Dave Ramsey’s Baby Steps Tutorial

One of the theories that attracted our family to applying Dave Ramsey’s approach to finances in is his plan called “The Baby Steps.” Rather than trying to fix all areas of your finances immediately, you work on a specific step, with focused intensity, solve the problem, and then advance to the next goal. Before we began the program we felt like we were attacking our financial issues in fifteen different directions, not one was effective, and long term success seemed nearly impossible. This new, single-minded strategy led us to a great point in our financial lives. Let’s look at each of the Baby Steps as defined by Dave Ramsey’s website.

Step One - $1,000 to Start an Emergency Fund. To start the process, scrape together $1,000 to use in case of an emergency while you are working your next steps. Begin a shopping freeze; eat only food from your pantry; sell extra household items; pick up short-term extra work to accomplish this goal as fast as you can. This emergency fund will help prevent you from accruing additional debt while you are working on Baby Step Two. For our family, this involved actually reducing our savings and applying the surplus to our Debt Snowball. While this step was scary at first, we were able to live with this level of savings for 30 months, rebuilding it a few times when life happened.

Baby Step Two - Pay Off all Debt but the House. List all debts but your house in ascending order. Pay off the smallest balance with focused intensity and make minimum payments on the rest. When you retire the first debt, apply the same focus to the next smallest debt, and so on and so on. Like a snowball rolling downhill,  your payment will become larger as it absorbs the extra money from the paid-off debt.  As an example, our family dealt with $55,000 worth of loans that took the shape of personal loans, medical bills, 401K loans, student loans and a second mortgage on our house. We spent 30 months cutting down our debt by following this plan, and we were so excited to make the last payment on our second mortgage in December 2010. At this point in the Baby Steps, many people find ways to make extra money through work and selling some of their personal property. The degree to which you are willing to sacrifice will reflect how much time you spend paying off your non-mortgage debt.

Baby Step Three - Build Your Savings to Three to Six  Months of Expenses. Now that all your debt is out of the way, calculate what it would cost to run your household for three to six months, accounting for  risk factors in your life such as illness, job stability or a growing family. Having several thousand dollars in the bank will add a feeling of peace that you may never have experienced.   You can  accomplish this in a short period of time on the heels of a successful debt snowball victory. This step took us approximately six months to accomplish,  and we were so excited to begin applying our knowledge towards creating a brighter future for our family.

Baby Steps Four through Six can be worked on at the same time.

Baby Step Four - Invest 15% of Household Income into Retirement. It’s time to plug back into investing after taking a break to complete the first three steps in the process. Between your Roth IRA, 401K, and  traditional IRA are several  options to build wealth for your long term use. The money you were using to attack debt can now go towards the future. We have found a wonderful financial advisor through Dave Ramsey’s Endorsed Local Provider (ELP) program that has taught us more about investing and work towards our long term goals.

Baby Step Five - College Funding for Children. Use 529s and ESAs (Educational Savings Accounts) to invest money for your children’s future. Ramsey doesn’t give a specific percentage or amount families should aim for, and leaves this to the discretion of parents. We personally want our children to pay for part of their college experience, but are still saving so that their contribution won’t have to cover the whole degree. 

Baby Step Six - Pay Off Your Home Early. In Financial Peace University, the video based class that we have taught for five years, Dave Ramsey shares that families who participate fully in the Baby Step Program with their spouse tend to pay off their homes in seven to ten years. When we began this process, we were trying to get out from debt that was causing us to lose sleep. Dreaming about a paid for house down the road wasn’t even  on the radar. Now, having applied these principles for nine years, we are a couple years out from paying off our mortgage. 

Baby Step Seven - Build Wealth and Give. At this point in the process you have zero debt, a paid for home, are investing 15% of your income for retirement, and have funded your children’s college account accordingly. Out of your income, you are called to live, give and grow wealth. With our target entry to this step quickly approaching, we have have a list of ways that we plan to live that are more extravagant than our life today. We want to take our children on a trip out of the country to solidify the connection between zero debt and amazing opportunities. We currently give 10% of our take home pay, and are looking to grow to a full tithe on our gross earnings. Growing wealth through additional investing in mutual funds and real estate is also on the table. We look forward with hopeful anticipation for how God might use us in new and exciting ways when we pay off our home and free up that monthly mortgage payment.

The nine week course Financial Peace University and Dave Ramsey’s book The Total Money Makeover delve deeper into each of these steps with detail and more actionable steps. This program did not feel sophisticated or heady enough to actually work when we first started. After living this system for almost ten years and teaching it for five, it’s clear that financial freedom is more about personal behavior than math. Building a plan, believing that it will work, and then following through is a sound way to make your financial dreams a reality.