Dave Ramsey’s book The Total Money Makeover has motivated hundreds of people to get out of debt. Dave Ramsey has a solid plan that will move you toward financial freedom and over the last two weeks, several personal finance bloggers have posted about Dave Ramsey’s 7 Baby Steps to Financial Peace. This series is a great introduction on Baby Steps, let’s go over what the series was all about.
Dave Ramsey Baby Steps Series Introduction
Patrick at Cash Money Life kicked off the series with an outline of all 7 steps. In the introduction Patrick says,
Dave Ramsey is one of America’s most renowned money gurus. He has a rabid fan base of followers whose main goal in life is to get out of debt and stay out of debt. Being debt free is the first step to financial freedom, and being debt free affords you the freedom to live your life the way you want to live.
Baby Step 0 – No More Debt
Officially Dave Ramsey’s plan only has 7 Baby Steps. Unofficially, there is a Step 0, which is “No More Debt.” Ana at DebtFREE-Revolution and Single Guy from Single Guy Money both covered this step in detail.
Ana, our resident Dave Ramsey expert, says that even though Baby Step 0 isn’t mentioned on Dave Ramsey’s site, it’s essential to success. She describes baby step 0, saying,
Baby Step Zero has three basic components: swearing off debt, getting current on your bills, and making the written budget. Before you start in on Baby Step One, you need to have these three things covered.
Single Guy also insists that Baby Step Zero is vital to success. He says,
Taking on additional debt while you are trying to get out of debt is a prime example of making a bad situation even worse. If you are trying to get out of debt, you don’t want to continue to borrow your way into a deeper hole.
Baby Step 1 – $1000 Emergency Fund
Over at Gather Little by Little, Gibble talks about the importance of the baby emergency fund. Unexpected expenses, such as car repairs, medical bills, and home repairs will happen in life, and you need a way to deal with them. Gibble stresses,
Without an emergency fund, these expenses typically land on a credit card in hopes that you can pay them off quickly, but in reality just add to the already large pile of debt many of us have.
Baby Step 2- Pay Off Debt Using the Debt Snowball
PaidTwice at I’ve Paid for This Twice Already tackles the important step of paying off debt. Basically, the debt snowball is paying off your debts, smallest to largest, by continuing to pay the same amount each month, even as debts are paid off. This creates a snowball effect, as the payments that were going to the smaller debts are added to the payments for the larger debts after the small debts are paid off.
There is some controversy to this method of paying off debts, though. PaidTwice says,
The idea has also come under fire for one main reason – paying the debts smallest to largest costs you more money (in interest) than paying down debts highest interest rate to smallest.
Baby Step 3 – Fully Funded Emergency Fund
I wrote about Baby Step 3 here at BeingFrugal.net. Once your debt is paid off, it’s important to put enough money in your emergency fund to cover 3-6 months worth of expenses. Having that emergency fund tucked away gives you options when you’re in a tough situation.
When you have 3 to 6 months of expenses tucked away, you have the freedom to wait for a good job. You have the freedom to quit a job that’s sucking the life out of you, because you know you can survive until you find a new one. You have the security of knowing you can pay high deductibles for medical issues if the need arises.
Baby Step 4 – Save for Retirement
The Dough Roller covered Dave Ramsey’s Baby Step 4. After your emergency fund is in place, you should work towards putting 15% of your income toward retirement, preferably in a Roth IRA or a Roth 401k. The Dough Roller answers the obvious question as to why the savings should be in vehicles that use after-tax money. He used some great visual aids, too, so be sure to check them out.
One of the things I like about Roth accounts is that you know exactly what you have saved for retirement. With traditional retirement accounts, you have to make a guesstimate about taxes to know how much money you have to fund your retirement.
Baby Step 5 – College Funding for Children
Saving money for their children’s college education is something that’s on a lot of parents’ minds these days, and David tells you all about it at My Two Dollars. Dave Ramsey’s take is that you should not begin funding your children’s college education until you are fully funding your retirement, and David agrees.
Although the government and some companies used to really help out when it came time to retire, nowadays you really only can depend on yourself to make sure you can do it in style. And part of that is taking care of yourself first and then worrying about your child’s education.
Baby Step 6 – Pay Off Your Mortgage
Dave Ramsey wants you to get out of debt. Completely out of debt. And that includes paying off the mortgage. Pinyo addresses Baby Step 6 at Moolanomy. Pinyo is not completely on board with the need to pay off the mortgage early however. He says there are other options, and what you do depends a lot on your personality and your financial situation.
In general, if you are uncomfortable with investing for the long-term, you’re better off prepaying your home mortgage. However, investing as opposed to prepaying is a real and financially sensible option for many people.
Baby Step 7 – Build Wealth and Give
Baby Step 7 is the goal. The place where your needs are taken care of, and you can use your money for your wants. It’s also important to give back. Plonkee covers Dave Ramsey’s final step at Plonkee Money. Plonkee talks about investing your money, investing in yourself, and investing in other people.
Donating money to something that you believe in, and really making a difference will make you feel good about yourself. It’s an investment in you, and in everyone else.
Learn More About Dave Ramsey and His 7 Baby Steps
In addition to this wrap-up, PaidTwice wrote a synopsis of the M-Network series on Dave Ramsey’s 7 Baby Steps to Financial Peace at I’ve Paid for This Twice Already.
If you still want to learn more about Dave Ramsey, I recommend reading his book The Total Money Makeover. He goes into much more detail on each of the baby steps. I’ve read the Total Money Makeover a couple of times, and Dave Ramsey always manages to motivate me to stay on track with money management.
We hope you’ve enjoyed this series. Remember…there’s no better time to start taking charge of your finances than today.
I really enjoy the content of your blog, since I am a blog addict I shall return, lol
The biggest thing ever to help our family was reading Total Money Makeover by Dave Ramsey. Not only did we cut our credit card bills in half each month, but we only took out half the amount of trash as we normal did, one can instead of two! Amazing how far a little effort goes. :)
I know the Debt Snowball generates controversy over interest rates, but Dave covers that in his book (I don’t own it, but I’ve checked out of the library). He says he’s aware of the interest rate issue, and that the reason he recommends paying debts off from smallest to largest is for the psychological payoff of having paid off debts. And you know, for some people that is going to be really beneficial.
It’s especially helpful when you don’t have a lot of income, as in my situation. My debt feels like a huge mountain with a really steep grade and you know, I’m afraid of heights. :) Being able to say I paid anything off at all is a huge emotional charge and inspires me to go after the rest of it, sort of like how you tackle the smaller elevations before you go trying to climb Mount Everest.
Hi lynaee, I am a long time reader, first time poster. I am just starting to read Dave Ramsey and planning to folow his method to get out of debt, these posts were very helpful in explaining things,