Breaking Down Dave Ramsey’s Baby Steps

Updated: Aug 5


Many of us are familiar with Dave Ramsey’s Baby Steps, and they are an effective strategy for building a solid financial foundation. From time to time I get questions about the process and some of the finer points, so here’s a break down of the 7 steps with some opinions thrown in.


Baby Step 1 – Save $1,000 for Your Starter Emergency Fund

If you are in debt and trying to get out, you absolutely need a starter emergency fund to keep from going deeper and deeper into debt. Does that amount need to be exactly $1,000 though? Probably not. Some people may need a little more and $3,000-$5,000 would be more reasonable; however, I agree with him that too big of a starter emergency fund will dampen your motivation to do something about this debt. What I have seen work is starting at $1,000 and slowly building up to $5,000 and then taking $4,000 to knock out a debt. Rinse and repeat. That way you frequently have a little more than $1,000 available should a real emergency happen.


Baby Step 2 – Pay Off All Debt (Except the House) Using the Debt Snowball

Just like in Baby Step 1, I mostly agree with this. Yes, getting out of debt is important. I have a hard time ignoring interest rates, though, when I am giving advice on the debts to attack. If you have mostly the same interest rates on your debt, then absolutely, yes, pay down the ones with the smallest balances first to keep the motivation going. If you have a credit card that is $20,000 at 18% interest and a bunch of student loans between $10,000 and $15,000 at a 6% rate, please pay down the credit card first!


Baby Step 3 – Save 3-6 Months of Expenses in a Fully Funded Emergency Fund

Yes, I agree that an emergency fund is very important, and that it can be 3-6 months; however, some people have different situations and may need less, or may need more. It is not uncommon for retirees to have 1 years’ worth of expenses set aside because they want the extra security of knowing they don’t have to touch their investments when markets fluctuate downward. The key is to have enough savings in the right locations that in your given situation you can weather the storms of life and not tap into your investments hastily.


Baby Step 4 – Invest 15% of Your Household Income in Retirement

Most people want to have a retirement that is similar in lifestyle to what they are living during the working years. Assuming that is the goal and also assuming that you don’t have a work pension in addition to future Social Security, then 15% of your income is a great thing to aim at if you are in your 20’s or 30’s, or any age if you have enough in retirement already.


I have been able to come up with some general guidelines that could position you in the general vicinity of having a similar retirement to your working years. If you are in your 20’s, the goal should be to save 10% of your salary to retirement. If you are in your 30’s, the goal should be to save 15% of your salary to retirement and to have 1 years’ worth of salary in your retirement accounts. If you are in your 40’s, the goal should be to save 15% of your salary to retirement and to have 2 years’ worth of salary in your retirement accounts. If you are in your 50’s, the goal should be to save 15% of your salary to retirement and to have 6 years’ worth of salary in your retirement accounts. If you are in your 60’s, the goal should be to save 15% of your salary to retirement and to have 10 years’ worth of salary in your retirement accounts.


These are general guidelines and your specific situation may vary, but they will point you in the right direction. You can always save more, and if you don’t have the amount saved mentioned, you may want to save more to maintain a similar lifestyle.


Baby Step 5 – Save for Your Children’s College Fund

Saving for college today can be a challenge because of the exponentially increasing costs of college. It is definitely important to save for college, and I recommend you do what you can without sacrificing your retirement. The best way can be to set up a college account and fund it regularly through small contributions. These will add up over time and will help bear the financial burden.


There are ways that we can help prepare for our children’s college in addition to financially. Some of those things can be helping them to cultivate a talent that could provide financial support through scholarships; helping them develop a work ethic so they feel comfortable working during college; and help them to strive academically in an area that will allow them to flourish while doing something they enjoy.


Baby Step 6 – Pay Off Your Home Early

In theory, yes, I agree with Dave on this one. If you have saved at least 15% going into retirement accounts, put aside enough to pay for kid’s school, and have the right size emergency fund, then by all means pay off the home early. Where I find people are led astray by this step, if they overprioritize this and make a point of paying off their home when they don’t have enough saved for retirement and their kids are nowhere on track for having money for college. If you have a 15 year mortgage like Dave teaches and are on schedule to pay it off before retirement, make sure the other pieces are well accounted for before you start locking all that cash into your home.


Baby Step 7 – Build Wealth and Give

This is the most redundant step that Dave has because these things have already been accounted for in the other steps. He has always talked about being generous and by putting money into your retirement accounts you are building wealth. I think that a better title for Baby Step 7 would be, “Learn to be Wealth Wise.” At this stage, if you’re saving the right amount and have enough saved for both retirement, kids’ education, and have no debt at all, you owe it to yourself to really understand wealth. There are many things that you can learn to maximize your situation and be good stewards of your money at this point. Knowledge on estate planning, tax planning, retirement planning, business transition planning, and charitable giving strategies are all important things to be introduced to.

As you can see, I don’t overly disagree with any of Dave’s points and believe that overall it is great! For all the nuances in life that may come up to alter the plan or expand on it at the end, having a relationship with a financial planner makes a lot of sense.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Any opinions are those of Andrew Cremé and not necessarily those of Raymond James. Raymond James is not affiliated with and does not endorse the services or opinions of Dave Ramsey.

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