Thousands of individuals worldwide have used Dave Ramsey’s 7 Baby Steps to get out of debt. He combines harsh love, religion, and financial counseling to help individuals change their spending and saving patterns.
You are aware of how problematic being in debt can be if you are one.
Your income might be significantly reduced by debt, making it more difficult to maintain a balanced budget. And Americans are increasingly having this issue. According to a 2019 Bankrate poll, over 30% of Americans have no emergency savings at all.
If you don’t have any funds, you could have to use credit cards or other payment methods to cover emergencies. According to a ValuePenguin survey, the average household debt in the United States is $5,700, and that amount rises to $9,333 for homes that have credit card balances.
That means that many families spend thousands of dollars annually on interest and hundreds of dollars each month on debt repayment.
Dave Ramsey’s Baby Steps, a seven-step plan for paying off debt, setting aside money for emergencies, and improving your overall financial situation, is a solution to these issues that is gaining popularity.
Who is Dave Ramsey?
Financial guru Dave Ramsey learned how to handle his money after growing up with a lot of debt due to failed real estate investments.
book cover for Dave Ramsey’s Total Money Makeover
He used the teachings and ideas he had learned to start his own coaching company, create Financial Peace University, and self-publish his book.
From there, his company expanded and changed its name to Ramsey Solutions in 2014, but the emphasis on helping individuals get out of debt and get control of their money remained the same.
Through his publications, including The Total Money Makeover and Dave Ramsey’s Complete Guide to Money, and his radio call-in program, The Dave Ramsey Show, Dave Ramsey does this.
Additionally, he disseminates his message via Financial Peace University, which offers online or live financial seminars in churches around the nation.
Ramsey also has a YouTube page where he streams his radio show.
Thousands of individuals all around the world have benefited from Dave Ramsey’s debt relief advice. He combines harsh love, religion, and financial counseling to help individuals change their spending and saving patterns.
What Are Dave Ramsey’s 7 Baby Steps?
The Dave Ramsey Baby Steps serve as the foundation for all of his lessons. These are a number of doable actions that you may do one at a time to move toward a better financial future.
Baby Step 1 – Save $1,000 in an emergency fund
Being unprepared to handle catastrophes is one of the reasons individuals accumulate debt. You may protect yourself from having to use credit cards or personal loans the next time your car breaks down or your cat becomes ill by setting up a small emergency fund.
Dave Ramsey suggests setting aside a $1,000 beginning emergency fund in this phase. In the event that you lose your job or become unable to work, this is not intended to be your long-term emergency fund. That action will be taken later; for the time being, this modest emergency fund will serve.
The actions you must do to achieve this phase will pave the way for your success in subsequent steps. You’ll discover how to create a budget to make sure your income exceeds your expenses and enable you to put aside the funds you require for an emergency fund. Additionally, it will assist you in ending the pattern of living paycheck to paycheck.
The idea of continuing to be “gazelle intense” is one that Dave Ramsey strongly supports. This entails saving money everywhere you can, eating meals of rice and beans, and forgoing cable and other entertainment costs.
In the meantime, you’ll exert every effort to raise your revenue. Dave Ramsey frequently advises getting a second job and selling all you can.
Baby Step 2 – Pay off all non-mortgage debt using the Debt Snowball
Baby Step 2 presents the most hurdle and takes the longest for many people. In this stage, you’ll use a strategy called the debt snowball to pay off all of your debts except for your mortgage.
Making a list of all of your bills and sorting them from smallest to largest in terms of balance is how the debt snowball strategy is carried out. Every month, after covering your essential living expenditures, you apply all of your remaining funds to your debts, starting with the one with the smallest balance.
Every month, after covering your necessary living expenditures, you pay off all of your remaining debts, starting with the one that is the least expensive.
You could spend a long time working on this stage if you have a lot of debt. But keep in mind that you’ll complete this phase more quickly the more you reduce your spending and boost your income.
Baby Step 3 – Save 3-6 months of expenses
After you have paid off all of your debt, you can concentrate on building a bigger, fully-funded emergency fund. You’ll benefit from this in the event of a serious emergency, such as needing to replace the roof over your home or going without work. With this money in place, you should be able to manage almost any emergency without having to turn to debt once more.
The adjustments you made by reducing your spending and raising your revenue to prior levels should make it possible for you to do this one even more quickly. For instance, you’ll need to know exactly what your monthly spending is to finish this phase, therefore you’ll need to have a budget in place.
Ramsey advises saving three to six months’ worth of costs rather than income because you’ll be paying your bills if you lose your work. In addition, saving for 3-6 months of costs seems less daunting than saving for 3-6 months of revenue.
Your second, high-yield savings account online, where you can still quickly access it but also earn interest, is a good place to keep your completely filled emergency fund.
