My first avenue into the personal finance realm was a discussion with my Aunt. I forget exactly how the conversation went, but she was and still is a fan of Dave Ramsey. She spoke about his book and she eventually began teaching his course: Financial Peace University

After our initial conversation about Dave Ramsey, I went and did some research about him and his background. Ramsey did exceptionally well by investing in real estate at a young age. He developed a portfolio worth over $4 million.

However, Ramsey had a great deal of short-term debt that ultimately led to him having to file bankruptcy. After Ramsey filed bankruptcy, he began to rebuild his business and now he is quite successful as a radio show host and author. You can read more about Ramsey’s story here.

I wasn’t a huge fan of Ramsey back then and I am still not now. I believe his steps are too rigid and he doesn’t allow for flexibility. For example, he is absolutely, 100% opposed to taking on any debt. Taking on debt isn’t always bad. If you know exactly what you want to study in college, then invest in yourself. Of course, you want to ensure the degree you are seeking has a good return on the investment you are making in yourself.

Next, I’ll breakdown Ramsey’s Seven Baby Steps and provide my color commentary on each of Ramsey’s baby steps.

Dave Ramsey vs. The Grounded Engineer


Ramsey’s 7 Baby Steps

Baby Step 1: $1,000 cash in a beginner emergency fund

Saving $1,000 is a good thing to do. My first step is to track where all of your money goes. I believe tracking your money is the first step to getting your finances under control. It is also important to understand where all of your money is going. If you build an emergency fund of $1,000 but you continue to overspend, you will constantly be dipping into your emergency fund. Then, you will have to work to replenish your emergency fund and you get into a cycle that never stops.

Related: How to Get Your Finances Under Control

Baby Step 2: Use the debt snowball to pay off all your debt but the house

A common question is: Do I start with my largest balance, smallest balance or my highest interest rate?

There are different arguments regarding which balance to start with – my take is to do what you think is best for your situation. The common argument for starting with the smallest balance is that you get a quick “win” and start to build momentum. This is the reasoning behind Ramsey’s support of the debt snowball.

However, I’m a fan of the debt avalanche over the debt snowball. If you start with the largest balance, you are saving yourself a significant amount of money in interest payments. Therefore, my philosophy is to knock out the debt that was costing the most. This isn’t always the debt with the largest balance – you need to factor in what your interest rate is.

Related: What is the Debt Snowball and How does it work?

Baby Step 3: A fully funded emergency fund of 3 to 6 months of expenses

Good idea. I personally like more in liquid savings, so closer to 6 months. If you read my recent post on our basement flooding, you can understand why I am a fan of a big safety net. I also recommend saving into a savings account that can provide a better return, .75% – 1.0%, compared to the big banks.

Baby Step 4: Invest 15% of your household income into retirement

The FIRE community is taking off. People don’t want to work for the man for 30 plus years. Instead, people are bolstering their savings rate to 50% or more so they can retire early. FIRE stands for financial independence retire early.

15% is great. But challenge yourself to increase your savings rate beyond 15%. Run some numbers and see what saving 50% of your income can do for your retirement.

Baby Step 5: Start saving for college

There is a big debate on this one. Many folks debate whether you should worry about yourself and your retirement ahead of your children’s college savings. If you are unsure of what to do, save into a Roth IRA. A Roth will enable you to pull money out tax-free and penalty-free for your children’s education. Therefore, if you are in a good spot for retirement and you have extra money, you can tap your Roth IRA!

Baby Step 6: Pay off your home early

Another great debate. Do you invest or pay off your home early. My simple take is to do what is best for you. If you really hate debt, like I do, then pay off your mortgage quickly. I am currently taking a blended approach – my extra money after monthly bills and savings gets split – 50% toward the mortgage and 50% toward investments.

Two great articles that were written recently on this topic are:

  1. Physician on FIRE – POF paid off his home early. He also tackled student debt and developed a healthy portfolio before the age of 45. This is ridiculously awesome considering he didn’t start working until 30 (ish). Some of you may be thinking – it is easier as a Doctor. Granted it might be, but high-income earners often succumb to lifestyle inflation. The POF has not!
  2. Need2Save – I love this blog because Mr. Need2Save is a fellow engineer. And, Mrs. Need2Save is awesome! This post is a comprehensive discussion of the reasons FOR and the reasons AGAINST paying down your mortgage early. I highly recommend this article if you are stuck in the debate for paying off your mortgage.

Baby Step 7: Build wealth and give generously

I agree whole heartily on this point. Not terribly specific, but either is my last step.

Who wins?

Well me obviously 🙂 Just kidding. If you are reading this article and planning to take action – keep going! I applaud your efforts getting this far – now execute!

I have two big issues with Ramsey’s Seven Baby steps.

First, I think one of the steps needs to be specifically about budgeting or changing habits that got you into debt in the first place. My first step is tracking where all of your money goes. If you don’t start with this step you will never be able to effectively manage your money. You need to spend time each week, or at the least every two weeks, reviewing your spending and your budget. This is the only effective way to grasp control of your finances.

Related: How much time do you spend budgeting?

Second, I don’t like the order of Ramsey’s steps. For starters, I think Step 1 can be eliminated and you can go right into the debt snowball. Again, I would recommend tracking your spending and then developing a budget first. I would also ensure your retirement accounts are fully funded (maxing out 401(k) and IRA) before tackling college savings for your children.

In general, our processes are fairly similar. So which process will work for you?

I bet if you track all of your expenses for a few months you will come across some surprises. You will see that you spend too much money on food – groceries and going out to eat, and it will be a wake-up call. That is really what I want to get across. From there, follow Dave’s steps or my steps. Any path that will help you eliminate debt and begin investing I support!

Here are a few other takes on Dave Ramsey’s Baby Steps

My favorite is this podcast from Choose FI.

Peter over at Bible Money Matters provides a review of the Seven Baby Steps.

G.E. Miller at 20 Something Finance also has a good review on Ramsey’s Baby Steps.

What are your thoughts on Ramsey’s Baby Steps?

Do you think my five steps are valid?