7 Dave Ramsey Baby Steps: Can They Help You Achieve Financial Freedom?

Last Updated on November 10, 2021 by Rebecca Lake

Dave Ramsey Baby Steps

Ready to get out of debt? Learn how to use the Dave Ramsey 7 baby steps to get out of debt, save money and live a richer life. And grab a free budget template printable!

Sick of being in debt? Tired of living on a low income? Ready to save more and live better?

The Dave Ramsey baby steps could help with both of those goals.

If you don’t know, Dave Ramsey is a personal finance guru, author and radio show host. His book, The Total Money Makeover, is one of the most popular personal finance books of all-time.

In the book, Dave outlines 7 baby steps to help you:

Start and grow an emergency fund
Pay off debt
Save and invest
Give back
Make the most of your income

The idea behind the baby steps method is to live like no one else so later, you can live like no one else. In other words, it’s about making short-term sacrifices so you can enjoy a richer life in the long-term.

But do the Dave Ramsey baby steps work? And should you follow them?

Today, I’m explaining explain what the 7 baby steps are, how to implement them and how to decide if this financial strategy is right for you.

Related post: How to Get Rich From Nothing

What Are the 7 Baby Steps of Dave Ramsey?

The Dave Ramsey baby steps are simple and look like this:

Baby Step 1: Save $1,000 for a baby emergency fund
Baby Step 2: Pay off all non-mortgage debt using the debt snowball method
Baby Step 3: Grow your emergency fund to 3 to 6 months of expenses
Baby Step 4: Invest 15% of your income for retirement
Baby Step 5: Save and invest money for college (if you have kids)
Baby Step 6: Pay off your mortgage early if you own a home
Baby Step 7: Build wealth and give

As you can see, the Dave Ramsey steps assume a few things. Namely, that you have kids and own a home.

But that doesn’t mean this financial plan can only work for families or homeowners.

You can still use the baby steps method to pay off debt, save and invest if you’re single, partnered up without kids or rent your home.

That’s one thing I like about Ramsey’s methods. His financial tips, including his Dave Ramsey budget percentages system, can be adapted to fit your situation.

Breaking Down the 7 Dave Dave Ramsey Baby Steps

The 7 baby steps method is very specific about what you should be doing to improve your finances and in what order you need to do each one.

In The Total Money Makeover, Dave goes into more detail about why you should follow each step in the order he outlines them. If you read the book you’ll see there’s a clear logic to it.

Technically, you could skip around. But according to Dave, the 7 baby steps method works best when you go through them from 1 to 7.

Dave Ramsey Baby Step 1: Save a $1000 emergency fund

The first of the 7 baby steps is saving $1000 for emergencies.

But why $1000? Why not $2000 or $5000?

Dave’s reasoning is simple. Having $1000 in savings is enough to cover any small emergencies that might come your way.

If you’re following the baby steps method, the goal is to get this $1000 saved as quickly as possible. That way, you can get to work on the remaining steps.

Some simple ways to save $1000 fast include:

Selling things you don’t need for quick cash
Cutting out things you can afford to stop buying
Taking advantage of free money hacks

You can also use things like tax refunds or stimulus checks to create your $1000 baby emergency fund.

Dave Ramsey Baby Step 2: Use the debt snowball to get out of debt

If you’ve got your $1k in savings you’re ready to tackle the second of Dave Ramsey’s baby steps.

Dave advocates using the debt snowball method to pay off debt. That means:

Listing all your debts from smallest balance to highest (not including your mortgage)
Paying as much as you can toward the smallest balance debt
Making minimum payments on everything else
Rolling over the payment from the smallest balance debt to the next debt on the list once you’ve paid it off

On the pro side, the debt snowball can help you stay motivated to stick to the baby steps path. If you can wipe out one or two small debts fairly quickly, that can energize you to work on your bigger debts.

On the other hand, it doesn’t take interest charges into account. So you may end up paying more in interest total versus using the debt avalanche.

With the debt avalanche, you’d organize debts from highest APR to lowest. Then you’d work on paying off the highest interest debts first.

If you wanted to adapt Dave Ramsey baby steps to save money on interest, you could use the debt avalanche instead.

In terms of how long does it take to complete the 7 baby steps, the debt payoff stage can be one of the longest.