Baby Step 4: – Contribute 15% of gross income to retirement plans
Following your debt-free status and establishment of a sizable emergency fund, Dave Ramsey advises beginning retirement savings.
If you have a workplace retirement plan, setting up automatic withdrawals just requires communicating with your HR department. You’ll need to find out how to accomplish this on your own if you’re self-employed or your place of employment doesn’t have a retirement plan.
The four mutual fund categories that Ramsey advises investing in are growth, growth and income, aggressive growth, and international. Many people who aren’t experienced investors find this phase to be intimidating, so Ramsey keeps a network of investment experts he may recommend to those who need further assistance.
It’s crucial to remember that Dave Ramsey’s recommendations for financial advisers aren’t totally objective because these experts must pay Dave Ramsey a fee in order to receive his endorsement.
Baby Step 5 — Save for kids’ college
Many parents are concerned for their children’s welfare, even if it means paying for their college expenses. Having student loan debt might cause your kids to have high repayment obligations and restrict their post-graduation job prospects. Saving money now to pay for college later is vital since many parents wish to avoid this.
To receive a tax credit, Ramsey advises saving money each month in an ESA (Educational Savings Account) or a 529 college savings plan, or in Canada, an RESP.
Additionally, since you may often only utilize the money in these accounts to pay for authorized educational fees rather than a last-minute trip, it keeps your money safer against withdrawals for non-college reasons.
If you have money left over after contributing 15% to your retirement account, you can complete this step using Baby Step 4. Ramsey advises making your retirement funds the top priority before even considering how essential your children are. Although it’s not ideal, taking on debt to pay for your kids’ college expenses is a possibility. On the other side, you are not permitted to borrow money for retirement.
You can skip this stage if you don’t have children and go straight to the next one.
Baby Step 6 — Pay off your Mortgage
Mortgage debt functions differently from other consumer debt, making it simpler to put off until you’ve established other better financial practices. In this step, Baby Steps 4 and 5 will still be continued, but you may now concentrate on getting through this last obstacle.
The moment has come to pay off your mortgage if you’re still making payments on it. All of your excess funds will be used to reduce your home’s mortgage, just as you did with your debt in Baby Step 2.
This enables you to fully own your property so that when you approach retirement, you won’t have to worry about mortgage payments.
Baby Step 7 — Build wealth and give
The final stage is to leave a lasting legacy by giving back financially. That can take the form of lending a hand to friends and family or giving to charitable organizations that have a special place in your heart.
A foundation can be established to carry on your legacy when you pass away, or you can concentrate on generating money to live a more comfortable life in retirement, leave your children an inheritance, or all three.
Now that your money is free from financial obligations, you may decide how to utilize it.
How to Remain Inspired While Taking Baby Steps
These actions appear straightforward at first, but in order to go past even the first step, it’s essential to have a support structure in place. You’ll need support from those around you to help you stay motivated and focused while you make the required sacrifices and try to alter your behaviors.
Find your “WHY”
If you don’t have a strong cause to change the way you’re presently doing things, you can’t. Even if what you’re doing right now isn’t giving you the results you desire, you’re used to it. It takes discomfort to alter that, at least until you’ve formed new habits.
Selecting your motivation for change is the first stage, thus.
Perhaps you realize how detrimental student loan debt has been to your life and desire better for your children. Or perhaps you feel ashamed about how frequently your credit cards are denied when you go out with pals. Perhaps you’re disappointed that you can’t afford to buy a house with a great yard for your dog.
Each person’s “why” is unique and distinctive. Although it may not be identical to anybody else’s, yours must be something that inspires you to keep moving forward.
Keep visual reminders
Many people have financial issues because they find it convenient to disregard them. Instead, try bringing yours into the open during this procedure.
Debt Free Charts are a simple and enjoyable method to monitor your progress toward your financial objectives. You might also experiment with other original ideas, like making a paper chain representing your debt and cutting off links when you complete Baby Step 2.
You may also display photographs of the things inspiring you to make a change, such as vacation destinations or future residences.
Last but not least, using a budgeting app on your phone, like Mint or YNAB, may provide you with alerts and updates about your monthly expenditures. You may identify your spending patterns and triggers with the use of these notifications, which may also enable you to alter certain potentially self-destructive behaviors.
Celebrate small wins
Debt repayment might take a long time. You don’t have to go bonkers, but give yourself permission to treat yourself to a little cash every time you reach a significant milestone.
Paying off certain debts or portions of larger obligations is one way you may celebrate. When you pay off a $5,000 or $10,000 portion of a $50,000 student loan, for instance, you may hold a mini-party. After all, every little step you take brings you closer to your goal of becoming debt-free, so it’s crucial to celebrate your success.
