensuring that you can enjoy a comfortable lifestyle when you retire.
I want to say here that I do not do this. I am a real estate investor and so I invest in single family homes, apartment buildings and shopping centers for my retirement. I have never been the type to let others do my investing for me, like in the stock market. With that said, let's see what Dave has to say about his step #4.
Importance of Investing for Retirement
Investing for retirement is important because it allows your money to grow over time. The earlier you start investing, the more time your money has to increase. This is due to the power of compound interest, which means you earn interest on your initial investment as well as on the interest that accumulates over time.
Imagine if you start investing at a young age. Even small amounts can grow into a significant nest egg by the time you retire. This is why setting aside 15% of your income is a smart move for your future.
Types of Retirement Accounts
There are several types of retirement accounts you can use to invest your money. Here are some common options:
Investment Strategies
When investing for retirement, it's crucial to have a solid strategy. Here are some key points to consider:
I agree that investing 15% of your income toward your retirement is a crucial step toward achieving financial independence. I just disagree with retirement accounts and 401K type of investment strategies. I like and prefer real estate. But real estate is not for everyone. So, whether you choose a retirement account, or portfolio of rental houses, I highly recommend you select and implementing a smart investment strategy that works best for you. This way, you can begin to build a secure future for yourself. Remember, the earlier you start, the better off you’ll be when it’s time to retire!
Step 5: Save for Your Children’s College Fund
After you've secured your retirement savings, it's time to focus on another important goal: saving for your children's college education. Step 5 in Dave Ramsey's Baby Steps emphasizes the importance of preparing for your kids' future while keeping your own financial health in check.
Here is where Dave Ramsey and I really begin to differ. I did save and put two children through college and I felt mostly that it was a waste of money. My son graduated business school and stared an online business and then jumped to investing in real estate. Never used his degree. My daughter got a degree in Health Sciences and works as a personal trainer at a business that does not require a degree. So, she does not use her degree either. I realize that is my own personal experience but college has gotten ridiculously expensive and if you don't use the degree, what is the point?
I know there was a time when you needed to have a college degree to get a good, high paying job. But I don't believe that is the case anymore. Unless you want to be a doctor, nurse or other profession where a license is required, I have a hard time telling you to save and pay hundreds of thousands of dollars, or take out enormous student loans, for your kids to earn a potentially useless college degree.
Instead, my strategy would be to buy a duplex or a fourplex when your kids are young. When they are born if you possibly can. Let it appreciate every year, for the 18 years until your child needs to go to college. If they do need a degree, refinance the property at that time, and use the funds to pay for their schooling. If not, you have a tremendous asset on your hands with a great deal of equity built up. That is what I wish I had done and I urge you to at least consider all your options.
In case you prefer Dave Ramsey's saving for college options, here is some more information about that:
Education Savings Options
There are several options available and here are two popular choices:
Both options have their benefits, so it’s important to research which one fits your family’s needs best.
Prioritizing Savings
If you do decide to set up a savings account for your children's college fund, it's essential to remember that your retirement savings should come first. Why? Because there are loans available for education, but there are no loans for retirement. If you don’t have enough saved for retirement, you could face financial difficulties later in life. So if you don't try out my duplex or other real estate investment idea, you probably should be investing in a retirement account first, and then the kids college funds.
Like I said, I am not a big fan of Dave Ramsey's step #5. I don't really believe how expensive collect educations are today. It would be one things if kids graduated and went into high paying jobs that justified the degree and the expense. But I have not found that to be the case. Instead, I recommend you find a way to buy a investment home, duplex or 4 plex and let it appreciate for 18 years as your kids grow up. Then, refinance or sell it at the time they go off to school, should they decide to.
However, if you are more traditional, and believe every child should go to college, and don't like real estate, then saving for your children’s college education could be right for you. In that case, it might be a vital step in your child's future. You can feel free to explore education savings options like 529 Plans and ESAs, and by prioritizing your retirement savings first, you can create a balanced approach to your family’s financial goals. Whatever you decide, start investing in real estate or saving today, and give your children the opportunity to pursue their dreams!
Step 6: Pay Off Your Home Early
Once you've taken care of your children's college fund, it's time to focus on paying off your home. Step 6 in Dave Ramsey's Baby Steps encourages you to pay off your mortgage early. This step can lead to greater financial freedom and peace of mind.
