What are Dave Ramsey’s Baby Steps?
Finding a great debt management plan is one of the best ways to start getting control of your finances.
And one of the most popular budgeting plans is laid out by Dave Ramsey.
This simple plan outlines seven steps to help you get control of your money, tackle your debt, and save for your future.
The Dave Ramsey baby steps list is a great way to help plan your spending so you’re working toward an ongoing goal of improving your family’s financial situation.
Who is Dave Ramsey?
Dave Ramsey is a radio personality and author who turned his story of past financial failure into massive wealth to teach people how to manage their money.
Ramsey coined his method in the 1990s, and since then, he has been teaching countless families how to take control of their budget in seven easy to understand steps.
Ramsey started as a real estate mogul who lost everything when he went bankrupt.
He used this failure to help him gain control of his finances through his popular seven-step method. He has since turned his financial plan into a multi-million dollar company.
In addition to authoring several books about financial planning, he is also a popular public speaker and educator in the field of finances.
Dave Ramsey Baby Steps List
The foundation of Dave Ramsey’s financial plan centers around seven baby steps.
This baby steps list is a breakdown of each of the steps you’ll follow as you move through the plan:
- Save $1,000 for a starter emergency fund.
- Pay off all debt using the debt snowball method.
- Save three to six months of expenses in a full emergency fund.
- Invest 15 percent of your income toward your retirement
- Start saving for your children’s college fund.
- Pay off your mortgage.
- Build wealth and give money to charity.
If you’re looking for a way to track your progress throughout each baby step:
Now that you know the seven basic steps in Dave Ramsey’s plan, let’s take a look at each baby step in more detail to see exactly how to work your way through the plan.
Step 1: Save $1,000 for an emergency fund
The first step in Dave Ramsey’s financial plan is to start saving for emergencies.
But before you create a fully funded emergency fund, you’ll need to start with a smaller goal of $1,000.
This small amount provides you with a bite-size goal to get you started on your financial journey.
This emergency fund can be used any time you need emergency cash – from paying for unexpected car repairs to covering emergency medical expenses. To ensure your family is ready when emergencies happen, it’s a good idea to start setting money aside today.
If you’re looking to track your emergency fund, here’s my emergency fund tracker printable that has a specialized $1000 emergency fund tracker. There are also other quantities and blank options. It comes in black & white as well as color.
If you’re struggling to stick to your monthly budget, it can be hard to find ways to save extra money for emergencies.
The best way to begin allocating money toward an emergency fund is to take a critical look at your budget. Find areas you can decrease your spending slightly, allowing you to reallocate that extra money toward your savings.
Related articles on how to decrease your spending:
- The things I stopped spending money on (which didn’t impact my quality of life)
- Best money saving tips and tricks
- How to save money on your utility bills
- How to save money on groceries
You could also think about ways you can earn extra money to put toward your $1,000 goal, including selling unwanted items from around your house, working extra hours at your job, or starting a side hustle to earn extra income.
Then continue working toward adding money to your emergency fund until you have reached your $1,000 goal, and then move on to step number 2.
Step 2: Pay off all debt.
The majority of families have some debt they need to take care of before they can be financially free.
Whether you have to manage a large amount of debt or a small number of bills, using Dave Ramsey’s snowball method is one of the best ways to chip away at your debt so you can move on to the next baby step in the plan.
Using the snowball method, you’ll pay off all your debt with the exception of your mortgage. You’ll work toward paying off that larger bill later in the plan.
During this step, you’ll start with the smallest bill and end with the largest until all your debt is fully paid off.
Types of debt to pay off during this step include:
- Credit cards
- Car loans
- Student loans
- Medical bills
- Payday loans
- Home equity loans
- Personal loans
- Car repairs
To get started on a debt tracker:
- Make a list of all your debt.
- Put the bills in order with the smallest balance on top and the largest balance on bottom. With this list, you’ll know exactly where you need to start on your debt payoff snowball.
- Put all your effort toward paying off your smallest debt first. To start, use the money you had set aside to contribute toward your emergency fund to add to the minimum monthly payment you’re already making on your debt. Then, find additional ways to put money toward the bill until it’s fully paid off.
