Dave Ramsey’s Baby Steps: My Take

I have been hearing a LOT of talk about Dave Ramsey’s Baby Steps approach but never paid attention to it.

Then today I decided to bite the bullet and go see what all the hype is about.

Basically, Dave lists a series of baby steps that everyone should take in order to become financially independent. These steps are as follows:


  $1,000 to start an Emergency Fund
  Pay off all debt using the Debt Snowball
  3 to 6 months of expenses in savings
  Invest 15% of household income into Roth IRAs and pre-tax retirement
  College funding for children
  Pay off home early
  Build wealth and give! 
Invest in mutual funds and real estate

Now these steps seem simple on the first glance so it should not be too difficult to talk about them

$1000 to start an Emergency Fund

I actually had an Emergency Fund right now called my Never Go Back To Fresno Fund. It is not at $1000 but it is slowly getting there. Of course this fund would have been much bigger now but I raided it at one time to pay off a debt.

So I guess now my Fresno Fund is now the additional savings fund that Ramsey talks about in point 3.

Now according to the definition of ’emergency fund’ that was not a true emergency and not really the best use of the money. The thing is that I am glad I used the fund to pay off that debt because the interest on that debt was MUCH higher than the interest I was getting on my savings account.

This brings me to the next step.

Pay off all debt using the Debt Snowball

I know of two methods for the debt snowball but the idea behind both of them is the same. With any kind of debt snowball what you do is this:

* List all your debts

* Pick a target

* Pay the absolute minimum on all debts except the target

* Pay extra on the target so that you are exceeding the minimum

* When the target is paid off pick a new target and repeat the process

You can pick what ever you want to be the target for your debt repayment but there are two widely used methods that seem to give the best results.

3 to 6 months of expenses in savings

This money is in addition to the emergency fund that you have already established. You can set it up in your ING account like I did and give it a different name.

I currently have a Never Go Back To Fresno Fund which could be my addtional savings account. This is separate from my Emergency Fund because while I can access the emergency fund by making a withdrawal, the Fresno Fund is tied up in a CD.

Invest 15% of household income into Roth IRAs and pre-tax retirement

Now this is where I start to diverge from Dave. I know I have some retirement money going somewhere as a teacher but I have no clue if it is in a Roth IRA or what. I know I should be more on top of this …but I am not American so I can’t retire here anyway unless I become a citizen. I am working on a work visa and if I do go back home then the retirement money is gone. Bah! So they are taking out the basic amount they have to for taxes etc and that is it. I am not going to put in the maximum amount because I do not know if I will be a citizen that CAN retire here yet.

College funding for children

I don’t have any children so, um, yeah.

Dave thinks that you should set up a fund for college for your children so that they have a slightly easier time when going to college because the cost of that is not going down.

Pay off home early

Renting now so this does not apply. Basically what Dave is saying here is that you need to own your home outright so that you will not be paying interest to the banks to make use of your own living space.

I say this is nice if you can do it….but not really realistic for those of us who don’t make buckets of cash. 

There is a reason there are 30 year mortgages available. I am not sure that on an average income, especially if it is a single income that I would be able to pay off a house early unless it was REALLY low priced.

Build wealth and give! Invest in mutual funds and real estate

I am giving now to my church every Sunday, although it is not even close to 10% of my income for the month. I am unable to invest in real estate or mutual funs right now because I do not have any income left over for something like that.

I guess those steps are for later on when I do not have as much debt as I currently have right now.

Have you been following Dave Ramsey’s baby steps? What is your take on the plan?

Author: Lulu

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  1. We’re kind of following our own “modified” Ramsey plan. We are trying to put $5000 back in our emergency fund (had truck repairs), and I also modified the order of our debts, putting our highest interest student loan first (it’s our second lowest debt in terms of amount owed).

    Despite our debt, we also contribute to the husband’s 401k (they match 75 cents on the dollar up to 6%) since it’s free money, and we also put a small amount into the kids 529 plan.

    I’m not sure if working on a bunch of steps at once is best, but it works for us. I think that the Ramsey plan is excellent to help people become aware of their money, and is a great blueprint for some. I also think it’s ok to modify it to fit one’s individual needs though 🙂

    moneyloveandchange’s last blog post..No shopping in stores for us this weekend!

