My take on Dave Ramsey’s 7 Baby Steps (Part 1, Baby Steps 1-3b)

Mud crawling

I offer my opinion and review of each of Dave Ramsey’s Baby Steps, starting with Baby Steps 1, 2, 3, and the often-forgotten Baby Step 3b.

This post is part of a two-part series:

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At this year’s FinCon, both Rachel Cruze and Chris Hogan were giving keynotes. They are both part of Dave Ramsey‘s “Ramsey Personalities” team, bringing his message, or some part of it, to more people.

For those who don’t know, Dave Ramsey is a personal finance author and radio host (and some would say “guru”). He is best known for his aggressive stance on debt, and for his “7 Baby Steps”, a plan to financial freedom.

Dave Ramsey
Photo courtesy of Jessica Adkins

It occurred to me that I have never actually talked much about the 7 Baby Steps, so I figured I’d give each one of them my take. To make this not too much a giant screed (too late), I want to just focus on the steps, and not on Dave Ramsey himself, or anything else about his work.

So here goes: What are the 7 Baby Steps and how could they work for you?

The 7 Baby Steps

You can read about the 7 Baby Steps on Dave’s site. In short, they are:

  • Baby Step 1: Save $1,000 to start an emergency fund
  • Baby Step 2: Pay off all debt using the debt snowball method
  • Baby Step 3: Save 3 to 6 months of expenses for emergencies
  • Baby Step 4: Invest 15% of your household income into Roth IRAs and pre-tax retirement funds
  • Baby Step 5: Save for your children’s college fund
  • Baby Step 6: Pay off your home early
  • Baby Step 7: Build wealth and give

Let’s take them one by one. In baby steps, you could say.

Baby step 1: Save $1,000 fast

If you have no savings, zero, no cushion whatsoever, then any little unexpected expense becomes an emergency, and you are pretty likely to reach for a credit card. This first step both forces you to commit to the process, and will ensure that little problems along the way don’t derail you and keep you from making progress.

My analysis

I think this is a wise first move, though I do wonder whether this number needs to be revised. The Baby Steps were put together in the 1990’s (originally in the book “Financial Peace”) and a lot of inflation has happened since then. $1,000 back then is almost $2,000 today. $1,000 might be enough, but might not.


I think, personally, I might want people to save a little more first.

Baby Step 2: Get out of debt

You can’t get out of a hole if you keep digging. You can’t build wealth if you’re still in debt. And finally, there is no such thing as “good debt“.

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Use the debt snowball, listing your debts smallest to largest, and paying off one at a time. As you pay off debts, the amount you can put forth toward larger debts gets bigger, so you can actually see that you’re making progress.

You could make the case that this step is the most fundamental of all Dave’s Baby Steps, as it’s the one that people associate with him more than any other step.

My anaylsis

I love this. I especially love the psychology of it all. Technically, you will pay off debt slightly faster if you paid off the largest interest rate first, but that misses a crucial aspect of this process: we are human, and thus subject to emotions. If you pay off a highest interest rate first, you might be chipping away at a single large debt for years without making any progress. You’re likely to get unmotivated. (Read about a test I did on these two methods.)


Math isn’t what got you into debt; behavior is. So this is one place where I like to put aside my love of math and focus on behavior. This is one you feel. I can speak from serious experience here.

Baby Step 3: Complete your emergency fund

Once you have your debts paid off, your next step is to save a full emergency fund of 3-6 months of expenses. So this is like a continuation of Baby Step 1.

My analysis

Once again, I think this might be a little insufficient. Job loss and redundancy is a real issue, and not everyone can just go out and find a new job next Monday. If you only have 3 months of expenses saved up, that doesn’t feel like very much. And if you combine job loss with some other emergency, or if you have a larger situation, 3 months is going to be eaten up quick.

I think 6 months is the bare minimum you would want.

And remember, to find out this amount, add up your average monthly Bills and Expenses and multiply that by 6. So if you spend $3,000 in an average month, you need $18,000 in your emergency fund. (I also created a rough guide to how much you need.)

The other question is what you should do if you have a larger emergency fund but still have debt. Dave would say that if you have $20,000 in emergency fund, but $40,000 in debt, that you should immediately pay down $19,000 of debt, to take you to the $1,000 emergency fund, which you should stay at until your debts are paid off.

In many cases, I think that might be a bit too extreme for me.

Case in point, when I was getting out of debt (before my mortgage), I had a large emergency fund which I built up until such time as it was equal to my debt, which I then paid off all at once. I called this the debt blunderbuss method. This meant that I only wiped out my emergency fund when I had no additional debt. That mitigated the anxiety of doing so. You may want to think about that.


If you’re starting from scratch with the Baby Steps and no money, I’d say that going in order as written is a good idea. But if you already have money saved up, I don’t think you necessarily need to wipe out your emergency fund today. Just as there is psychology around making progress with debt, there is psychology around having a safety net.

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Baby Step 3b. Save for a home

You’ll notice this one isn’t on the list above, and in fact it gets talked about a lot less, but it’s absolutely key for those who don’t own homes. The specific point of this one is to save for the house before you start investing, but after you are debt-free.

Beyond this, Dave recommends saving a down payment of at least 10% (preferably 20% so as to avoid PMI, and even better if you save 100%) and to get no more than a 15 year fixed-rate mortgage, where the payments are no more than a quarter of your take home pay.

My analysis

I’ve talked a lot about reasons people can’t afford to buy a home. There’s so much house fever (and sense of scarcity) out there that when people find their “dream home”, they jump on it and expect to be able to figure out how to pay for it later, even if they have to pay 50% of their income for the home payment!

Homes are expensive these days. And if you’re only saving up 3% for a down payment, just keep renting for now.

The question here is how much time it’s going to take you to save up for the home. If it takes you 5+ years to save up for a down payment, does that mean that during that entire time that you shouldn’t invest a dime? Given the power of compound investing, I don’t think that’s a good trade-off.

I certainly am not so hard-line that I would suggest foregoing an employer match (which is free money) because you’re still trying to build up a down payment. At the very least, I think you want to take advantage of that.


I don’t believe that buying a home is the most important part of your financial plan. Because of this, I don’t think this needs to get in the way of your investing for the future. You can be wealthy without owning a home, so I believe I think you might want to only save up for a down payment when you feel like it’s right for you. Otherwise, move on to Baby Step 4, and come back to this later.

Let’s pause for now

Whew, I didn’t expect this post to be one of my absolute longest ever. Because of this, I’m going to split this up into two pieces.

At this point, I feel like Dave’s first three Baby Steps are good templates you can use to get yourself to a positive financial net worth, which is a good place to be. I don’t believe that you need to do it exactly as he states in order to be successful though. The spirit of the message is as important as the letter.

In my next post, I’ll cover the remaining Baby Steps.

Continue to Baby Steps 4-7

But enough about me. What do you think about Dave Ramsey’s Baby Steps?

Everyone struggles with money, but most will try to muddle through on their own. Will you be different? I help people from all over the world reach their financial goals. Let’s talk.

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