Dave Ramsey-Baby Steps to Financial Freedom

Dave Ramsey is one of the most popular personal finance gurus in the United States. He is known for his motivational ability and his no nonsense approach to personal finance, especially when it comes to getting out of debt. One of Dave Ramsey's common sense methods is taking a series of baby steps to accomplish a financial goal.

Dave Ramsey's 7 Baby Steps

Step 1 – $1,000 to start an Emergency Fund.
Depending upon your circumstances, you may need more, but $1,000 is a good starting point. 

Step 2 – Pay off all debt using the "Debt Snowball".
The debt snowball is a strategy in which Dave Ramsey advocates paying the minimum on larger debts while adding any extra funds toward the smallest debt to eliminate it more quickly. When you retire that debt, you add the amount you were paying on that bill to the next debt on your list, and repeat the process until all your debt is paid off. Therefore, your debt payments “snowball” over time. The theory is that the quicker pay-offs will help keep you motivated.  

Step 3 – Three to six months of living expenses in savings.

Having 3-6 months of living expenses at your disposal will make it much easier for you to face a financial emergency or to make it through an extended period where your income does not match your expenses. Having this additional financial cushion can money give you the freedom to keep from worrying about an emergency forcing you back into debt and the associated pressures that come with it.

Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement.
You need your money to work for you if you are ever going to be financially free. Saving for your retirement in tax advantaged accounts is the best way to make progress for long term savings.  Dave Ramsey recommends investing 15% of your household income (or more if you can afford it) into Roth IRAs and pre-tax retirement accounts.

Step 5 – College funding for children.
If you have children, your next major expense will likely be college. Whether or not you assist your children through college is a decision you will have to make on your own. Dave Ramsey recognizes it is very important to place your retirement savings ahead of college savings for your children, and I agree.

Step 6 – Pay off your home mortgage early
If you already have completed steps 1-5 and have additional funds every month, paying off your mortgage early will free up more money every month and allow you other freedoms that you would not have with a mortgage. 

Step 7 – Build wealth and give!

In my opinion, it seems like a couple of different ideas were thrown together into one step.   I’m not sure why Ramsey didn’t just include eight steps!
Building wealth: Ramsey suggests investing in mutual funds and real estate. I prefer to invest in index funds and ETF's over mutual funds because the fees are generally much lower.  As for real estate, I don’t think that it is the best investment for everyone.
Dave Ramsey advocates tithing 10% throughout all the baby steps. Giving, by his definition, is anything above 10%.

Should You Follow Dave Ramsey?

Overall, I think Dave Ramsey’s plan is a solid one to get out of debt and ultimately reach financial freedom. However, this plan should be viewed as a rough guide, and not an absolute road map. Everyone has different personal and financial situations and goals.
Dave Ramsey has a loyal and enthusiastic following, and after listening to his radio show and reading a few of his books, I can understand why he has followers and fans.  I also understand why some people prefer books written by the late Larry Burkett, such as the Family Financial Workbook.

Ramsey's motivational, no nonsense style is exactly what some people need, but it can rub some people the wrong way. His methods are also more about behavioral changes, rather than always choosing the best financial decision. For example, the debt snowball may not be the best financial option mathematically, but the theory is that small victories may give a needed psychological boost to someone who is feeling overwhelmed by debt.  In the Ramsey methodology, the psychological victories are sometimes more important than the actual money saved.

I think Dave Ramsey is very good at much of what he does, which is to motivate people learn to control their money, instead of having their money control them. He is a motivational speaker, and a salesman. But his product is one that has worked for many people and one that many people need.

However, personally, I would not base my investing decisions (Step 7 above) on Mr. Ramsey's investment advice. While he is very good at explaining basic financial concepts for getting out of debt, I found his investment knowledge to be too "one size fits all".

When you get to the point that you have surplus money to invest, I would recommend reading other authors. You can see my recommended best personal finance books and also read my article about important considerations when choosing a financial advisor