I have to say, as much as I like to use leverage to buy my real estate investment properties, there is something really reassuring to knowing that your personal family home is safe and paid off. As I write this, my home is not paid off. However, I am about 6 years into a 15 year loan at a 2.5% interest rate on my home; so my mortgage is paying down really quickly. I like the way that feels. I will go into my retirement (has not happened yet) with my personal home paid in full.
I don't pay off any of my investment property loans. Instead I use leverage and financing to purchase my investment properties. As they appreciate, so every 5 to 10 years or so, depending on the real estate market, I refinance them and take out the cash. I use this cash to buy more real estate investment properties. To buy these properties, I generally use DSCR Loans because they are easy to get, have interest only options and they rely solely on the income and expenses of the property I am purchasing to qualify.
So, if we all agree it's a good thing to pay off the mortgage on our personal residence, let's look at how to do that:
Methods to Pay Off Your Mortgage
Benefits of Home Ownership
I agree with Dave Ramsey that paying off your personal home mortgage early is a smart financial move that can bring you peace of mind and financial security. You can use one or all of these strategies to make extra payments or even refinance your loan if rates go low enough to make sense. Anything you can do to work toward owning your home outright is a smart move. I feel that this step not only enhances your financial stability but also allows you to enjoy the freedom that comes with being a homeowner without a mortgage!
However, where I differ is with investment properties. I don't like to pay down my rental property loans. Instead, I use leverage to finance properties. I keep the loan for 5-10 years and refinance as soon as the property has appreciated nicely. I do a cash out refinance to take out of equity in the property and then use that cash to purchase another property. I do this over and over again!
Now if you purchase a home or duplex or other property type to use for your kids college funds, you probably won't want to refinance every 5 to 10 years or so. Instead, you will want to let that property appreciate as much as possible so you have the equity to tap into when it's time for your kids to go to college.
Step 7: Build Wealth and Give
Congratulations! There has been a lot of reading here but now you've made it to the final step in Dave Ramsey's Baby Steps. Step 7 is all about building wealth and being generous. Dave says, that after you work hard and manage your finances, pay off debt, and secure your future, it's time to focus on creating lasting wealth and giving back to your community.
This step sounds amazing and I do agree with Dave here. I mean, who doesn't want to give back? I think I am doing that right now by writing this blog post. I've owned every type of business there is, invested in a lot of different real estate types and I've done some things right and others really wrong. I hope I am helping you make some decisions for yourself that can really help you with your own financial freedom and independence. But let's explore Dave's step #7 a little bit more here:
Strategies for Wealth Building
Building wealth is an ongoing process that requires smart financial decisions. If you save instead of spend, invest in retirement accounts if that is what you are comfortable with, use DSCR loans to buy cash flowing rental properties and work hard, you will set yourself on a course to grow your wealth naturally. So let's discuss how important it is to also give back.
The Importance of Giving Back
As you build wealth, it’s essential to remember the importance of giving back. Generosity matters too and I agree whole heartedly with Dave Ramsey's Step 7.
Life is about more than just accumulating wealth; it’s about using that wealth to make a difference. By continuing to invest wisely and giving back to your community, you can create a fulfilling and meaningful financial life and help others along the way too. And remember, giving back can mean different things to different people.
Maybe you give at your church, or help at a shelter for homeless people or pets. Maybe you help at the VA because you love and appreciate the military and our veterans. Or, maybe you love horses so much that you donate to a horse sanctuary ensuring all the retired horses have plenty of feed, supplements and blankets through the winter. Or maybe you blog and teach to make sure that others are able to learn the things you know and maybe help them figure a few things out too. Whatever it is you can do, just remember to do it.
Remember, the journey to financial peace is not just for you; it’s also about how you can help others along the way!
Do the Baby Steps Really Work?
Now that we've explored each of Dave Ramsey's Baby Steps, you might be wondering: do they really work? According to the Dave Ramsey people, the answer is a resounding yes for many people who have followed the plan. They say the Baby Steps have proven to be effective for many people seeking financial stability and freedom.
I think it is very reasonable to believe that following the 7 Dave Ramsey's Baby Steps can transform your financial life. The steps make sense to me. Some are pretty quick and easy and others challenge you to make a real commitment to them. No matter which step you are on, if taken seriously, I believe each step can help move you from a place of financial stress to one of security and freedom.
To me, the steps are straight forward and clear and seem to provide a neat and structured path to help you manage your money wisely, pay off debt, and build wealth for the future.
