Pay Off Debt

Dave Ramsey’s Baby Steps and How to Make Them Perfect

Dave Ramsey's Baby Steps why they aren't perfect

Dave Ramsey’s Baby Steps are synonymous with debt freedom.  The popularity is both earned and warranted by Dave himself.

Mr. Ramsey has branded himself well and, to his credit, has helped millions get their financial shit in order.

I love the motivation he exudes, but I loathe the strict program he keeps his “fans” on.  Without options, most quit.

A cookie cutter program rarely fits the financial mold of your unique life!  So, what can you do?  Just give up and go buy some more shit you don’t need?

No, no… There are options.  You can make Dave Ramsey’s Baby Steps fit YOUR LIFE! 

You can still be wildly successful with a few tweaks!  We paid off over $109,000 following an abbreviated version of Dave Ramsey’s Baby Steps.  You can totally do this!

Baby Step #1

Baby Step #1 is pretty simple.  Save $1,000.  That’s it.  You just need to save this $1,000 and keep it in a general savings account for emergencies.

It will be known as your “emergency fund”.

Is $1,000 enough to cover an emergency?  That depends…  If that emergency is replacing your washing machine, sure.

If the emergency is covering the costs of a new roof, medical emergency, or vehicle transmission… it’s going to come up short.

Most American’s don’t have nearly $1,000 saved, so this is a great step in the right direction!

So, what’s the perfect amount to stash away to fend off those pesky emergencies?  That’s a damn good question isn’t it?

It comes down to your tolerance for risk and what your responsibilities are.  If you’re willing to roll the dice with Murphy’s Law or maybe you’re in a rush to start attacking debt, then $1,000 might not feel so bad.

If you’ve got a home and other responsibilities, you might want to pad that account with a bit more.  Before you get all antsy, consider Baby Step #1 as front-loading your debt freedom.

If you decide to save MORE than $1,000, you can use the excess to pay off the last of your debt when you’re coming down the home stretch of Dave Ramsey’s Baby Step #2.

The time you take to save the extra cash now will not impede your debt freedom If you’re unsure where you fit in, these options might help you decide.

Baby Step #1 (High Risk Tolerance)

Are you feeling lucky… well… ARE ya?  If so, this might be the place for you!  Perhaps you don’t have a ton of responsibilities, or you’re antsy to start powering through your debt.

The “high risk” option would have you saving that $1,000 and then jumping right into Dave Ramsey’s Baby Step #2.

You’ve got places to be and not a care in the world.  Go get that debt you brave SOB!

Baby Step #1 (Moderate Risk Tolerance)

Debt payoff printables

Debt-Printable-Book.pdf (325 downloads)

Not really a risk taker, but you also drink milk right out of the carton?  Yea, I feel you.

The moderate risk section would have you saving a bit more than $1,000.  The exact amount will take some work to figure out.  Do you have older cars, an older home, or some pending health care costs coming up?

If so, you might want to consider putting away $5,000 to help cover those costs.  $5,000 will cover quite a large emergency.

You can replace your vehicle’s transmission or fix some major roof damage, and you’re not going to lose any sleep over needing to replace your vehicles brakes or tires.

This $5,000 is a cozy little blanket to keep you warm if the world gets a bit chilly around you.

When you’re crushing the Step #2 of Dave Ramsey’s Baby Steps, you’ll use that extra $4,000 to pay off the last $4,000 of debt when you get to the finish line.

Dropping your savings to $1,000 feels a lot safer when you’re debt free.  You’ll be able to replenish your emergency fund quickly at that point.

Baby Step #1 (Low Risk Tolerance)

Not a risk taker?  That’s ok.  We weren’t either.  We decided to keep $10,000 in our savings while working on Dave Ramsey’s Baby Steps.

I didn’t know we were “low risk” folks, but we owned a home, had 2 vehicles and was wildly uncomfortable only have $1,000 in our savings.

I knew that the anxiety from not having a savings would actually be a hindrance on our ability to stay on Dave’s plan.

You don’t have to keep $10,000 in your account.  Not by any means.  It’s what felt right for us, and when we got to the finish line we had the ability to just pay that last $9,000 off.

Again, don’t get hung up on how long it’ll take you to save $5,000 or $10,000.  This time is completely irrelevant.  It’s going to pass whether you’re paying off debt, or putting cash into your emergency fund.

It won’t prevent you from becoming debt free, and I think there’s an argument to be made that spending the first few months saving money will actually help you nail down your budget.

Baby Step #2

You did it!  You nailed Baby Step #1, and now you’re ready to start hammering away at your debt.  Kudos, you’re further than most folks ever get.

