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Dave Ramsey Baby Steps

What are the Dave Ramsey Baby Steps? The baby steps is a simple, straight-forward game plan to help you gain control of your finances from the finance-guru, best-selling author & host of "The Dave Ramsey Show".

Are you doing everything you possibly can to be financially fit? If you lost your job tomorrow would you still be able to pay your bills? Do you have a plan to get out of debt? Are you investing enough to retire? The Dave Ramsey baby steps will answer those questions and put you on the path to financial fitness.

In order to get the full benefit of the baby steps I highly recommend reading The Total Money Makeover. You won't be able to put it down - I promise you.

In This Article:

Step 1 - Save $1000 Fast
Step 2 - The Debt Snowball
Step 3 - Finish the Emergency Fund
Step 4 - Maximize Retirement Investing
Step 5 - College Fund for the Kids
Step 6 - Pay Off the Home Mortgage
Step 7 - Build Wealth Like Crazy

#1 - Save $1000 Fast - Step 1 of the Dave Ramsey baby steps is about starting your emergency fund, you don't need 3 to 6 months worth of expenses in your fund (not yet anyway). For now, think small, strive to put aside just $1000, this should be enough to cover most emergencies.

The key here is to have something set aside until you can build up an adequate emergency fund equal to 3 to 6 months of living expenses. Also you want to do it as fast as possible, do whatever it takes to bank $1000.

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#2 - The Debt Snowball - At this point in the Dave Ramsey baby steps you should have a thousand dollar emergency fund - it's time to wage war on your debt using the debt snowball method. What's the debt snowball? It's a highly effective strategy for getting out of debt fast. With momentum like a snowball rolling down a hill you pay off your debts one at a time until all your debts are paid.

Here's how the debt snowball works. First, you make a list of all your debts, sort them in ascending order by balance (smallest to largest). Then you target the top debt in your list, pay only the minimum payment on all the other debts. Pay whatever is left on your target debt until it is paid in full. Target the next debt on your list, again make minimum payments on all other debts and pay what's left on the target debt. As your debts get paid off one-by-one it frees up more and more money for the target debt and each subsequent debt gets paid faster...hence the term debt snowball.

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#3 - Finish the Emergency Fund - By step 3 of the Dave Ramsey baby steps you should now have a thousand dollar emergency fund and be debt free (except for your mortgage). You can focus more your time, energy and let's not forget - money - on finishing your emergency fund. A fully funded emergency fund is essential to achieving financial fitness.

It's important to remember that your emergency fund is strictly for emergencies - it is not an investment! Your fund should be fairly liquid, meaning you can access the money you need when you need it. That's why it's a bad idea to invest the money from your emergency fund. 3 to 6 months worth of living expenses is alot of money

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#4 - Maximize Retirement Investing - By now you're well into the Dave Ramsey baby steps, debt free with a fully funded emergency fund - time to build your retirement nest egg. At the same time you can try to pay off the house so you can live in a paid-for house and have lots of money to LIVE in your golden years.

Invest 15% of your income - Why only 15%? Like most people have a mortgage you'd like to pay off early or you might also be looking to bankroll your children's college education. If your employer matches contributions think of it as bonus, don't include it in your 15%. The important thing is to start investing as soon as possible, Dave's preferred investment vehicle is a growth-stock mutual fund.

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#5 - College Fund - Skip past this step if you don't have kids or your kids are already past college. At this stage of the Dave Ramsey baby steps you should be debt free (except for your mortgage), have 3 to 6 months of expenses in your emergency fund and investing 15% of your gross income. The main goal of this baby step is to make sure the kids getting a running start financially by setting up a fund to help them pay for their college education.

Since college tuition prices rise faster than regular inflation choosing the right investment for your college fund is crucial. Depending on your circumstances you should look into investments such as a RESP (registered education savings plan), ESA (educational savings account) or a 529 plan.

If your child is under the age of 8 and you earn less than $200,000/year, you should invest in an ESA, also known as an Education IRA.

if your child is over the age of 8 and you earn more than $200,000/year, you should invest in a 529 plan.

Here's a summary of Dave's rules for college:

Research the costs of attending various types of schools - way all the costs such as tuition & living and eating off-campus versus dorm and cafeteria meals.
Pay cash - If you have enough cash in the college fund or in scholarships you're way ahead right out of the gate.
Avoid student loans - If at all possible try to avoid taking out a student loan. This should be a last resort. Graduating with a huge, burdensome student loan is not starting out on the right foot.
Consider all your options - Get creative about cutting costs, rent a room or eat meals with relatives living close to campus. Consider community college for one to two years before going to a bigger college. Getting a job part-time might also be an option for you, if you want to gain work experience, it will also give you more of an appreciation for your studies.

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#6 - Pay Off the Home Mortgage - If you've already paid your mortgage off, congratulations, you're almost there! Skip to baby step #7. By the time you're ready to start this step of the Dave Ramsey baby steps you should be debt free (except for your mortgage of course), have 3 to 6 months of expenses in your emergency fund, investing 15% of your gross income and building a college fund to help pay for your kids' college education. The goal of this step is to start an accelerated payment plan to pay off your mortgage.

The idea is simple, pay anything left over after regular living expenses, retirement investing and college funding on your mortgage. The faster you can free yourself of your mortgage the more you will save in interest.

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#7 - Build Wealth Like Crazy - In the final stage of the Dave Ramsey baby steps you are 100% debt free, have 3 to 6 months worth of living expenses in your emergency fund, are investing 15% of your gross income, investing in or have fully funded your children's college education and have paid off the mortgage. As Dave says, "This puts you in the top 5 - 10% of all americans because you have some wealth, have a plan and have all your finances under control!"

Retirement looks brighter than ever and you have your finances well under control but your not quite there yet. Here are Dave's basic rules of investing for baby step #7.