Dave Ramsey came out with his book, Total Money Makeover, back in 2003. If you did the math, that’s 18 years ago! So much has changed in that time. An iPhone wasn’t even released in that time. So many legendary movies and songs were never heard yet and life has become completely difference since then.
His advice has changed millions of lives, getting rid of debt and finding the right path to a better future. His lessons on personal finance have changed the game. He became the center of debt-free advice and the very face of personal finance. But are his 7 baby steps the right path for everyone?
He created what is called the 7 baby steps. These steps will help structure your finances to get out of debt and build up your money for a better future. From creating an emergency fund to paying off your house entirely. He created a “simple” guide to financial freedom.
Baby Step 1: Save $1,000 for Emergency Fund
The first step is to get your emergency fund started before jumping into the next 6 steps. You’re meant to cover any surprises that may pop up while you are busy pouring all your extra funds to pay off debt.
In fact, only 39% of Americans could pay for a $1,000 emergency without relying on credit cards. A new study revealed that 45% of people say they have $0 in savings. It’s hard to believe so many people have no money to their name.
Well, it’s not hard to believe, since I’ve been there. But this first step to build an emergency fund isn’t a bad way to get started. I think in today’s time, with unemployment so high, and the economy so volatile, building up to at least 1 month worth of expenses would be a better path to take.
Baby Step 2: Pay Off All Debt Except House
The next step is one a big one. Paying off all of your debt using the debt snowball method. What you do is start paying off all those small credit card balances first. Then gradually move up the ladder to tackle those larger debts. It’s all about those small wins to keep you motivated and pushing forward.
I actually recommend this method. It’s the one my wife and I used to pay off all of our debt. We spent years just paying the minimum balances. But once we started to get serious, make some sacrifices and really buckled down, we were able to become debt-free.
We actually did a small variation. During the pandemic, we were able to call our credit card company and request a month reprieve since our family was suffering from COVID. This gave us an opportunity to build up some more money and when the time came, really make a difference. During that time we were able to save up enough money to hit the ground running and pay off a lot of debt in one go.
Back to this point, paying off debt is a hard job, but by following the snowball method you’ll be able to escape that blackhole of debt in no time. Just stay patient and dedicated to the cause.
Baby Step 3: Save 3-6 Months of Expenses In Emergency Fund
You are now officially debt-free and living life without a care in the world. That huge weight has been lifted off our shoulders. The air seems fresher, the sun seems brighter and your outlook on life is just better. So, what’s next? Building up that emergency fund.
The first step was to start with $1,000. I recommended 1 month, but regardless, here we are. I think having 3-6 months of expenses in an emergency fund is a smart plan. Even if you never use it, it’s such a great reassurance to have. It’s like a weighted blanket to comfort you and instill some confidence to move on to the next step.
No matter what life throws at you, it’s such a nice feeling to know you can face it and have the money in the bank to offer support. Before, you were all alone in the battle of life with nothing but your credit cards and high interest rates.
Baby Step 4: Invest 15% In Retirement
I love this step, but with a caveat. 15% is a lot of money. Yes, you no longer have credit card payments and have some money on the side for emergencies, but there are still 3 more steps to tackle. Moving on with 15% less money can be a challenge.
If you can swing it, I’d definitely recommend sticking to it, because the sooner you invest the more you’ll wind up with. But if 15% is too much, tone it down a bit. The important thing is you started it and can move on to the next step.
Baby Step 5: Save For Children’s College Fund
This is a tricky one. College is expensive and can really set you back. My parents didn’t have the money to pay for college and I took out student loans to carry myself through school. It left a large debt to pay after graduation, but for most, that’s the only path we have.
If you are able to save for your children’s college, then they will be a huge step ahead of everyone else. But this could add up to a lot of money. The average cost of attendance at any 4-year college is around $25,000. Multiply that by the number of kids you want or have.
I would love to have 2 kids, so that’s around $50,000. If I have 18 years to prepare for when they start college, I’d have to save $1,389 a month just to have enough for pay for 1 child to go to college. That is so much more money than most can afford. And that’s just for 1 kid. I guess I’ll pick my favorite to send to college and the other will go to community on their own dime.
This calculation was done under the assumption I’d wait until they were born. If you start earlier it would be cheaper, but that’s a bit risky, assuming life goes your way and you still want kids after a few years.
If this is too much money, which I assume it is for 99.9% of people, save what you can. You don’t have to pay 100% of your child’s college to help them. Pay for half or even a few semesters worth. Any little bit can help them stay above water after graduation.
Baby Step 6: Pay Off House Early
After saving up your emergency fund, getting rid of debt, paying 15% of your income every month for retirement and paying over $1,300 for your child’s college, you now have to pay off your house early.
No big deal. I think it’s easy to see how quickly out of touch Dave Ramsey can get with reality. This all quickly added up to a lot money, more than anyone can handle. I’m all for paying off a house early, but I think if you can maintain your payments for the next 15-30 years for mortgages, while building up your retirement and other funds, that’s fine too.
Baby Step 7: Build Wealth & Give
So, at this point, you’re supposed to have no debt, saving 15% for retirement, no house payment and saving for your kid’s college tuition. Now with all the money you have left you’re supposed to save even more and start donating to charity. Good thing we are all loaded and have all this cash we don’t know what to do with.
I am the first person to recommend you start investing, however not if you are already overextended. Saving for retirement should always come before investing in other things.
But if you manage all this, start investing in some index funds and secure stocks for the long-term. Find some charities you really believe in and donate.
Final Thoughts
I think Dave Ramsey’s 7 baby steps are a great way to get out of debt and build a future towards financial freedom. However, it’s a big outdated and can make him see a bit out of touch with reality. Not everyone can pay off their house in cash and spend their days on a radio show yelling at everyone about making financial mistakes.
I would never call in to that show in fear of him yelling at me and making me hate myself more for my mistakes.
Following the 7 baby steps is great for creating a structure for spending your money. You have these clear steps to follow. But it’s okay to tweak them to match your lifestyle. I would choose to take longer to pay off my house just so I can invest more. I see that as a higher priority.
Paying off debt should be a main priority. That is one thing that will really hold you back in life. Having a little more money in your emergency fund to start out may be a smart move, especially during these volatile times, but overall, this a good plan to start with.
Make it your own so you don’t give up and be patient.