Baby Step #2 is when you’re going to start paying off your debt.  This is probably the most difficult Baby Step.  It requires patience and intestinal fortitude.  Paying off debt sucks.  It’s not fun, or glamorous.

If anyone tells you that it wasn’t difficult… they’re either lying or have a massive income and a tiny debt.

We spent about 4 years working Baby Step #2.  We hit a few road blocks and failed a few times.

If you ask Dave, there is only one option to pay off debt… and that’s the “debt snowball”.  Luckily, that’s not true.  There are a few options and none are really that complicated.

The debt snowball vs the debt avalanche

Debt Snowball 

The debt snowball.  The rock star of those pursing debt freedom.  If you’re not familiar with the debt snowball, it’s pretty simple to explain.

You’re going to do the following things:

  • List your debts out in order of balance (least to greatest)
  • Pay the minimum payment on all debts except the smallest
  • Pay extra as much as you can on the smallest balance
  • Roll that payment into the next debt and keep going

It’s really that easy.  It’s all balance related.  Interest rates are irrelevant here… As you pay off each debt, you just keep rolling those payments into the next debt until you’re debt free.

By the time you reach your final debt (largest balance) you should be packing quite the punch each month and you’ll be able to pay it off with some speed.

The debt snowball is all about emotional wins.  You’ll get satisfaction early as you pay off your first (smallest) balance.  By the time you get to those nasty big balances, you should have developed some thick financial skin and will be ready to settle in for the last fight.

Debt Avalanche 

The debt avalanche isn’t often referenced by those who are following the Baby Steps.  I sorta feel bad for the avalanche… It’s not that it’s ineffective.  It’s just not marketed as well.

The debt avalanche is similar to the snowball but instead of listing your debts out in order of balance, you’ll list them out in order of interest rate (highest to lowest).

You’ll follow the same steps as the snowball, but this time you’re going to start paying off your debt in order of interest rate.  Starting at the highest and working backwards to the lowest.

The avalanche is about money wins, not emotional wins.  The debt avalanche could save your thousands of dollars in interest if you’re largest debt also carries the highest interest rate.

The biggest problem with the avalanche is that most folks aren’t mentally prepared to attack their largest debt first.  The tedious nature that accompanies the debt free journey can scare a lot of people away.

If you’re able to stick it out, the avalanche might save you a boat load of cash… The potential savings makes the debt avalanche worth considering.

Can a Snowball Cause an Avalanche?

Maybe there is a best of both worlds?  What if a debt snowball causes the avalanche?

What I mean is, what if we start with the debt snowball and then merge into the debt avalanche?

Let’s get crazy here. (Gary Busey Eyes)

Let’s create two debt lists.  First, list out your debts in order of balance (least to greatest) and then list them out again in order of interest rate (highest to lowest).

Pay off the debt with the lowest balance (or 2), get those delicious emotional wins… and THEN jump into the avalanche.

Whichever debts are remaining are going to be listed out in order of interest rate (highest to lowest) and you’re going to attack that high interest rate.

Had I known about the debt avalanche, I would have most likely used this method when we were navigating the Baby Steps.

Baby Step #3

Dave Ramey's Baby Steps how to make them perfect

Yaaaasssss!!  At this point you’re consumer debt free.  This will most certainly be one of the best feelings you’ll have the entire time you’re working through the Baby Steps.

Baby Step #3 is when you save up your true emergency fund.  That emergency fund will be 3 to 6 months’ worth of your living expenses, according to Dave.

Much like the previous Baby Steps, this one isn’t cut and dry either.  The amount you save will again relate to your risk tolerance and specific life circumstances.

One major item to consider here is your job stability.  If you were to lose your job today, how long would it take to find a new one?

Sadly, in 2019 there aren’t many jobs that are rock solid.  I used to feel immune to the fear of losing our jobs because we’re both Registered Nurses.  That’s really not the case anymore.

Recently, hospitals have closed entire floors and departments…laying off Registered Nurses like my wife and I.  I feel confident that I can go find another nursing job but at this point in my life, I’m not sure I want to just take “any” job…

I want the security to know I can take my time looking for a job and not just jumping into an opportunity because I need the money.  For this reason, we saved 6 months’ worth of expenses and placed the money in a general savings account.

If you feel secure in your job, maybe 3 months is plenty.  Perhaps you work in a field that would require a longer job hunt and more security.  If that’s the case, maybe you’ll want to save 6 months or even a year’s worth of monthly expenses.

The absolute last thing you want to do is go back in debt because of an unfortunate life circumstance.  You’ve worked too hard to get to this point, and that would be devastating.

Consider your risk tolerance and save accordingly.

