> > What Are Dave Ramsey’s Baby Steps, and Do They Work?

What Are Dave Ramsey’s Baby Steps, and Do They Work?

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Are you afraid to check your bank balance? Would a financial emergency wipe you out? Does a debt-free life seem like a faraway dream? If you answered yes to one, or all, of these questions, you might be a perfect candidate for  Dave Ramsey’s Baby Steps, a seven-step program through which users can transform their finances and build wealth. The program can be used no matter how dire your financial situation, and it has helped millions of people change their lives for the better (for free)!  Interested? Keep reading for our review of Dave Ramsey’s Baby Steps.

Who is Dave Ramsey?

Through his best-selling books, incredibly popular radio show (which he’s hosted for 25 years), plus his website, podcasts, YouTube channel, and the Financial Peace University, Dave has taught millions of Americans how to build savings, get out of debt, and live their best life financially.

Ramsey first developed his Baby Steps plan after he lost more than $4 million in real estate assets during the 1986 real estate crisis, which forced him to file for bankruptcy and start over from scratch. His experience led him to develop a system that he discovered could be used to guide others back towards financial stability.

What Are Dave Ramsey’s Baby Steps?

Dave Ramsey’s Baby Steps are a self-directed personal finance program that aims to help people build savings, eradicate debt, pay off their mortgages, and establish wealth through seven simple steps. The best part? It is completely free. Millions of people have transformed their lives using Dave’s Baby Steps today. Keep reading to find out more!

What are Dave Ramsey's Baby Steps?

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Step 1: Save $1,000 in an Emergency Fund

The first of Dave Ramsey’s Baby Steps is what he calls the “baby emergency fund.” All you need to do is set aside $1,000.

If you have outstanding debt, it might seem a little silly to put $1,000 towards savings rather than paying down what you owe, but the logic behind the suggestion actually makes a lot of financial sense. 

Dave recommends that all people establish a small emergency fund to protect themselves against unplanned expenses. This emergency fund allows people to take care of unexpected costs, without adding to or taking on new debt.

When something comes up and you need to dip into your emergency fund, Dave recommends holding off on paying any additional funds into your debts until your emergency fund is fully recovered.

There’s more to this first step than you might realize. It doesn’t just help you jumpstart your savings — it also helps to establish the good financial habit of paying for emergencies with cash, rather than racking up more debt on your credit cards.

If saving $1000 seems like a difficult task, don’t worry! There are a lot of great tools available to you to help you reach your goal. Services like Mint, Empower, and You Need A Budget are accessible and designed to help people of any financial situation and financial literacy level succeed in taking control of their finances through establishing a budget.

Additionally, apps like Trim, Rocket Money, and Bill Shark can give your savings a boost and help you save an average of $512 per year by helping you to find and eliminate unused subscription service and memberships, and even negotiating you lower rates on certain monthly expenses. When you are building your savings, every dollar counts!

All of these apps and services really speak to the same principle: making the most out of every dollar. When times are lean, you need to reconsider what services and products you absolutely “must” have and which ones you can live without.

Step 2: Pay Off All Debt (Except the House) Using the Debt Snowball

The debt snowball is a debt repayment strategy that helps people successfully pay off their debts by providing regular “wins” for motivation.

To make use of this method, start by making a list of all of your debts (excluding your mortgage) and organize them from smallest to largest.

Then, stop paying extra towards your debts. Instead, begin making only the minimum payment on all of your debts — except the one with the smallest amount outstanding.

Put any money left over (outside of your primary expense budget) towards your smallest debt until you’ve paid it off. 

Continue working your way through your remaining debts, from smallest to largest, until you are completely debt-free.

Mini-Controversy: Avalanche vs. Snowball

We’ve outlined Dave Ramsey’s preferred method, the debt snowball, above. However, there’s a competing philosophy called the debt avalanche method. In the avalanche method, you make minimum payments towards all of your debts except for the one with the highest interest rate. You pay off the debt with the highest interest rate first and then you move on to the account with the next highest interest rate. And so on.

