I’ve been writing about personal finance for just over a year now. During that time I’ve written a lot of about Dave Ramsey and his class “Financial Peace University“, but I realized that I’ve never written in depth about his 7 baby steps plan to getting your finances in order and on track. So today I’ll be starting a series of posts about his system that I’d like to call “Dave Ramsey’s 7 Baby Steps By The Numbers”. In this series I’ll be going over the 7 baby steps in depth, talking about each one and going over what you need to do to achieve each step.
So first of all, who is Dave Ramsey, and what are the 7 Baby Steps? Dave Ramsey is a personal money management expert, radio talk show host and TV personality who over the years has helped thousands of people become debt free and change their financial lives forever. He gives no-nonsense advice to folks who have gotten in over their heads, and helps them to find their way out, in a responsible way. If you’re afraid of hard work, you may want to look elsewhere for your advice.
In addition to his best selling books and radio and tv shows Ramsey also teaches “Financial Peace University” at huge live events, and the 7 Baby Steps are an offshoot of the FPU class.
So what are the 7 Baby Steps?
Dave Ramsey’s 7 Baby Steps
- Step 1 – $1,000 to start an Emergency Fund: Before you even get started on the rest of the plan, you need to save up a little bit of cash just in case small emergencies happen. Things like flat tires, doctor visits, and flying somewhere for a funeral will usually be covered by this small emergency fund.
- Step 2 – Pay off all debt using the Debt Snowball: You list your debts from smallest to largest. Pay the minimums on all of your debts. With any leftover money you may have you pay extra on your smallest debt until it is paid off. You then roll that amount over to the next smallest debt.
- Step 3 – 3 to 6 months of expenses in savings: Save up 3-6 months of expenses in case of extreme misfortune like a job loss, illness or other long term problem.
- Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement: Save for your retirement.
- Step 5 - College funding for children: After saving for retirement you can save for your children’s education and college expenses.
- Step 6 – Pay off home early: Make extra payments on the mortgage to pay it off early.
- Step 7 – Build wealth and give! (Invest in mutual funds and real estate): Continue building wealth through mutual funds and real estate, and give, give give!
So those are the 7 Baby Steps. Pretty simple, yet effective. Even though it may seem like common sense to a lot of people, a lot of times people just don’t think about doing these things if they haven’t actually been told how to do them. So let’s get started.
Baby Step 0: Getting Started, Making A Decision To Change
Before I even get into the 7 Baby Steps, I think it’s important to start out by talking about just how key it is that you sit down, talk with your significant other (if you have one), and actually make a decision that you want to change.
A lot of people talk about how to change, but never touch on the fact that if you or your spouse isn’t ready to change, it isn’t going to happen. You have to want to change.
I know for my wife and I there wasn’t one moment where we decided that we wanted to change, it was just a gradual realization that we weren’t spending our money as wisely as we should, that we were accepting too much debt as a part of our financial plan, and that we craved the freedom of not carrying any kind of debt. We wanted to be free!
Getting to the point where you want to change might mean that you’ve hit bottom and declared bankruptcy, or it might just mean that you’re sick of not saving enough towards retirement. It’s a different point for everyone. But when you get there you’ll know.
No More Debt
Once you’ve made a decision to change, you need to be able to begin the change immediately and make a decision as a family that you aren’t going to incur any more consumer debt. Credit cards and home equity lines of credit are off limits now. No more high interest auto loans! If you want a new TV or a new kitchen countertops, you’re going to have to save for them. No more store credit cards to buy clothing at ridiculous interest rates!
Cut up your credit cards, and draw a line in the sand. No more debt!
My wife and I used to use our credit cards in a variety of ways. We would use them to pay for vacations because we wouldn’t plan ahead and save up for them in advance. We’d use them as a safety net for our household, instead of saving up a cash emergency fund. If we needed new furniture we would just finance it at the store, and pay it off over time. Once we made a decision to change, we realized that we couldn’t do that any more. We had to make a life change. Using the 7 Baby Steps we were able to make a change in the way we looked at money, and in the process change our lives for the better.
Prepare Yourself
When you’re starting on the road to financial freedom you need to brace yourself and realize that it isn’t always going to be easy getting out of debt and building wealth. There will be bumps along the road, and there will be times that you’ll want to quit. Your family and friends may even think you’re a bit odd for all the “strange things” you’re doing – like not using credit cards, not incurring debts to buy nice cars or not upgrading your house. You’ll seem abnormal, but that’s ok. Normal is being broke. Being debt free and financially sound IS strange. So you want to be strange.
Make a commitment today to simplify, and get started on the road to financial freedom! Join with me, won’t you?
Next in our series, baby step 1, “$1,000 to start an Emergency Fund“! In my opinion, this step is one of the most important, so don’t miss it!
Have you made a decision to make a change in your financial life? What steps have you taken to prepare yourself for this change?
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I must take exception to Dave’s rule 5. College education is near critical for your child’s future. If you have to cut her, try a community college for a couple of years. You will save tens of thousands in cash or debt.
Bill Muhlenfelds last blog post..The College Credit Card Trap
I thank you for going over this subject. My fiance and I are starting out on this road before we get married. I think is the one of the best book and ideas I have read in a long time. The best part is that we can start our life out debt free and start saving for a house within a year of being married. This book should be a must for everyone, all high school and college kids should be given this as a class. I really wish I knew these things then and I would be in such a better place now.
i’m halfway between step 2 and 3. i’ve got a 3 month emergency fund built up, but i’m also attempting to pay my debt off. i’ve paid 1100 dollars off on a 7700 dollar debt in the last 3 months and am on my way to becoming debt free. it has not been easy and it won’t be easy but i’m excited and determined.
unfortunately my job security is in question so i’m currently looking around and brushing up my resume and all of that. hopefully i won’t be laid off but if it happens i feel far better prepared than i was 6 months ago. i’m only 26 but i am going to make it my 2009 resolution to make this year the last year of my life in debt and the first year of my life as a financially and personally resourceful and intelligent person.