- After your smallest bill is paid in full, put the money you were paying on the minimum payment for that bill toward the next debt on your list.
- Keep working on paying off that debt until it’s fully paid, then continue down the list in the same manner.
As you work your way down your debt list, you’ll be able to contribute more and more money toward each debt payment, allowing you to quickly tackle your larger debts with ease.
Here’s my debt tracker, which is based on Dave Ramsey’s debt snowball method. It tracks up to 10 debts over 10 years. It highlights paid debts and includes a debt-free date.
Step 3: Save three to six months of expenses in an emergency fund.
Now that you have all your debt paid off, you can start working toward creating a fully funded emergency fund for your family.
That typically entails saving three to six months of expenses to help cushion your family in the event of a big financial issue, like a job loss.
The amount of money you place in your emergency fund will depend on your family’s financial situation.
- If you are a two income family, having a minimum of three months of expenses in your fund is a good choice.
- If you are a one-income family, it’s a good idea to fully fund your emergency fund with at least six months of expenses.
Start by calculating all your essential monthly expenses to see how much you’ll need for your must-have bills each month, like grocery purchases, mortgage payment, and utility bills.
Multiply that by three months to see the bare minimum you’ll need to accumulate in your emergency fund.
Once you reach that amount, shoot for saving up six months worth of expenses before moving on to the next step in the plan.
Luckily, at this point you should have some wiggle room in your budget thanks to the reduction in debt you finished in the previous step.
Use the money you were paying toward your debt payments to start building up your emergency fund. Keep the money in a high interest savings account to help you earn interest on the money you’re saving.
Step 4: Invest 15 percent of your income toward retirement.
You’ve been working hard toward paying off your debt and saving for emergencies – both tasks are focused on helping you in the present.
But once you have those tasks completed, it’s time to start thinking about your future.
Whether your retirement is decades away or is creeping closer than you’d like to admit, it’s always a good time to invest in your future by putting money in a retirement account.
To determine how much money you’ll need to invest toward your retirement each year, start by figuring out how much your total household income is for the year.
Then, multiply that number by 0.15 (or 15%). That number is the amount of money you’ll need to invest to reach the minimum requirement of this baby step.
There are a few different ways you can tackle this step, depending on your financial situation and options at work.
- First, investigate your employer’s 401k option. If you have an option to invest in a 401k, start by investing a portion of your income into this account. A 401k is a great choice because it allows you to invest pre-tax dollars toward your retirement. The maximum amount you can invest into your 401k each year is $18,500. So, if 15 percent of your annual income is more than that amount, it’s a good idea to look into other investing options.
- Beyond a 401k, you can also invest your money into an IRA to be used in retirement. A Roth IRA allows investments up to $5,500 per year, making it a great secondary choice for investing your money toward retirement.
Step 5: Save for your children’s college fund.
If you don’t plan on having kids or your kids are already grown, you can skip this step and move on to baby step number 6.
But if you do have kids at home, planning for their future education is an essential step toward financial freedom.
In addition to allowing you to reduce future debt you may incur to pay for your child’s education when they’re ready to go to college, it also helps reduce your kids’ financial burden as they work their way through school.
It’s important to note that while you will start this step after setting up your retirement fund, saving for your children’s college fund does not replace the amount of money you’ll be contributing to your retirement.
These steps will work in conjunction with each other, allowing you to work toward both baby steps at the same time.
That means you’ll need to be able to allocate a certain amount of money toward a college fund as part of your monthly budget, just like you’ll be allocating money toward your retirement.
Creating an Educational Savings Account or 529 savings funds are both great options for saving for your children’s college. These plans offer great tax breaks for families, including tax-free withdrawals when the money is used to pay for college.
Step 6: Pay off your mortgage.
Your mortgage payment is likely your biggest monthly expense.
What if that monthly payment was eliminated?
Think about what you could do with that extra money!
After completing this step, you’ll have the freedom to build your wealth and contribute that ongoing payment to something you love.
