My take on Dave Ramsey’s 7 Baby Steps (Part 2, Baby Steps 4-7)


This post is part of a two-part series:

In my last post, I talked about the first three (well, three and a half) of Dave Ramsey’s 7 Baby Steps for financial wellness. 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 3b. Save for a home)
  • 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
Dave Ramsey
Photo courtesy of Jessica Adkins

This is where it gets fun.

Baby Step 4: Invest 15% of your income

This one states that you’re not ready to invest until you’re out of debt (Baby Step 2) and have a fully funded emergency fund (Baby Step 3). (And apparently, that you’ve bought a home in Baby Step 3b.)

Once you are ready though, save 15% of your gross annual income—no more, no less—towards retirement, using tax-advantaged accounts when possible (IRAs, 401(k)s etc.)

My analysis

I’m a fan of the 15% number. I think that’s the minimum one needs in order to fund a comfortable retirement.

One controversial part of this is that Dave recommends that people who are still in debt, but who are offered a match by their company should not take it, and devote all of that money to debt. I find that hard to swallow, personally. A match is a 100% guaranteed return on investment, and most of the time it’s only a small percentage of your check, such as 3%. I understand the “do only one thing at one time” ethos, but seriously, take the match.

Also, people get stuck here because Dave says that you can make 12% on investing. Pretty much everyone says that this is bad advice. I would expect a long term average return of about 6-8%. But that 15% figure for how much of your paycheck to invest is still valid to me., regardless of the claims of returns.


15% of your paycheck going to investing for retirement is the least amount of money a debt-free person would want to be putting away. But I’d say that even if you’re in debt, at least take the match if it’s offered.

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Baby Step 5: Pay for your children’s college

Take care of your own retirement first, then save for your kids’ college. The idea here is that they may or may not go to college (and may or may not need your help), but you are definitely going to have to retire at some point.

But if you have any money left over after the 15%, put aside money toward college. This step happens simultaneously with Baby Step 4 and 6, if applicable.

My analysis

I don’t have kids, so I can’t speak to any personal experience here. All I can say is that given the cost of college these days, I would start to save up now even if you’re thinking of having kids in the future. We’re no longer allowed to say that college wasn’t a bargain, since we now know the true cost of a degree and the cost of a degree that doesn’t lead to a job.

But I agree that you want to take care of your retirement first, just like you put your own oxygen mask on before helping others.


Have a plan to help pay for your children’s college. But you still come first.

Baby Step 6: Pay off the home mortgage

Once you’ve got your 15% investment in place, and you’re saving the maximum toward your kid’s college (is there such a thing?), any extra money you have goes to paying off your mortgage.

My analysis

Obviously, you skip this step if you don’t own a home, though maybe you go back to 3b at this point. It’s a little unclear. What if you don’t want to buy a home?

I think this one is good, and it’s roughly the plan I’m following today with my mortgage, though I recognize that this is controversial. And I’m not talking about the dumb ideas like “holding onto a mortgage to get the tax deduction”. I’m talking about spending your extra money on your mortgage versus spending extra on retirement.

Mortgage rates have been at historic lows for at least a decade now. But back in the 1980’s, mortgage rates were at an eye-popping 18%. So the question of mortgage-vs.-investing was more clear cut.

Nowadays, you can sometimes make a better return on your investments than you can by paying off your mortgage. It’s not guaranteed, of course, but it is possible, and that leads people to pay the minimums on their mortgage and use their extra money for retirement.

I understand the desire to maximize returns. But I also understand that there is a powerful emotional factor in owning your own home outright. When you have a mortgage, disaster might strike, and if you can’t pay your mortgage, you may lose your home. But when you own your home outright, that’s a totally different story.

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Personally, I want the mortgage dead. I’m paying mine aggressively down. Maybe I could make more money if I invested, but I don’t think that’s as important to me.

Baby Step 7: Build wealth and give it away

This is the bonus step. Once you’ve gotten debt free and mortgage free, you can build wealth in a big way. (Think about it. How much could you put away if you put your rent/mortgage money away each month?)

But after you’ve earned a big pile of money, now what? Or, more to the point, so what?

Once you’ve achieved financial freedom, what good does piling away endlessly more amounts of money do for you? Once you’re taken care of more or less forever, what then?

The task is to give it away. Be generous. Help others.

My analysis

I love this idea, at least in theory. I love the idea of helping others once you’re in a position to do so.

But I do kind of struggle here, and this is more of a political point. As an individual giver, you’re giving to those people and organizations that are both visible to you and aligned with you.

And frankly, I’m not sure that’s the best way to do things.

People are struggling, and one of the reasons why they are struggling is because we have depleted our safety net, and punished people for being poor, in effect perpetuating the cycle of poverty for millions of people.

Do you know who needs the most help? Of course you don’t.

That’s why I support higher taxes and better safety nets for everyone, regardless of whether I know them or am aligned with them. I want to be able to have my money go to people I will never know, and know that I am contributing to a better and more just society.

I wish there was a way to donate to the public safety net, rather than some private institution which, though it might have its heart in the right place, is not a substitute for state assistance.

I would gladly have less money in Baby Step 7 if it meant that we were contributing to a more just world.


Yes, build so much wealth that you have the ability to help other people with scale. But I also wish those in this position had a little less, so that everyone else could have a little more.

The final take

Dave Ramsey’s 7 Baby Steps are an excellent template for securing your financial freedom. While I have some critiques with some specifics of the program, that doesn’t take away from the benefits of its simplicity. The one-size-fits-all might be a little too reductive, and I think the larger plan can still work even if you tweak it, but as a place to start, you probably can’t beat it.

I guess you could say that I’m on Baby Step 6. What Baby Step are you on?

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