I think Dave talks about how if you’re expecting a major event like a layoff, it’s ok to start stockpiling cash in preparation for that. He doesn’t want you to go into further debt when the event happens. Here’s another post of mine that might help you in your current “job security situation”. Good luck!
What to do when you’re laid off
What I love about Dave is that even before I read his book or knew who he was I shared a lot of his principles with my clients. Then I read his book and I was like “Yes!” Somebody out there actually shared my views. That was a nice moment and I’ve been an advocate of his for quite some time.
We’ve been a huge proponent of Dave Ramsey ever since we took his class, Financial Peace University. It really changed our lives for the better. Since teaching the class myself this winter I know it can change others lives as well. We’re living proof that his system works!
Thanks for highlighting Dave’s baby steps, but also mentioning the need for Baby Step 0… It is different for everyone, but God works in each of our lives differently.
For us, Baby Step 0 came in 2004 as we started thinking about having children. By fall of 2005 we were blessed with a new baby boy, had graduated from Financial Peace University, started our emergency fund, eliminated 42K of our 50K debt snowball, and dropped down to a single-income family.
Without Step 0, persistence, and God’s help with the other next few baby steps we would not have eliminated the rest of our debt snowball & finished baby step 3 before I was laid off in December 2008.
We now have two children and no income, but we are still ‘better than we deserve!!!’ We have no debt payments except our mortgage.
God helped us through the last few chapters in life & I have confidence He will help us in the next.
I love Dave’s plan. It had changed my wife’s and my view of money and our responsibility with the money that is provided to us through work. I just found this site and I have to say that it rocks! I cannot wait to learn more and read the comments!
To obtain financial freedom one has to be serious and forget what others are saying about him/her. It will not be achieved overnight but sticking towards the goals and trying to achieve will eventually be rewarding to the individual.
Good post on Dave’s baby steps. I think the best thing the Baby Steps and the Crown Money Map have done for people is to give them a guide and a set of priorities for financial goals. I know for my wife and I, our efforts were diluted for a long time becasue we were trying to pay off debt, save, invest, etc. Once we found these tools, we were able to have a focus. We could somewhat forget about everything else (which can be overwhelming) and focus on our immediate goal. I look forward to reading the rest of the series.
Jason @ One Money Design´s last blog ..Making Giving a Priority in Today’s Economy
We started Daves class in Sept ‘05..since then have paid off over 150,000. Good thing we did, lost my job this march…been diagnosed with MS. Wife has to support me now.
House is all we owe for and in 5 years that will be done. Thanks Dave for opening our eyes. It took COMMUNICATION and dedication to do it but IT IS WORTH IT.
Tithe is the first thing. Then hit the small stuff…7 baby steps..
God is good, all the time.
My wife and I started out on Dave’s plan and still think its great for anyone trying to get our of debt. My itty nitty bone to pick is his unwillingness to adjust to the current economic conditions.
For example, my wife and I were on baby step 2 when we both became uneasy with the amount of debt we had to pay off while only having the $1000 EF as a cushion. I understand the principle, but with layoffs and companies folding left and right, we decided to flip steps 2 and 3.
Some may say that doesn’t make financial sense, but neither does his smallest to largest debt snowball. It’s what makes us feel more secure.
Torrey´s last blog ..4 Simple Reasons Why He Won’t Marry You
Yeah, I was a bit more flexible than some on baby step 1, and we saved $2000 instead of $1000. I think you have to balance the need for security, and the need to get out of debt. Personally I’d rather get out of debt, but I know my wife probably wouldn’t feel the same. If you were looking at a possible layoff I think I might be more inclined to see the need for saving up a bit more in the old emergency fund.
See I agree. And that’s the only problem I have with Dave. I personally like how Suze Orman had readily admitted that the economic times may call for different strategies, depending on your situation of course. But I am grateful to Dave, because he gave us the wake-up call to look at our money in the first place.
Torrey ´s last blog ..4 Simple Reasons Why He Won’t Marry You
I certainly see your point. But to some degree I understand Dave’s point about $1000 being enough for most families as well. There aren’t too many emergencies that are going to cost much more than that. If you start building up too large of an emergency fund it’ll kind of short circuit your debt reduction – it’s gonna take a lot longer. Also at that point the gazelle intensity concept starts to wane a bit as well. But as you say, difficult times call for difficult measures.
Just stumbled on this blog site but it fits me to a tee! I lead FPU at our church each year and have personally met Dave last year in Chicago while attending a conference. He was super nice and talked to me a little bit; and signed my book of course. My wife and i have cut up all credit cards and pay cash for it all. We had step one in cold hard cash in the freezer until SOMEONE threw it away by mistake! Anyway, we are 22 months form being completely debt free but the home.
I totally agree with getting a small emergency fund in place. There is absolutely always something that crops up that needs paying for – car insurance, broken lawnmower etc.
Mick@ Mortgage Deals Help´s last post ..Mortgage rates falling but loan restrictions tighten
My husband and I took the FPU class at our church last April, and it has helped so incredibly much to get our finances in order! We were happy to find this class at the beginning of our marriage to start it off right!
Peter,
Nice job on adding Baby Step 0. It takes a burning desire to want to change, and a conscious effort to begin. Keep up the good work!!!