But paying off your mortgage won’t happen overnight.
Taking a few extra steps each month can help you tackle this big goal.
Start by looking into the possibility of refinancing your home.
A mortgage refinance can help you reduce your monthly payments, allowing you to put more money toward the principal of the loan each month. Or you can reduce your loan terms, cutting down the number of payments you need to make until your loan is paid off.
If refinancing isn’t an option, or you want to take a more aggressive approach toward paying off your mortgage, consider making extra payments whenever possible.
Each extra payment you make toward your mortgage will take one month off the total length of the loan. And you’ll be drastically reducing the amount of interest you pay over the life of the loan.
Just as you’ll be working toward contributing to retirement and your child’s college fund at the same time, you’ll need to find a way to incorporate paying off your mortgage into your ongoing budget.
These three steps will work in conjunction until you’re ready to move onto the final baby step in the plan.
Step 7: Build wealth and give back.
When you finally have your mortgage paid off, it’s time to move to the final step of the Dave Ramsey plan – building wealth and giving back.
Start by making sure you’re maxing out the annual contributions to both your 401k and IRA.
After you have reached the threshold for both accounts, find new, fun ways to use your remaining wealth. You can contribute to your favorite cause or spend your money without guilt because you know your future is taken care of.
Dave Ramsey Baby Steps Tips
Now that you know how to work your way through Dave Ramsey’s baby steps, you’re probably ready to get started!
But taking the first step toward building an emergency fund and eliminating your debt takes a little more effort than just committing to improving your finances.
To be successful, you’ll need to follow a few simple tips and guidelines as you work your way through the plan.
These Dave Ramsey tips and tricks will help you work through each step in the plan.
1) Start with a zero-based budget.
To help you understand exactly how much money you have to contribute toward your emergency fund and debt payoff snowball, you’ll need to start with a budget.
Ramsey recommends using a zero-based budget to help gain ultimate control over your spending each month.
That means you’ll need to start with your monthly income and subtract all your expenses until you reach zero. This allows you to allocate all your income to each budgeting category every month.
This is my budget spreadsheet. It has monthly and annual income, expense and savings summaries, trackers and charts. It has 3 different calculators to track your early retirement progress. You can adapt the zero-based budgeting style to this spreadsheet.
If you prefer budget books, here’s a list of the best paper budget planner books.
Related: Here are budgeting tips to create a simple budget.
2) Avoid credit cards.
Since the point of the baby steps in this plan is to eliminate debt, avoiding credit cards is a good idea.
Instead of paying for something with a credit card, save up for the item and pay in cash to reduce the likelihood of incurring debt as you work through the plan.
3) Pay with cash.
In fact, Ramsey recommends paying with cash whenever possible.
Every time you pay using a method other than cash, you run the risk of going over budget or overdrawing your checking account and incurring fees.
Using cash allows you to easily track exactly how much money you have to spend at any given time so you essentially never go over budget.
To make it easier to track your cash, you can use a cash envelope planner.
This system features 12 cash budget envelopes and 12 expense budget sheets to help you track your family’s cash spending each month. You can store everything in a budget binder so your finances are accessible.
4) Trim your expenses.
As you work your way through each step of the plan, you’ll see that you’re going to constantly need to find money in your budget to use toward your financial goals.
That means you’ll need to take a critical look at your spending on a regular basis to find ways to reduce the amount of money you spend each month.
Taking the time to evaluate your expenses on a regular basis is one of the best ways to work your way through each baby step quickly and easily.
5) Increase your income.
In addition to taking a look at your expenses each month, another great way to help achieve your financial goals is to find ways to increase your income.
Adding to your monthly income will allow you to dedicate more money toward each baby step, helping you complete the financial plan more quickly.
Related Articles on Dave Ramsey’s 7 Baby Steps
- Simple Budgeting Tips for Beginners
- No Spend Challenge: How to Not Spend Money for 30 days or More
- Best Money Saving Tips to Save You $1000’s
- 18 Things to Stop Buying to Save Money Every Day
- 11 Ridiculously Easy Ways to Save Money on Groceries
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