Mathematically, the avalanche method makes the most sense. By paying off the high-interest loans first, you save money on interest payments, apply that saved money towards debt, which saves more on interest payments, etc. Your debt will be paid faster using this method than with snowball.

What the avalanche method lacks, and what Dave Ramsey realizes it lacks, is psychological reinforcement. The snowball method “rewards” you faster than the avalanche method. By paying your smallest loan first, you’re psychologically rewarded with an accomplishment which reinforces your behavior going forward

Whether you choose avalanche or snowball should depend on whether you think you require the additional psychological reinforcement the latter gives you.

What is the Debt Snowball Method

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Eliminate Credit Card Debt

Whatever else is going on with your finances, eliminating credit card debt needs to be at the top of your list. Not only will this save on interest payments, it will reduce your credit utilization rate (the percentage of your revolving credit that you’re currently using) which dramatically increases your credit score.

With an improved credit score, you can benefit from balance transfers to low-interest credit cards. Many cards offer a year (or more) of low interest on transferred balances. Taking advantage of these will significantly reduce your interest payments and allow you to put more of your money against the principal.

There are a few websites that let you check and monitor your credit score for free, including Credit Karma and (in Canada) Borrowell. Make heavy use of these sites, as keeping an eye on your credit score is necessary to have a realistic picture of your overall financial health.

Consolidate Your Debt

If you have a lot of different loans with differing interest rates and payment due dates you can easily get confused. You may consider consolidating your loans, or bringing them all together into a single loan with one interest rate and monthly payment due date. Many banks and other financial institutions will allow you to do this if your credit is good enough.

If you don’t have any luck with the banks, you may consider a peer-to-peer lending service like Lending Club, Prosper, and SoFi. These are platforms that allow everyday people to lend you money for the purpose of debt consolidation. Your interest rate will be computed based on the risk you pose to lenders.

Be wary of unscrupulous debt consolidators, though, and don’t get roped into paying even more interest than you were already on the hook for. Do the math, or have someone do it for you!

Debt Forgiveness

For a few lucky people, especially some of those with a lot of student debt, debt forgiveness might be an option. It can be a longshot, and involve a lot of paperwork, but the option does exist. Companies like Earnest and Commonbond provide reams of information about the various loan forgiveness programs available to those in the US who are suffering under the yolk of student loan interest and debt.

Step 3: Create a 3- to 6-Month Emergency Fund

Once you are living debt-free, it’s time to start building out your emergency fund. The goal is to put away enough to cover all of your expenses for between three to six months.

Saving that much money may seem daunting, and even nearly impossible (especially after starting out with just $1,000 in savings), but at this point in your financial journey, you are in an excellent place to do so.

Having an emergency fund that can cover a few months of expenses provides you with financial security in worst-case scenarios, such as major home repairs, medical emergencies, and job loss, which is especially important if you are the sole provider for your family.

This step has the added bonus of helping you get into the habit of paying for things with cash rather than credit cards.

How Much Should You Save?

Whether to save three or six months of funds in your emergency fund depends on a lot of factors. The most important of these are:

  • Your risk tolerance, and
  • Your income volatility

In other words, if you’re comfortable with relatively higher amounts of risk and your income is very reliable, you should be alright with a three month emergency fund. If, however, you’re uncomfortable with risk and your income is relatively unstable or likely to be reduced significantly and suddenly, you should have six months worth of expenses tucked away.

In order to calculate your expenses for six months, remember the following:

  • Include EVERY expense. Even the ones that recur only bi-monthly or every three or six or twelve months. Don’t leave out your property tax bill just because you only pay it annually.
  • Include some leeway for unexpected expenses. Life throws a lot of curveballs and you’ll need some extra extra cash if you need to dip into your emergency funds.
  • Be realistic about your lifestyle. If you’re a big spender, don’t expect that you’ll just be able to turn that off at the flip of a switch. Six months of expenses means six months of all of your likely expenses, not just the ones you absolutely need to survive. That doesn’t mean you need to budget for chocolate fountains and caviar. It just means that you shouldn’t budget for rice and beans if you’re used to porterhouse steaks.
What is the 50 30 20 budgeting method

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How to Save

Remember these three numbers: 50/30/20. It’s a great financial rule of thumb for budgeting. Basically, it means that 50% of your income should go to necessities, 30% to discretionary spending, and 20% to saving.

