Dave Ramsey’s Baby Steps

Dave Ramsey has been a prominent figure since the early 90s, making him one of the longest standing influencers in the personal finance space to date. After famously going bankrupt in the late 80s, due to overreaching with investment properties, it’s no wonder why he has such an affinity for staying out of debt at all costs. Ramsey has since built wealth on his financial advisory company (Ramsey Solutions), his radio show, book sales, speaking engagements, and (naturally) real estate investments.

Today, Ramsey has an estimated net worth of around $200 million! Obviously, he is doing something right! 😂 Despite all his success, Ramsey has seemingly more critics than supporters. At times, his war against debt has led to questionable financial advice, mainly due to a “one size fits all” approach. Personally, I’ve always felt that his financial advice has overall done more good than harm; just be sure to take with a grain of salt! 😜

Let’s explore Dave’s most famous guideline to building wealth: The 7 Baby Steps.

Consider this $1,000 your starter emergency fund. The intention here is to always have this as a safety against life’s inevitable unexpected events. A recent report from Bankrate showed that 59% of Americans wouldn’t cover the cost of an unexpected $1,000 expense from savings! 😬

Whether it’s a health event (ER), car trouble (flat tire), or an issue with the house (broken appliance), Dave has stated that $1,000 should be able to cover most of life’s true emergencies. It’s also motivation to prioritize getting out of debt as fast as possible so you can further build your emergency fund.

SDB Take:

This advice came straight out of the 90s and hasn’t changed. While hitting the $1,000 mark for emergency savings is a great start, it’s not enough protection for today’s climate. I actually did this at the start of my financial journey, but the shoestring of wiggle room gave me too much anxiety.

I would generally recommend most to save one full month of fixed costs before tackling other financial goals. At the very least, this amount actually should cover most of today’s true emergencies when life inevitably throws a curveball. Also, in the event of income loss, you’ll have one full month to figure things out. It’s enough comfort to sleep at night, but not enough to get reckless.

Dave is a big fan of the debt snowball method, but the actual method utilized is up to the individual. This method allows for those early wins to help build motivation. It also mitigates a few of the smaller minimum monthly payments early on, which allows for more wiggle room in case an emergency strikes in the middle of this process (which you might need with $1,000 to your name 👀).

Ramsey has often said that personal finance is “20% math and 80% behavior.” By putting debt payoff at the top of your priorities now, you’ll experience more freedom and peace of mind later on.

SDB Take:

I agree with Ramsey that paying off debt should be a higher priority for most Americans, particularly high interest debt. I’m on board with whatever method most motivates you to make intentional steps towards financial freedom. If that means debt snowball, great! If that means debt avalanche, awesome! If that means paying off low interest debt instead of getting that company match? NO!

Don’t cut off your nose despite your face here. By prioritizing debt over all other circumstances no matter the cost, you might be putting yourself in a dangerous financial situation in the future. It might take years to get out of debt (18 months for me), come up with a plan that will better your financial situation from a big picture viewpoint. I’m not discounting the detrimental effects of debt here but take this one with a little grain of salt. 😉

Congratulations! You are now debt free! 🥳 Don’t slow down, time to build that level of cushion that will protect you on a much bigger scale. This foundation will help in the events of job loss, significant medical incident, major car issues, etc.

By this point, you should have some type of budget that gives you a good idea of what your monthly expenses are. If you spend $4,000 per month on housing, transportation, groceries, and the like; you’ll want this emergency fund to be at a minimum of $12,000 but up to $24,000.

SDB Take:

Having an emergency fund is absolutely essential for building wealth. That said, I’m not a fan of building a fully funded emergency fund before you start investing. Compound interest is pretty astounding, the sooner your money is in the market the better.

Also, I like to take this idea of the emergency fund to the next level. It’s my opinion that a Savvy Solo should aim for 6-9 months with the emergency fund, while also allocating some towards a bucket fund for upcoming events. Don’t freak out, it’s a slow build to reach these goals, and you’ll be investing for your future along the way. Most would agree that having too much in savings is a hell of a lot better than having too little. 🤪 As long as you are utilizing a HYSA, cash is not trash!

Alright, now that we are debt free (minus the mortgage) and have that emergency fund fully built up, it’s time to get our money in the market! Ramsey suggests putting 15% of your household income into retirement accounts (401K, 403B, IRA, etc.) regardless of company match.

If you happen to get a 5% company match, then you’ll actually have 20% going towards retirement, which is great! If you have been full steam ahead on these steps thus far, this step should be a breeze!

SDB Take:

I’ll never stop shouting from the rooftops that saving for retirement is important. To answer your question: Yes, my neighbors hate me; but I’m passionate about literal and metaphorical wake up calls every single morning at 5AM, what’s the big deal?

So obviously, I feel that most should have been investing towards retirement this whole time. But also, why limit it to just 15%? If you have to play catch up, shoot for more, and utilizing these tax advantaged accounts can help in many ways. If someone did a great job saving and investing at a younger age, they might not need to continue to save 15% moving forward.

This is among the many areas where one size does not fit all. If someone is shooting for early retirement, they will benefit more from utilizing a taxable brokerage account on at least a portion of their investments. No need to lock up all investments till the age of 59-1/2! So, if you haven’t already, take this one with a slightly bigger grain of salt. 🤪

Now we are debt free (minus the mortgage), have that emergency fund built, and are on track with retirement savings. Why not extend all this debt free glory to our next of kin? The cost of college is absolutely sky rocketing; reports show that it could be north of $40k per year depending on where your children attend! 😬

Many will attest (myself included) that student loans are a hinderance to reaching other financial goals. Get your kids started off on the right foot by having them graduate debt free! Dave suggests utilizing a 529 plan or ESA (Education Savings Account) with this step.