You could pay the debt off faster if you’re able to make more money to put towards debt or lower your interest rates. For example, you can check out Upgrade for low-interest personal loans to consolidate debt.

Dave Ramsey Baby Step 3: Save 3 to 6 months of expenses for emergencies

As mentioned, the $1000 emergency fund you saved in baby step 1 is meant to be a starting point.

If you’ve used the Dave Ramsey debt snowball to clear your non-mortgage debt, then your next goal is beefing up your emergency savings.

Specifically, that means saving enough to cover 3 to 6 months’ worth of expenses.

According to The Total Money Makeover, this should be enough to see you through any major curveballs such as an illness, injury or getting laid off from work.

But 2020 taught us that even that much money might not be enough if you go through an extended layoff or become seriously ill. So I recommend bumping your emergency savings target up a little more, to say 9 or even 12 months’ worth of expenses.

As far as where to keep your emergency savings goes, this should be liquid cash that you can easily access. So think savings accounts or money market accounts.

A high yield savings account like the ones offered by Axos Bank and CIT Bank are two great options for earning the best interest rates on your emergency stash.

Dave Ramsey Baby Step 4: Invest 15% of your income for retirement

After your debt is all gone (other than your mortgage) the next baby step is saving 15% of your income for retirement.

If you’re doing this the Dave Ramsey way, this means pre-tax income invested in a 401(k) or similar workplace plan and/or a traditional IRA.

And if you’re saving for retirement at work then you could get the benefit of an employer matching contribution. This is essentially free money you get just for adding money to your 401(k).

An IRA can be a great way to save for retirement if you max out annual contributions to your employer’s plan or you don’t have a retirement plan at your job. And if you’re self-employed like me then a SEP IRA can help you save for retirement and get some tax breaks.

But here’s the catch with baby step 4: it requires you to wait to invest until you’ve paid off your debt.

Sure, putting all your extra money to your debt can help you get rid of it faster. But the longer you wait to invest, the more you miss out on the power of compounding interest.

Dave Ramsey Baby Step 5: Save and invest for college

If you graduated college in the last decade or so you know that it can be hellishly expensive.

The average student spends just over $35,000 per year on college costs.

If you have kids and you don’t want them to end up mired in student loan debt, saving for college is next on the list of Dave Ramsey baby steps.

The best way to save for college if you want to get a tax break is opening a 529 college savings account. This is something you can easily do online with a company like CollegeBacker.

I have 529 savings plans for both my kids. The money I save grows tax-deferred and I won’t pay taxes on withdrawals as long as they’re used for qualified education expenses.

You could also save for college with a savings account, savings bonds or even a Roth IRA. But be sure to check out 529 plans first, since they can offer more tax benefits.

Dave Ramsey Baby Step 6: Pay off your mortgage early

Paying your mortgage off early can make sense if:

You plan to stay in the home long-term
You’re maxing out contributions to tax-advantaged investment plans
You’d like to save on mortgage interest

On the other hand, there are some good reasons to skip this baby step. For example, if your current home is not your forever home then why sink all your money into paying off the mortgage?

You might get a better return on your investment by putting that money into the market instead or even starting a profitable business.

I don’t disagree with this step, per se. Paying off your house can make total sense for some people.

But consider how it fits into your overall financial plan.

Dave Ramsey Baby Step 7: Build wealth and give

The last of the 7 step baby steps is all about continuing to invest and sharing the wealth you’re creating.

A key part of Dave Ramsey budgeting involves earmarking money for giving each month. And the baby steps continue to encourage that.

At the same time, you should have plenty of disposable income at this point that you can use to build wealth. For Dave Ramsey, that means investing in mutual funds.

But for you, it could mean:

Building a portfolio of stocks and ETFs
Dipping your toes into cryptocurrency
Buying real estate as an investment
Creating passive income on the side

How you invest and how you give is up to you. But the goal is to keep growing wealth and using some of it to give back.

And if you want a simple way to get started investing with little money, check out M1 Finance.

Do the 7 Baby Steps Work?

The short answer is yes, Dave Ramsey baby steps can work and they have worked for millions of people.

(I’ve used some of the steps myself to get out of debt, save and invest. I’m not paying off my home early though because I plan to sell it in the next few years.)

