Dave Ramsey's 7 Baby Steps: How To Win With Money
At this point, Dave Ramsey really doesn't need an introduction — he's become the face of personal finance and debt management. Here's a close look at his 7 Baby Steps and how to use them.
At this point, I really don’t think Dave Ramsey requires any introduction. He has basically become the face of personal finance and debt management. It’s no wonder, then, that his seven baby steps have become a pinnacle of managing your wealth. So what are these 7 baby steps from Dave Ramsey, you ask?
The seven baby steps were created by a man who had gone through bankruptcy, worked his way back up, and ended up becoming a national best-selling author, a very popular radio host, and a financial guru. That man, of course, is Dave Ramsey.
So without further ado, let’s take a closer look at Dave Ramsey’s 7 baby steps, analyze how you can incorporate them into your own life, and win with money.
What are the Dave Ramsey Baby Steps?
Before taking a look at the seven baby steps, it’s equally important to understand what they are and what they represent.
A great way to look at it is walking up a flight of stairs. To get to the top, everyone has to start at the bottom. You take your first step, then your next, until you’re at the top. Sure, you might try to skip a few steps, but you also risk tripping and falling all the way back to the bottom.
The Dave Ramsey Baby Steps work the same way. If you want to do better with your finances, get out of debt, and save for retirement, you’ll have to take steps toward those goals. One baby step at a time :)
In summary, Dave Ramsey’s 7 Baby Steps are:
| Step | What to do |
|---|---|
| Step 1 | Save $1,000 for your starter emergency fund |
| Step 2 | Pay off all personal debt (except your mortgage) |
| Step 3 | Save 3–6 months of expenses in your emergency fund |
| Step 4 | Invest 15% of your income toward retirement |
| Step 5 | Save for your children’s college fund |
| Step 6 | Pay off your home early |
| Step 7 | Build wealth and give |
Baby Step 1: Save $1,000 For Your Emergency Fund
The very first of the Dave Ramsey baby steps is to save $1,000 in your emergency fund. According to GoBankingRates, only about a third of Americans could comfortably cover a $1,000 emergency.
Doing simple math, that means roughly two-thirds of Americans would have to borrow money to handle a $1,000 surprise. If you have to go to the ER, your car breaks down, or your furnace goes out, statistically you’ll have to borrow to cover it. That is absolutely no way to live.
Instead, Dave Ramsey suggests that you save at the very least $1,000 for any emergency in an emergency fund. This money is to be used for emergencies and emergencies only, so once you reach $1,000, lock it away and don’t touch it unless it’s an absolute crisis.
Baby Step 2: Pay Off All Personal Debt (Except your mortgage)
Now for baby step 2, the goal is to pay off all of your debt excluding your mortgage. But remember, only start working on Step 2 after you complete Step 1. No skipping steps!
That looming debt is absolutely the number one thing that holds a lot of people back financially. Having that cloud over your head is a heavy burden to carry, and it’s a huge obligation that holds you back from building wealth.
The trick here is to pay off your debts using the debt snowball method. Simply pay off all your debts smallest to largest. So if your smallest credit card has a balance of $200, pay that off before you start working on your $2,000 car balance. Remember: smallest to biggest. Knocking out the little ones first gives you quick wins that keep you motivated. Our guide to escaping debt and credit card tips break the method down further, and the debt-to-income calculator shows where you stand right now.
Baby Step 3: Save 3-6 Months of Expenses In Your Emergency Fund
If you’re now on baby step 3, congratulations! You are now completely debt-free (except the house) and on your way to building wealth! To better protect yourself from emergencies and unexpected expenses, it’s very important to build that emergency fund cushion.
At this point, you likely only have about $1,000 in your emergency fund. Now it’s time to build it up to cover 3 to 6 months of your monthly expenses. Save that amount and store it in a high-yield savings account or money market account — the where-to-park-cash tool compares your options so the money keeps earning, and the emergency fund calculator pins down your exact 3–6 month target.
Remember, this is an emergency fund and not a vacation savings account. This money will only be used for emergencies. It stays untouched until an actual emergency arises. By now you’ve built up real saving experience and figured out a pattern that works — just keep going. It’ll feel much better in the end not having to worry about unexpected emergencies and knowing you can completely cover them.
Baby Step 4: Invest 15% of your income towards retirement
The thing about retirement is that nobody worries about it until it’s almost too late. There are two certainties in life: you’ll get older, and time will always move forward.
What this means is that at some point you’ll get too old and tired to keep working, so you’ll need some kind of retirement savings to live off. A lot of people have the misconception that Social Security will be enough to live on. That is simply not true.
If you think about it, once you retire you’ll still have groceries, utilities, bills, and health care expenses to worry about. Because of all this, saving for retirement should become a primary focus. The first place to look is an employer-sponsored 401(k). If you have one, contribute as much as you can each year — and never leave an employer match on the table. If you’ve maxed that out, then consider other retirement accounts such as a Roth IRA. Not sure if you’re on track? Start with how much you should have in your 401k and how much you actually need to retire.
Just remember to invest 15% of your household income toward retirement.
Baby Step 5: Save for your children’s college fund
If you have children, or are considering having some in the future, then it’s never too early to start investing for their college.
Over the decades, college tuition has become increasingly expensive. Planning ahead for your children’s college fund is the financially responsible thing to do. A 529 plan is the usual vehicle, since it grows tax-free when used for education.
Once you reach baby step 5, you’ve mastered saving and living within your means. As long as the other baby steps are covered, you can start saving toward your children’s college fund. Again, remember not to skip any steps — one baby step at a time.
Baby Step 6: Pay off your home early
Once you’ve reached this step, you’ve paid off all of your other debts except your home. If you have a mortgage, you can now start tackling it.
When paying off a mortgage early, there are some things to remember. For starters, make sure there are no prepayment penalties. These are usually written into the mortgage agreement you signed at closing; if you’re not sure, contact your lender. There’s also a math question worth running first — whether those extra dollars do more good against a low-rate mortgage or invested elsewhere. We dig into exactly that in should you pay off your mortgage early.
Once that’s cleared up, you can start tackling your mortgage and paying it off ahead of schedule. Can you imagine life without any mortgage payments, putting that money to better use? Sounds amazing! Work with your lender to figure out how extra payments apply and how early you can knock it out.
Baby Step 7: Build Wealth and Give
Baby step 7 is the very last step and the epitome of Dave Ramsey’s 7 baby steps. Once you reach it, you’ll start building wealth beyond your wildest dreams.
By now you’ve paid off all your personal debt, built a healthy emergency fund, saved for your children’s college, contributed 15% of your household income toward retirement, and paid off your mortgage. Now it’s time to just grow. A good habit here is to actually watch it grow — track your assets and liabilities in the free net-worth tracker so you can see the wealth compounding.
Once you start building real wealth, you’ll be in a much better position to give generously and improve other people’s lives. You’ll have reached a level only a few ever do, and it’ll have come through perseverance and hard work. Just remember to consistently max out your 401(k) and Roth IRA so your retirement stays guaranteed and protected.
Final thoughts
Dave Ramsey developed these 7 baby steps to be as easy to understand as possible. They’re simple, straightforward, and apply to anyone regardless of their situation.
It’s important to remember that these steps are meant to be taken one at a time and in order. It might be tempting to skip a step or two, or do them out of order, but doing so can leave you worse off.
I most definitely recommend implementing these steps in your life, as they can only improve your financial situation and your future. One baby step at a time — you’ve got this.