SDB Take: GO AHEAD AND SKIP THIS STEP ENTIRELY SAVVY SOLOS!!! 😁

LOL… JK… Kinda…

To all my Savvy Solo parents out there: it is not your duty to pay for your child’s college tuition! It is, however, your duty to teach them about personal finance to the best of your ability, and to have them understand the detrimental effects that debt can really have on their future. Start a conversation with them about why they want to go to college and help them decide if this really is the best path to reach their goals. If it is, there are a number of affordable routes to take that don’t include an inflated private school tuition.

To Dave’s credit, he stresses the importance of the major over the name of the school attended. Personally, it’s something I wish I would have known back then. Nobody really cares where you got your degree in “left-handed puppetry” (as Dave would call it 😂), most only care that your degree correlates to the job at hand. He also points out that there are more and more opportunities becoming available without the need for a college degree at all.

As a Savvy Solo parent, if you happen to be reaching all of your financial goals (or at least well on the way), and you still want to invest towards your child’s college… then I would have to agree with Dave here. 529 plans are worth looking into for the tax benefits, just try not to over fund them. It’s my personal opinion that most should only tackle this one after they have all the other boxes checked off.

Here we go! We are going to get debt free for real! Just imagine living your life the way you are now, minus the burden of a mortgage payment every month! Think about all that extra freedom you’ll have! Putting extra payments towards your mortgage could save you thousands, if not tens of thousands (maybe even hundreds of thousands!), of single dollar bills! 😲

I ran a quick simulation on calculator.net on a $500k house with 20% down with a mortgage at 6.5%. Check out the savings just from making one extra payment per year!

So just from making one extra payment a year to this mortgage, we would be saving $120,737.13 and shaving off 6 years of payments from this 30-year mortgage! 😶 Imagine how much we would save if we went even more aggressive on it!

SDB Take: 🤔👀🧐🤓🤔

Special note: Contrary to what Dave may say, it doesn’t make financial sense for everyone in every geographic area to own their own home. Check out this post to help determine if homeownership is right for you.

Of all the baby steps, this is the most controversial. If you currently have a mortgage at this point of the process, it’s definitely worth thinking about.

On one hand we know that the S&P 500 has a return of roughly 10% over the last few decades. So mathematically speaking, you’ll likely have a greater net worth by investing these extra payments instead of putting towards the mortgage. Also, funds allocated towards extra payments on a mortgage are illiquid. You can’t sell a chunk of your house to go on vacation. 🤪 Of course, you could do a HELOC, but that defeats the purpose of this entire strategy of getting debt free!

On the other hand, extra payments towards a mortgage are a guaranteed return. While the market fluctuates up and down all year, this extra payment is saving you 6.5% every single time. Wes Moss, host of the Retire Sooner Podcast, has done extensive research showing that retirees without a mortgage are much happier than those who still have one. The thought of living “rent free” is pretty enticing to most.

Ultimately, as long as these extra payments aren’t being blown on low value items, I’d say this one is up to the Savvy Solo. If this extra payment is invested or put towards the mortgage, you are going to wind up a little richer either way. Maybe the solution is a mix of both for now? Compound interest works both ways, utilize it in a way that brings you the most joy.

We are now completely debt free, well on our way to a healthy retirement, and at the point we have worked so hard for! We have the freedom to do what we want, with who we want, wherever we want! This is what dreams are made of! One of Dave’s famous sayings: “Live like no one else now, so you can live – and give – like no one else later.”

Now, we want to continue to build wealth for legacy reasons (to leave to the next generation), but more importantly to be charitable in the areas we care about. Dave typically recommends tithing 10% throughout this whole process but being even more charitable now. This is the part where life really gets fun!

SDB Take:

You’ll hear no arguments from me on the charitable giving. Being generous with your time and money pays dividends in more ways than one. Once you have reached financial independence, you have the freedom and flexibility to be philanthropic with whatever cause you like the most! Moreover, there can be tax benefits for being charitable. You’ll want to consult a CPA or tax professional, but a DAF account (Donor Advised Fund) can be an instrumental tool in optimizing your charitable giving!

For the Savvy Solos out there who don’t have children, I wouldn’t worry too much about building wealth for legacy reasons. Even for the ones who do, it’s your money to choose which direction it goes! If that means retiring early, and planning to die net even, so be it! Side note: the book “Die With Zero,” by Bill Perkins is really worth checking out.

The only caution I would throw out there is to make sure that your elder years are covered before donating all your funds towards charity. Assisted living and/or nursing homes can be quite expensive. You’ll want to seek the advice from a CFP or other personal finance professional to ensure that you’ll be comfortable in the latter years. Once you have that plan established, it’s time to make it rain on those charities and party up! 🥳

Although Dave Ramsey takes a lot of criticism, I do firmly believe that his impact has done more good than harm. These baby steps, his books, his radio show/podcast, have helped millions of people find the motivation to get out of debt and begin forming the building blocks necessary to create real wealth. This specific framework is a straightforward step-by-step guide on how one can attain the financial peace he always talks about.

All that being said, we should all be taking this advice with a grain of salt. 😂 There is no “one size fits all” plan for wealth building, you’ll want to make adjustments where necessary. Dave has also been known to give advice that leads to people getting out of debt in the least tax efficient way possible. Sometimes I think he’s an undercover agent for the IRS. 🤪 On top of all that, he tends to promote investments with high-cost mutual funds that are run by (you guessed it) Ramsey Solutions.

So… maybe don’t take investment advice from the guy, but the basis of what he preaches is still pretty legit. Take the good with the bad, and (as always) create a life that provides you with the most possible value!

Stay classy Solos! ✌️