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    • @ MLAC
      It is good that you have taken the plan and modified it to fit your needs. I think some people would see areas that they cannot work on and just decide not to follow the plan because they think they will not succeed.

      The best thing to do is pick what works for you and go with it.

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  2. Great post! It’s sound simple enough but not that easy to do for sure!
    But I am getting there!!!

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  3. Yay, one of my favorite posts here! Yep, I have been following Dave’s plan for 9 months and without sounding too cliche, it has totally changed my life and outlook on money and finances.

    For step 2, Dave suggest paying off your debts smallest to largest, regardless of interest rates. Many people tackle the higher interest rates first, and while that is mathematically the best method, I still prefer Dave’s plan. With his method, you actually feel like you are getting traction and making progress. Each smaller debt that is paid off gives you a feeling of success and motivation. Who would want to tackle their largest debt first and have it take years to pay off? His method is simply best for motivation and keeping you on pace.

    I do agree with you that dipping into your emergency fund to pay a debt was a bad idea and I even remember commenting about it at the time heh.

    You make a good point about your citizen status and investing 15% into IRAs. As you said, only have them take out what is required for taxes and just keep the rest, as you could possibly lose it if you don’t remain in the states.

    No kids means skipping baby step 5, yay!

    You pretty much nailed the baby steps for the most part, but I think you are selling yourself short on step 6.

    Anyone can pay off their house early and not make “buckets of cash”. The point of this step is not simply to avoid paying interest, its to avoid paying anything. By this point in your total money makeover, ALL of your other debt will have been paid off so you will have a lot of excess to throw at the house each month. Another part of this is not buying a house you can’t afford and putting at least 25% down for a down payment.

    100% financing is a huge mistake as is a 30 year loan. If you have spent any time messing with a mortgage calculator, you already know that if you do a 30 year mortgage, you end up paying more than double for the house in the long run. NOT WORTH IT! Stick with a 15 year fixed rate if you must borrow for a home.

    I’m not really a fan of taking the plan and totally overhauling it to “fit your needs”. People do this with religion all the time – only do what they think is right or follow things that is convenient for them. Rules and plans are meant to be followed, not changed to whatever you think is better. Just my opinion though 🙂

    Shawn Knight’s last blog post..Ole Miss To Cotton Bowl

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  4. I did an analysis of 5 different methods of paying off debts using an excel spreadsheet: DOLP, High Balance First, Low Balance First, High interest rate first, Low interest rate first. My criteria was very simple. With a fixed amount of X dollars to apply each month to all my debt which payment method resulted in the LEAST amount of interest paid by the time all the debt was retired.

    The results were very interesting because they varied depending on the balance and interest rates of each individual debt. Nevertheless there was one clear winner in my case and that was the High Interest First (HIF) method.

    Here is a summary of the calculations:


    Total debt: $23674
    Amount to pay each month:$3000
    Total number of accounts: 7
    Total time to pay off debt: 7.9 months.

    Total Interest Paid
    High Interest First $ (598.92)
    Low Interest First $ (717.99)
    High Balance First $ (710.60)
    Low Balance First $ (607.58)
    DOLP $ (670.79)

    As you can see there is a quite a bit of variation in the interest paid, but the HIF method results in the most savings in this case.

    In another calculation with different debt amounts and interest rates the HBF method tied for first with HIF with DOLP second, and in a third case it was second with DOLP fourth.

    So given my limited analysis if I had to extrapolate I would recommend the HIF method, but really it depends on each person’s unique situation.

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    • If you are so good with math, why do you have loans with high interest?

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    • So what are the chances of getting that spreadsheet so I might be able to use it on my few cards and loans? That would be a neat tool to use, only reason I can see typically lowest balance first is like the one person said, builds confidence as the debt get paid.

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  5. Never Go Back to Freshno? Haha. I call mine “Never Live With My Parents Again.”

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  6. Your article was featured in the 52 Week Experiment’s Weekend Edition:

    Thank you for the submission.

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