Now, not everyone will be able to put away 20% of their money. Some people are putting almost everything they have towards necessities. This usually isn’t their fault, it just means they’ll need to make some adjustments.

First, if you find yourself in this position, reconsider what “necessity” means. Is cable TV really a necessity? Is your car? Reducing your expenses can really make a big difference when it comes to saving up an emergency fund. 

Second, see if you can increase the total amount of money coming in. Are there any side hustles you can take up? You could, if your area offers these services, consider delivering for InstaCart, UberEats, or DoorDash. All three of these services pay drivers to deliver food to hungry clients.

Third, try and maximize every dollar you have. Apps like Rakuten, Ibotta, and Seated will give you cashback when you spend money at retailers, grocery stores, and restaurants. There’s no sense in losing out on that 5% by foregoing these services.

Finally, use your downtime productively by performing microtasks and completing surveys online. Swagbucks, Survey Junkie, and Pinecone Research will all pay you for your opinions. You can turn an evening of watching TV into a profitable night of survey-taking.

Step 4: Invest 15% of Your Income Into Your Retirement

Dave recommends that you aim to invest around 15% of your income into your retirement fund if you have the contribution room available. If you haven’t already been maximizing your retirement contributions, you may have a little additional room available from previous years that will allow you to contribute the full 15%.

Free Money

It’s incredibly important to max out your retirement accounts. Regardless of whether they’re IRAs (for my American friends) or RRSPs (for my Canadian buddies), maxing out your retirement accounts will allow you to take advantage of two extremely powerful wealth-building tools.

First, many employers will match a certain percentage of your retirement contributions. This has the effect of changing your instant rate of return from 0% to 100% just by virtue of the match. Consider, for example, if you invest $100 in a regular account. If you earn an 8% return annually, you’ll have $108 at the end of the year. If, however, that contribution is matched dollar for dollar, you’ll have $216 at the end of the year. That’s a 116% return.

Also, retirement accounts are tax-deferred accounts. This means that you’re not charged taxes until you withdraw your money from the account. What you would have paid in taxes grows by way of compound interest in the account.

This may not seem like a major difference, but consider what happens to that $100 in a tax-deferred vs. a taxable account. $100 in a taxable account (where you pay taxes each year on your capital gains) becomes $1090 after 40 years at an 8% return. In a tax-deferred account however, where you don’t pay tax until the end of the compounding periods, that $100 becomes $1760!

Easy-Mode Investing

If talk of investing either puts you to sleep or sets off a panic attack, don’t worry. There are more apps and firms than ever before to help you learn to invest responsibly. Companies like Acorns, Betterment, and Wealthsimple all take a remedial approach to investing in the stock and bond markets.

These companies will take you through investing, step-by-step, until you’ve got the hand of the basics. Besides, investing is much less complicated than you’d think. We promise.

Real Property

If securities aren’t your thing, what about real estate? Not only can you buy and hold land and buildings, new apps like Fundrise and Roofstock let you buy whole or fractional shares in residential or commercial properties.

If you like both real estate and securities, consider a real estate investment trust (REIT). These securities contain fractional interests in real estate, but the interests can be diversified over a wide array of locations and types of properties. This reduces the risk and volatility of the investment.

Step 5: Save for Your Kids’ College Fund

If you have children, this is the step in which you will want to start saving for their education. Discuss your savings plans with your partner (if applicable) and decide ahead of time how much you want to set aside for your kids.

Dave stresses the importance of weighing the cost vs. benefit of secondary education. This doesn’t mean that you shouldn’t offer your kids support — there are options beyond the standard four years of college.  And there are plenty of ways to lower the cost of education. Your child may be eligible for any number of unclaimed scholarships, bursaries, and grants, or they may be able to get their credits or degree at a local community college for a significant discount.

Depending on your child’s interests and skills, they may also be a great fit for one of several in-demand trade careers. (There is currently a shortage of skilled workers; in response, there are options that make learning programs more affordable.) 

