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Do Dave Ramsey's Baby Steps Even Work?

Dave Ramsey is an internationally regarded financial expert who has provided high-quality advice for multiple major corporations over the years. One of his biggest accomplishments was the wide spread of his Baby Steps concept, a seven-step plan designed to help people make money, get out of date, and retire early. Many people herald these simple and common-sense steps as powerful saving tools.

However, there have also been grumbles about this method by many throughout the financing world. Some call the steps too simplistic or even outdated. Others say they simply don't work at all. That said, there are many people who have used them to achieve financial security. As a result, Dave Ramsey's baby steps remain an interesting and controversial subject to discuss.

In this article, we'll break down each of Dave Ramsey's baby steps, discuss how they may help you, highlight a few common complaints against them, and help you decide if they are right for you. Our goal here isn't to praise or bury Dave Ramsey's concept but to give it a fair and objective examination. In this way, you can best decide if this idea is the best option for your needs.

What are Dave Ramsey's Baby Steps?

Dave Ramsey's Baby Steps include seven distinct steps designed to help you save money quickly and efficiently. They are laid out to handle your debt first, create an emergency fund, and slowly save towards retirement, paying off your home, and much more. The ultimate goal is for you to retire comfortably and have the money that you need to relax during your late years after retirement.

The unique thing about Ramsey's Baby Steps is that they're designed to work for people from all walks of life. Rather than being only suitable for the very rich, he designed them to work well for anybody. Even if you don't make much cash, you can adjust these steps to approach your financial situation with grace and ease. These seven steps, in order, include:

Step One: Starting a $1,000 Emergency Fund

The biggest problem that most people experience in life is not having any money for emergencies, such as medical care or car repairs. You don't need to create a massive emergency fund just yet, Ramsey argues. Instead, you can create a $1,000 fund that you can draw from when you need it. claims that this will help keep “...suddenly necessary expenses” from causing serious debts.

Step Two: Start Paying Off Your Debts

Dave Ramsey then suggests that people start paying off all their debts, besides the house, using the snowball method. The snowball method requires starting with smaller debts first and then working up to bigger ones. For example, you can pay off your credit cards first, move on to your car, and then your student loans. The method you use to save should vary based on your situation.

Step Three: Complete the Emergency Fund

After saving up some money and paying off your debts, try to create an emergency fund that will cover 3-6 months of your debt. This step is wise because it will help you if you lose your job, your house gets damaged, you crash your car, or you need medical expenses that insurance doesn't cover. That extra money gives you that breathing room needed to feel comfortable.

Step Four: Start Saving for Retirement

At this point, Ramsey suggests shuffling at least 15% of your income into a retirement fund each month. For example, if you earn $4,000 a month, he believes putting $600 (15% of $4,000) into a retirement fund is wise. In 12 months, that will earn you $7,200. With interest and other smart investments, that money can balloon into a comfortable retirement nest egg.

Step Five: Raise College Funds

If you don't have children, you can skip this step and funnel extra money into your retirement. If you do have children, try to set up a 529 college savings plan or education savings account. Put 10-15% of your income into these accounts every month to raise more money for your child's education. By the time they hit college, they'll have a nest cash nest egg on which to draw.

Step Six: Pay Off Your House

When you have enough money to send your kids to college comfortably, pay off your house. Your house is likely the biggest investment you'll ever make in your life. Paying it off early can help you put even more money into retirement or have fun exploring the world. At this point, you're just about ready for step seven, which is where the most wealth will be earned in your life.

Step Seven: Build Wealth

At this point, you should start investing in other sources of income, such as renting homes, stocks, bonds, and other passive income options. You can also start giving away money to people who you love, such as friends or family members. That's because you'll have more than enough wealth to live comfortably and can give it to whoever you want without worrying about struggling.

Dave Ramsey's Baby Steps Graphed

Step Purpose
Step One Save a $1,000 emergency fund
Step Two Pay off debt using the snowball method
Step Three Save 3-6 months of expenses
Step Four Invest 15% of your income for retirement
Step Five Pay your children's college fund
Step Six Pay off your home early
Step Seven Build wealth and give

Flaws in Dave Ramsey's Baby Steps Theory

While Dave Ramsey's Baby Steps theory seems pretty solid on the surface, there are issues that many have pointed out. For example, Habesha Finance has criticized the steps for being too simple and claimed that they stopped following them because they weren't effective. The biggest issue was in investing 15% of your household income into retirement.

This firm didn't have problems with the idea but was critical of Ramsey's suggestion to invest in low-cost, broad-based index funds. These funds, they argued, are safer but have lower yield. Ramsey also neglected to mention a few key points, like not investing in mutual funds that cost high fees. They used an example that showed how high fees could cut a $1 million retirement fund into a $600K fund.