Baby Step #4

Debt payoff printables

Debt-Printable-Book.pdf (325 downloads)

Much like Kevin Malone from The Office screaming “WARNING, WARNING” as Robert California enters the room…I’d scream WARNING at anyone starting the fourth of Dave Ramsey’s Baby Steps.

This is where Dave tells you to save 15% of your income for retirement…  First of all, 15% toward retirement is great.  It’s far more than most Americans save.

With that being said, most American’s don’t complete Dave Ramsey’s Baby Steps either.  You’re debt free and pretty much a financial badass at this point. (high five)

Will saving 15% of your income help you retire when you’re 65?  Yes.  No question about it…. but what if you went a step further?

What if you maxed out your 401k, IRA and saved post tax as well?  What would your life look like at that point?

You’d quickly accrue what’s referred to as “F-U Money”.  F-U money is when you have enough money saved to tell your employer to “F off” if they present you with a terrible decision.

F-U money shifts the power from employer to employee.

Saving more than 15% would help put you in a strong financial position prior to turning 65, and it would allow you to build a massive net worth that could turn into generational money.

You can literally change your family tree by looking past 15% and saving more.  Personally, I wish someone in my family would have done this before I came along… (smirk)

Your retirement savings is also personal and directly related to your income and living expenses.  Luckily, you’re consumer debt free at this point and have some wiggle room in your budget to stash away more if you so choose.

Regardless of the percentage you end up, it has to be at least 15% to stay on track with Dave Ramsey’s Baby Steps.

Baby Step #5

If you don’t have children just move right on by… and enjoy your money and free time. (just kidding… but seriously)

This section is all about saving for your child’s college.  No kids, no problem.

Student loan debt is an epidemic… Totaling over 1.5 trillion dollars and growing like cancer.  You most likely had some (or a lot of) student loan debt.

Each month you were sent an enormous payment, and most likely you sealed the payment envelope with your tears… I get it.  Student loan debt has become comically bad, and it probably took you years to crawl out from under this debt boulder.

Hopefully our children won’t have to cope with this monstrosity.  One problem with the Baby Steps is that they don’t discuss how exactly to save this money…

Don’t fret though!  There are a few great options to save!

Dave Ramsey's Baby Steps aren't perfect

ESA (Education Savings Account)

An ESA is a popular way to save for college utilizing your after-tax dollars.  Your contributions aren’t tax exempt… but the growth will be entirely tax-deferred and no taxes will be paid on the distributions if used to pay for educational costs!

There are some limits with an ESA.  For starters, only individuals with a modified, adjusted gross income (MAGI) less than $110,000 a year, or couples (filing jointly) making less than $220,000 are eligible to utilize an ESA.

The contribution limit for an ESA is $2,000/year.  That may not sound like a lot, but consider if you started saving $2,000/year when your child was born.

18 years later and at an average annual return of 9%, your balance would be just north of $82,000.  That sounds great, but it gets better!  You’ve only contributed $36,000. compound interest grapg

That means $46,000 could be sitting there FREE FROM TAXES!  One thing to consider is that once your child turns 18, the account is transferred over to them.

They will have control over the money and they can do what they please.  This would include taking it out for beer money and paying taxes and penalties…

You can learn more about ESAs here

529 College Savings Plan

A 529 College Savings Plan is another popular way to save for college.  You’ll also use your post tax dollars to save, the money will grow tax deferred, and the investment will not be taxed if used to pay for higher education costs.

Bingo baby!

A 529 College Savings Plan is FAR more flexible than an ESA.  These plans are for all families, regardless of income level and don’t carry a contribution limit.  Stash that cash, baby!

The money in this account will be locked in to pay for college, or other secondary education expenses.  If used for something else, it will accrue some tax issues and also a 10% penalty…

Another massive perk to the 529 College Savings Plan is the fact that you remain in control of the money once your child turns 18.

I’m not saying your kid will make poor financial decisions, but if my parents dropped $80,000+ in my lap at 18… I might have made some poor decisions.

Ok… I would have made some terrible decisions because I WAS JUST A BABY!

You can learn a lot more about a 529 here.

The way and amount you save is again, personal.  If you’re starting later and want to really stuff an account with some cash, than a 529 might be right.  If you’ve got 18 years to save, than the ESA could do the trick.

Either way, saving money to pay for your child’s college will set them up for some pretty incredible financial success.  You’re a hell of a parent.

Baby Step #6

Shit… here I go disagreeing with Dave again. The sixth of the Baby Steps is all about paying off your mortgage… rapidly.

Is it a bad idea to pay off your mortgage?  No, absolutely not. There is a tremendous amount of security that comes with paying off your home.