Make time to sit down with your kids and have a conversation about their plans and how you plan to help.

Step 6: Pay Off Your Home as Soon as Possible

In this step, you will need to revisit your personal budget and reallocate any free funds towards your mortgage. This includes the money that you were previously putting toward debt repayment in Step 2, and the money you were putting into your emergency fund, as well as any bonuses or tax refunds.

Not only will these extra payments add up and help pay your mortgage off faster, but they will also help you avoid paying extra toward interest and fees.

Step 7: Build Wealth & Give Back

At this point, there are only two things left to do: continue to develop and grow your wealth through businesses and investments, and start giving back.

From here your journey should be fairly straightforward. Continue investing and finding new ways to create wealth. Don’t live outside of your means, and use a portion of your wealth to give back to your community — help those in need, and support charitable and non-profit organizations that are important to you.

Why are these steps important?

Each step of the Baby Step program was designed to help you develop a good understanding of the how’s and the why’s of personal finance while it guides you through the areas that are more important to your financial well-being.

Through the program you establish an emergency fund and long term savings, eliminate debt, and work towards owning your home, leaving you to focus on accumulating wealth and saving for your retirement. 

Do These Seven Steps Actually Work?

The short answer is yes. The longer answer is that these steps work when you adhere to them. If you actively focus on and commit to each step as you come to it, your results will be much greater. 

If you are still skeptical about the program, check out the countless rave reviews across financial blogs, on YouTube, and on Dave’s own website.

There is no risk to trying Dave Ramsey’s Baby Steps, and they are easy to start implementing immediately. So if you’ve been looking for solid guidelines to start building a better financial future for yourself, this is a great way to get started. 

Build Wealth and Give Back

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Pros and Cons of Dave Ramsey’s Baby Steps


●     The Baby Steps program provides a simple and easy-to-follow plan that can be used effectively by people of any income and debt level.

●     The program has been proven to be effective for millions of people.

●     The Baby Steps program was designed to do more than simply guide people towards improving their personal financial situations. They also help people develop a solid understanding of personal finance and money.


●     Many in the financial community have complained that the program is too rigid, or includes steps that do not apply to everyone. Step 5, (saving for your child’s post-secondary education) for example, is the subject of frequent debate, as family situations, beliefs, and parenting styles vary.

●     Some disagree with Ramsey’s hard-line approach to credit cards. Dave believes that people shouldn’t have a credit card at all once they are debt-free, but many people find them useful tools and great sources of cash back when used responsibly.

It’s important to remember that you can still follow the program and make reasonable alterations to suit your individual needs. If you know you can trust yourself to use credit cards without carrying a balance, or you know that your child is planning on trade school instead of college, simply make adjustments. 

Can You Make the Process Fun?

Budgeting and saving aren’t often things people would call fun, but that doesn’t mean they have to be boring or difficult.  There are lots of things you can do to keep yourself motivated and engaged throughout the process. A few people in The Modest Wallet Facebook Community share their experiences and help each other to stay motivated.

Challenge Yourself

One of the best ways to spice things up is to create challenges for yourself. Maybe you want to try and surpass your savings goal for the month, or bring your grocery budget below a certain amount, or pay off your debt in half the time.

Set Mini-Goals

Another great way to make finances more fun is to set small achievable goals along the path to give you a sense of progress and achievement.  Breaking your larger goals into smaller milestones can make the whole journey seem more manageable. Smaller goals (or baby steps) also provide built-in encouragement.

Celebrate Your Achievements

Making time to celebrate, or rewarding yourself with a small treat as you reach goals and hit milestones is a great way to maintain your focus and keep your morale high. (And keeping the rewards small allows you to celebrate progress as it occurs without derailing your efforts or cutting into your budget.)

Final Thoughts

Dave Ramsey’s Baby Steps program is a fantastic resource that anyone can benefit from. The program has already helped millions of Americans change their lives and gain control over their finances, and it’s completely free, so you have nothing to lose and everything to gain by giving it a try. If the testimonials are any indication, you’ll be glad that you did.