Does that mean the 7 baby steps are perfect? Not necessarily.

After all, Dave came up with his 7 baby steps plan back in the 90s. While some things about finance never change, the baby steps don’t account for things like:

Inflation
Wage stagnation
Soul-crushing levels of debt some college grads are carrying

And again, the baby steps assume that you’re living out some version of the American Dream that involves a spouse, a home and 2.5 kids. Which for many people isn’t reality.

For example, you might be a single mom struggling financially to make it on your own. Or owning a home might not be something you can even consider until your student loan debt is gone.

But again, what’s good about the Dave Ramsey steps is that you can mold them to fit your needs. So if I were starting the Dave Ramsey plan today, for example, here’s what I’d do:

Make a budget

Any financial plan has to start with a budget. So before you work on saving or paying down debt, first come up with a detailed budget and spending plan.

If you need some help making a budget, I’ve got a free budget template you can download.

And check out these helpful budgeting guides:

How to Make a Budget (When You Hate the Idea of Budgeting)

70/20/10 Budget Method: How to Use It to Spend, Save and Invest

Budget Percentages Explained: The Simplest Way to Make a Budget

Save $2000 to $3000 for emergencies

Saving $1000 for emergencies is a good start but having two to three times that is even better.

If you need some simple ways to boost your savings, you can start by drastically cutting your expenses.

I also like using cash back apps to make money for me that I can save.

With Rakuten, for example, you can earn up to 40% cashback when you shop online or in stores. And Ibotta pays you cashback on groceries and other shopping purchases.

Sign up for Rakuten and get a $10 bonus or download the Ibotta app now to claim a $20 cash bonus!

Find ways to increase income

I’ve done the Dave Ramsey baby steps and the thing that made the biggest difference for me financially was making more money.

What started as a side hustle has become a full-time, six-figure business. And making more money helped me make tremendous progress with the baby steps plan.

It could do the same for you. You might even be able to get to the 7 figure income mark!

Need some ideas on ways to make extra money? Try these guides:

30+ Legitimate Ways to Make an Extra $1000 a Month

10 Ways to Make $2000 a Month From Home

142 Side Hustle Ideas That Pay Real Money

Pay off debt aggressively

When I say aggressively, I don’t necessarily mean the debt snowball or the debt avalanche.

Instead, I mean paying down big chunks of debt at a time as often as possible. This is how I paid off a $24,000 car loan in under 18 months.

It goes against the Dave Ramsey baby steps rules. But if you can throw bigger chunks of money at your debt the faster you can make it disappear.

Increase emergency savings to 9 months of expenses (or more)

As I already mentioned, I think 3 to 6 months of expenses is a good place to start for emergency savings.

But having more money can be reassuring, especially if you’re worried about a repeat of 2020.

Invest at least 20% of income for retirement

There’s nothing wrong with only saving 15% of your income for retirement. But if you’re able to save more then why not not do it?

If you can commit to saving 20% or more of what you earn that can help with achieving a secure retirement. That’s more money that can earn interest and benefit from compounding.

Even if you only increase your savings rate by 1% each year that can make a huge difference in how much you have to retire on when the time comes.

Create savings buckets for different financial goals

Instead of following Dave Ramsey baby steps and saving just for college, think about other goals you want to achieve.

That might include:

Buying a car with case
Purchasing a vacation home
Starting a business
Planning a wedding
Becoming a digital nomad and traveling

Once you know your goals, set up different savings buckets for each one. Then go back to your budget and work how much you can save every month to achieve those goals.

Consider whether an early mortgage payoff makes sense

As mentioned, paying off the mortgage early may or may not be right for you.

So think about your goals and future plans to decide if this step is worth it or if you’d be better off doing something else with that money instead.

Final thoughts on Dave Ramsey baby steps

By now, you should know exactly how the 7 baby steps work.

What’s important to remember is that the baby steps are meant to be a guide for managing your money. They’re not set in stone. And depending on your situation, only a few of them might apply to you.

What matters most is coming up with a plan for paying off debt, saving and investing that works for you.

Have you used the Dave Ramsey baby steps to get out of debt? If so, head to the comments and tell me about it!

I’d love for you to share this post if it helped you. And remember to grab your free printable budget template!