Let's break down a few other common complaints lobbied towards each step. While these common-sense ideas aren't necessarily bad in and of themselves, financial experts who criticize them point out that a few simple adjustments more congruent with today's financial reality will make them better and more effective for people trying to save money.

Step One: $1,000 is Simply Not Enough

Data Driven Investor's biggest criticism of Ramsey's initial plan was the $1,000 initial investment cost. They argued that $1,000 was barely enough to pay for new tires on a car, let alone serious medical emergencies. In their opinion, 3-6 months of emergency funds at the beginning of this process was a far more realistic and effective goal than $1,000.

Step Two: Debt Snowball Ignores Interest Rates

While the debt snowball method is sound at its core, it doesn't include interest rates. Unfortunately, bigger debt sources with higher interest rates will sap much of a person's income and make it harder to pay off smaller amounts of money. As a result, this step may not be suitable for everyone and may require adjustment to achieve maximum effectiveness.

Step Three: This Step Should Be First

Criticisms of step three center on its placement on the list. It should be the first step, many argue, even before paying off all debt. Having an emergency fund like this will help people avoid making more debt, the argument states, and make it easier to pay off more debt later. Critics claim that a simple $1,000 goal is simply not enough in today's world.

Step Four: Retirement Investment Should Be Done Sooner

This argument states that waiting too long to start a retirement fund may leave people with little chance for savings. Instead, critics believe that individuals should be putting money into their retirement while paying off their debt. While this does make it harder to have liquid capital, it kills two birds with one stone and saves more money, they claim.

Step Five, Six, and Seven: May Be Done Earlier

Most critics of Dave Ramsey's Baby Steps agree that they are wise to do towards the end of your financing period. However, they argue that they could be done sooner as well. They still believe paying off your debts and funding your retirement is critical to do. However, they also state that investing in stocks, bonds, and paying off your home is smart when tackled as early as possible.

Do These Criticisms Invalidate Dave Ramsey's Baby Steps?

If you are interested in trying these Baby Steps, these criticisms might discourage you. That's understandable, but it is important to note that almost no critics attack Ramsey's steps on a basic level. By that, we mean that even people critical of this concept simply believe it needs to be adjusted with more realistic savings goals and tweaked to reflect modern society a bit better.

There aren't many people who would attack these common-sense and simple ideas because they do work well when properly approached. The main idea of staying motivated by hitting each of your goals in order is a common idea that works in human psychology. People have a hard time focusing on the big picture and often need to perform small goals first to handle significant issues.

This idea was explored by writer Stephan Manning for Global Policy Journal. Manning highlighted the “modular” principle or the idea of breaking down big tasks into smaller modules. Manning states that “...small wins might be a promising alternative to tackle large-scale problems.” While he was approaching problems on a global scale, this idea is the heart of Dave Ramsey's Baby Steps.

As a result, that doesn't mean that they lack validity or should be ignored for other methods. Instead, it is important to know that they may have limitations that you can work around in several ways. For example, if you can't save 3-6 months for the first step but can save more than $1,000, you might want to put as much as you can into your savings account before tackling debt.

You may also want to work with a health manager who can help you better understand and tackle these steps. A wealth manager typically takes a small percentage of the money you earn with their advice and is motivated to help you make more. They can look over your portfolio, help you understand Ramsey's Baby Steps, and make it easier to transition into them without a major challenge.

Other Things to Consider That May Improve Ramsey's Steps

Dave Ramsey's Baby Steps are typically more effective when you have more money coming into your home. Here are steps you may want to take to speed up your baby steps:

  • Finding a Side Hustle: A side hustle is a part-time job or activity that you can perform that makes you a little extra money. For example, you may make and sell wreaths during Christmas or make art to sell online to others.
  • Consider an Airbnb: Do you have an extra room in your house that you're not using? You could rent it out to make extra money with an Airbnb. This step may help you make more money to pay off your debt.
  • Cancel Your Streaming Services: Try to cancel as many of your streaming services as necessary, even your cable, if you rarely use them. You can always watch shows with friends or buy DVDs (they're very inexpensive now and don't require monthly payments) if you need your shows.

Should You Try Dave Ramsey's Baby Steps?

There's no real harm in trying these steps because they are simple and common-sense enough to be useful to many financial situations. Just make sure that you adjust them to meet your needs, such as saving more or less money for your initial savings, depending on your financial needs.

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Allen Lee

Written by Allen Lee

Allen Lee is a Toronto-based freelance writer who studied business in school but has since turned to other pursuits. He spends more time than is perhaps wise with his eyes fixed on a screen either reading history books, keeping up with international news, or playing the latest releases on the Steam platform, which serve as the subject matter for much of his writing output. Currently, Lee is practicing the smidgen of Chinese that he picked up while visiting the Chinese mainland in hopes of someday being able to read certain historical texts in their original language.

Read more posts by Allen Lee

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