The benefits of following the Baby Steps seem to be numerous. My guess is you’ll gain confidence as you pay off debts, build an emergency fund, and invest for retirement or buy your first investment property. You’ll should also begin to experience the peace of mind that comes from knowing you are financially secure. Plus, by saving for your children’s education and giving back to your community, you can create a positive legacy for future generations.
How Long Does Dave Ramsey's Baby Steps Take?
Dave Ramsey’s 7 Baby Steps generally take the average person about 7 to 10 years to fully complete, with the intense debt-payoff phase (Steps 1-3) usually taking 18 to 24 months. The timeline varies significantly based on income, debt amount, and "gazelle intensity," though most households pay off non-mortgage debt within two years.
Here is the breakdown of timeframes for the Baby Steps:
Baby Step 1 (Save $1,000): 30 days or less.
Baby Step 2 (Pay off all non-mortgage debt): Typically 18–24 months, depending on debt load.
Baby Step 3 (3–6 months of expenses): About 6–12 months.
Baby Steps 4, 5, 6 (Invest, College, House): These often happen simultaneously, with the average person paying off their home in 7–8 years.
Baby Step 7 (Build wealth/give): The ultimate, ongoing goal.
So How Can You Get There Faster?
Intensity: "Gazelle intensity" means treating debt like a true emergency, using a strict budget to pay off debt faster.
Income vs. Expenses: The gap between income and expenses determines how quickly debt is cleared and savings are built.
House Payoff: The average total program time (including paying off the home) is around 10 years, though many people reach financial freedom in under that, say Ramsey Solutions.
How to Start Dave Ramsey's Baby Steps
To quote Nike, just do it. That is really the only way to make it happen. Don't do it next week or next month. Start today. Make a plan, stick to it, modify when you must and if you ever stray, get back on track the next day.
What Is Missing From The Baby Steps Program?
This question is fairly easy for me to answer. See, I used to be a bit out of control with my finances. By that I mean that I just didn't know how much I had coming in, how much I had going out and how much extra (if any) I had to pay down any credit card balances or car payments - which were the two things that really weighed me down when I was in my 20's-40's.
I felt scared and out of control and I'm sure a program like Dave Ramsey's baby steps would have helped me BUT not before I had a way to figure out how much money I had coming in, going out and if I was in the red or black.
One day I decided to create my own spreadsheet just so I could figure that part out. It was illuminating. It seemed overwhelming to do but it was actually quite easy. I figured out that I was indeed over spending on SO many things and I saw exactly how much of my money went where every month. I NEEDED to do this before I could ever do a 7 step program like Dave Ramsey's baby steps because I had to know where I was at first.
Over time, I realized so many people could benefit from my spreadsheet so I dressed it up a bit, made is crazy easy us use and named it the Definitive Annual Budget, If you are thinking of starting the steps, but know that you really do not know where you are at just yet, I highly recommend you check out my spreadsheet. I know you will be happy you did.
I think that Dave Ramsey's Baby Steps are great ideas. As I said, I'd exchange the stock market/retirement investing for a personal real estate portfolio, but that's just me. I like to be in control of my investments. Maybe you don't, or don't have any time or interest in owning real estate, that is fine too. Either investment choice (maybe a bit of both for diversification) are good ideas.
Remember, to make the 7 steps work, you need to figure out exactly what you have coming in and going out each month. It is a MUST. Do not skip this step.
So, in my version, I'd add in a Step A prior to Dave Ramsey's Step 1. Again, if you need any help getting started, my Definitive Annual Budget spreadsheet can help you. I made it easy, easy, easy to figure out it's a great way to know where you are now.
Use it to know exactly where you are financially. If you figure out you bring in more income than expenses, that is great. You now know exactly what your overage is. You can make a spreadsheet of debts you need to pay off, and apply those extra funds to either the smallest debt first (best way according to Dave Ramsey), or to the creditor charging you the highest rate of interest (my preferred way), and this is something you can start today.
If you are bringing in less income than your expenses, that is great too. What? Why? How can you say that? I say that because now you know exactly how much you are over spending. And knowing is the #1 way to get it fixed immediately.
You can cut your expenses, work on making more income, sell items, etc. I have written all about it on my blog post here. The point is, now you know exactly where you are at. I am sure if you brainstorm, you can come up with a dozen things right now to turn yourself around.
I urge you not to wait. Start today. Financial freedom and success are waiting for you!