If shit hits the fan, your home is yours and you won’t end up on the street.  Solid emotional win there.

Consider this though…  If you’re rapidly paying off your mortgage and not saving any money post-tax, you’re still at risk of losing that house.

Suppose you get that balance down to $50,000 and you lose your job.  If you can’t pay those mortgage payments, the banks are going to come looking for that house regardless if you owe $50,000 or $500,000.

This comes back to a huge, personal choice.  If you’ve got a low interest rate, it might actually make better financial sense to invest rather than pay off your home.

This is the exact situation my wife and I found ourselves in.  As we moved through Dave Ramsey’s Baby Steps, we hit a road block at #6…should we pay it off, or invest?

After we ran the numbers, it became clear that paying the home off was ONLY an emotional win.  Financially, we would have $1.7 million MORE if we started investing now rather than paying the home off and starting later.

$1,700,000!!  How could that possibly be??  Well, compounding interest is real, and it can make you a lot of money if you give it time.

Why Exactly Are We Investing

Excel graph

Here is how we came to this conclusion…

If we pay our home off in 50 months, we would begin investing in December of 2022.  That would leave 23 years to invest $6,500 ($5,000 + Mortgage Principal) a month before I turn 60.

That will potentially produce a balance of $6,038,827.16.  That’s pretty damn good!!

Now, what happens if we begin to invest that $5000 a month in September of 2018?  That same $5000 a month invested for 28 years would potentially produce a balance of $7,778,310.28!!!


Do I want to work until I’m 60?  Abso-freaking-lutely NOT!  So, let’s shorten it to say… 10 years?

Investing $5000 a month for 10 years would potentially produce a balance of $947,122.95.

Even if we would then pay off our mortgage balance ($233,875.40) at that time, we would be left with $713,247.55!

That’s still a pretty awesome brokerage balance!

Instead of rapidly paying our mortgage off, we are investing in a Vanguard brokerage account.  We can revisit this once our brokerage balance exceeds our mortgage balance.

Much like a big ass Baby Step #2, I’d rather pay it off with one lump sum than navigate years of avoiding an emergency or job loss on a hope and a prayer.  It feels both emotionally and financially correct.

Baby Step #7

This is where Dave instructs you to begin hardcore investing and also giving.  I really don’t see any issues with this step (other than starting hardcore investing this late).

At this point, you are completely and totally debt free and your kids have a fully funded college savings.

You’re pretty much a financial King Kong.  You’ve crushed the Baby Steps and you’re just looking to grow your nest egg and give to those with less.

Another amazing investing resource is JL Collins Stock Series.  Spend time here before you start investing…  Always remember that financial mistakes come with 0’s on the end.

Final Word

Dave Ramsey’s Baby Steps have helped millions of people get their financial lives in order.  Debt has been paid and lives changed.

We owe a great deal to the motivation and knowledge that Dave provided when we first started on our debt free journey.

With that being said… a strict and overly standardized program doesn’t offer the needed wiggle room and can cause folks to just give up.

I hope the options outlined above will keep you motivated and invested in your financial future.  Like I’ve said before… the only perfect plan is the one you actually stick to.

Create your plan and achieve your financial dreams.  Don’t let the strict nature of his debt repayment program box you in.

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6 thoughts on “Dave Ramsey’s Baby Steps and How to Make Them Perfect

  1. I’ve actually attempted Dave Ramsey’s plan a few times. On a general level, I think it is effective, but I kept on feeling like I had to repeat the process because I wasn’t tackling my spending problem. And that problem was not just a money problem. You inferred this in your post, but I also think he is a little too “square” in making sure people follow his approach exactly.

    I agree with your approach on tackling high-interest rate consumer debt first. We are just about debt free and I was looking at one of our debts. We paid $2,000 in one year just on interest on that balance! Part of it depends on how quickly you can pay off debt, but getting that paid off saves a crap ton of money.

    This is the best Dave Ramsey plan analysis I’ve seen. Great job!

    1. I appreciate the compliment!! Dave probably draws a hard line because if he waivers, people won’t blindly buy his books and FPU. There HAS to be flexibility!

  2. Great job. I love Dave Ramsey and understand why he’s so strict with his approach. I’m glad I’m not the only one raising a question to whether it will work for us. I’ve never seen this level of analysis against the steps and clear explanation for each variance. Great job!

  3. I liked the way you have poked holes into DR’s plan with hard numbers. I believe the debt pay off is something I love about his plan. When it comes to investing I am a DIY investor and I want to keep myself away from any advisor.

    JL Collins fan here. He has single-handedly educated me more about investing than anyone else.

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