The most essential thing is to enjoy yourself, whether you want to celebrate with a massage, a lavish night out, or a new wallet. These little victories give you the drive and inspiration to carry on.
Build rewards and splurges into your budget
You’ll be living on a limited, “gazelle-intense” budget when you’re striving to finish Dave Ramsey’s steps. This implies that you reduce every expenditure you can in order to allocate as much money as you can to finish each Baby Step.
Long-term sustainability is not possible in this situation, particularly if you have a high debt load and a low income. Build tiny rewards and splurges into your budget to make it sustainable. These give you something to anticipate and motivation to continue working toward your objective.
Here, “little” incentives and splurges are crucial. For instance, you do not need to wait until you are completely debt-free before taking a vacation. Instead, you may go camping or visit friends and relatives for a more affordable vacation.
You may also include a modest line item in your budget for buying books, tickets to movies, or whatever else you enjoy doing for fun. To save money, try switching up your pricey habits, like eating out, with less costly ones, like going out for happy hour or one drink, or using Groupon.
Find a support system
It’s challenging to complete all of Dave Ramsey’s Baby Steps on your own. Finding individuals who can help you is a fantastic idea, whether they help you celebrate your successes or serve as an accountability partner who is participating in the program with you.
This is one of the reasons why so many people prefer to attend Financial Peace University alongside their local church in person. A really strong motivation to stay going when things get difficult is participating in the program with other families, learning the strategies, and developing together.
Spending time with those who share your interests can assist to support your new routines and decisions rather than with those who support the actions that placed you in your current predicament.
Why People Appreciate the 7 Baby Steps
The advantage of Dave Ramsey’s 7 Baby Steps is that it’s been simplified into a doable action plan for practically everyone. It has stood the test of time, and several individuals have utilized it as a roadmap to eliminate their debt in the past.
The core of Dave Ramsey’s strategy is that it is simple to implement, readily available, and does away with a lot of the difficult decision-making required to take control of your finances. He explains everything you need to accomplish, step by step, along with the proper sequence. You may use online calculators and tools to help you stay on track with his Baby Steps.
There is an abundance of connections and information available.
People that follow Dave Ramsey and are completing the program can be found in significant numbers. If you attend Financial Peace University, you can meet them in person or online through social media and forums. Many folks are helped to go forward by this support network.
You may meet other admirers and adherents of his Baby Steps approach by attending live events as well.
Overall, it’s an easy-to-understand strategy. You complete the stages in the correct order and are debt-free. Nothing else has to be done or thought about.
What the Critics are Saying
The 7 Baby Steps of Dave Ramsey are frequently criticized, especially by financial experts. The majority of criticisms are due to the fact that implementing a one-size-fits-all strategy offers little option for personalization or unique situations. Additionally, not everyone can adopt this kind of financial plan because everyone’s financial status is different.
Although it could help you reach your objective, it might not be the quickest, most affordable, or financially smart course of action.
Ramsey, for instance, advises not investing for retirement until all of your non-mortgage debt is settled, even if doing so means forgoing a work match. Financial experts advise against doing so since you’re effectively handing away free money. At a time when most people aren’t saving enough for retirement, you’ll become further behind.
Additionally, he does not distinguish between good and bad debt, instead stating that all debt should be avoided. If someone is talented enough to pursue a high-paying job, such as that of a doctor or software engineer, but can only do so by taking out student debts that they would rapidly be able to repay, this can be a costly error.
Finally, Dave Ramsey usually receives criticism for advising merely starting with a $1,000 emergency fund. This isn’t enough money for many individuals to safeguard themselves while paying off debt, especially if they have big children, live in high-cost-of-living locations, or have inconsistent incomes.
Despite the fact that his approach is straightforward, it is not without flaws, which you must compare to the simplicity of the Baby Steps.
Are Dave Ramsey’s Baby Steps Suited for you?
A color-by-number approach to bettering your financial situation is offered by Dave Ramsey. In order to save money, he advises individuals to adhere rigidly to his method, with little to no latitude.
Some people could find this useful, especially those who are unsure of the best ways to handle their financial position. This helps to explain why Dave Ramsey is so well-liked in America as it applies to many of us. It is simpler to be instructed step-by-step than to sift through the available information and recommendations and make a decision.
The truth is that you can apply and modify Dave Ramsey’s Baby Stages for your personal situation, even if you disagree with some of his suggestions or the sequencing of the steps. You don’t have to adhere to his instructions precisely or precisely. If you would feel more comfortable with a larger starter emergency fund, for example, or using credit cards to responsibly earn rewards, you can do so.
His advice is a wonderful place to start for anybody trying to gain control over their money, whether you choose to use it as a roadmap or guide rather than a detailed strategy.
