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Are you, like many others out there, financially struggling every month? Paying minimum payments only to not see the needle move?
Dave Ramsey’s 7 Baby Steps were what pulled us out of exactly that. We were struggling to keep up with paying over $1,000 each month in debt (that’s not even including our mortgage!). And struggling with the idea that it would take us a very long time to get those debts paid off.
So what are Dave Ramsey’s 7 Baby Steps? How can they help YOU?
Table of Contents
How to succeed at the Baby Steps
The first few steps in Dave Ramsey’s Baby Steps can come with a lot of resistance. They’re tough, not only because you’re just starting out, but also because you have to change your way of living.
To get through those first few steps, there’s a lot of sacrifice involved.
But don’t let that deter you! You’ll never feel more in-tune with your finances than you will when you go through these steps.
The biggest piece of advice I can give to succeed with the baby steps is to persevere. There will undoubtedly be days that you want to give up and “not worry about it right now”.
On those days, you have to remember why you started and what you’re working toward. Are you tired of paying your hard-earned dollars in principal and interest every month toward your debt, only to not get ahead? Or are you sick of living paycheck to paycheck, and just running out of money?
Remember those feelings!
And know going into this that it’s of course going to be tough. If it were easy, everyone would be out of debt and doing great with their finances.
So, you persevere!
Before you get started with the Baby Steps
I definitely recommend getting a few things in order and ready to go before starting the baby steps.
On the physical or tangible side, I’d recommend having the following things ready to go:
- a budget planner of some sort, whether it’s an app, spreadsheet, or budget planner. If you need help getting it started, here’s a list of over 150+ household budget categories you might be forgetting!
- a good list of budget-friendly meals (I really like Budget Bytes for quick, cheap meal ideas)
On the mental and emotional side, here are a few recommendations:
- your “why” – why you’re deciding to take this route with your finances, and what you’re working toward
- a short list of different rewards. This will come in handy when you’re going through a debt payoff and a reward system may help keep you going. Create a list of rewards that cost very little, to rewards that cost more. For example: go out for ice cream for a small win, plan a mini-vacation for a debt payoff!
What are Dave Ramsey’s 7 Baby Steps?
Let’s get to the meat of this post!
Baby Step 1: Save up $1,000 in an emergency fund
The very first step of Dave Ramsey’s Baby Steps is to save up $1,000 into an emergency fund.
Does that sound like too small of an emergency fund?
It’s small so that you can save it up quickly and move on, but also to not make you too comfortable. Think of it as an extra fire under you to get you through the next baby step.
Do you already have $1,000 in your emergency fund, or maybe more? If you have more, it’s time to take everything out except $1,000 and apply the rest to the next baby step.
Baby Step 2: Pay off all debt, except mortgage
This is the baby step you really need that list of tangible and emotional/mental items ready to go.
Depending on how much debt you have, this process can take a while. There are times that it will be really discouraging because you wonder if you’ll be able to keep going. That’s where the emotional/mental items will help you most.
It’s extremely important to have your budget in working order before starting this baby step.
To apply the most toward your debt and not get into financial trouble, your budget needs to work like a well-oiled machine.
If you apply too much to your debt snowball while forgetting that you have a bill coming out soon, your account could overdraft. It’s really important to budget properly so this doesn’t happen!
Baby Step 3: Save up 3-6 months of expenses into an emergency fund
Now that your debt is paid off, it’s time to beef up your emergency fund. If you have the same discipline as you did with baby step 2, this should go fairly quickly!
You may be asking yourself, “how do I know if I should save up 3 or 6 months of expenses?”.
That’s a great question to ask!
This mostly depends on your job situation.
If you have a nice, stable job with a steady income, it’s safe to save up 3 months’ worth of expenses. That’s because, even if an emergency pops up, you should be able to cash flow the emergency with the help of your smaller emergency fund.
If you have a more unstable job or something where work comes and goes, it might be safer to save up closer to 6 months’ worth of expenses. A good example is someone in construction, that may have more seasonal work. Or someone in landscaping that can see a lull in the winter months.
Baby Step 3b: Saving up for a down payment
There is an extra baby step thrown in, in case you are looking to buy a house soon.
Baby Step 3b is a step that can be done alongside saving up for your bulky emergency fund.
It isn’t wise to save up for a down payment in the first two baby steps, since this is when you are throwing everything you can to save up a small emergency fund and pay off all your debt.
Saving up for a house while doing those two steps could really slow down your progress. Because of that, if you’re saving up for a house down payment, this is where you’d do it!
Baby Step 4: Start investing 15% of your income into retirement
Baby steps 4, 5, and 6 are typically done at the same time.
You’re not taking all of your income to throw at just one of these steps.
Baby Step 4 is taking 15% of your income and putting it into a retirement account. This doesn’t include employer contributions; it’s 15% of your money.
Many choose to invest that 15% into a Roth IRA and/or 401k.
It’s really important to do your research and figure out where you want to invest your money. If you’re looking for a guide for investing, I’d recommend checking out this book to build your foundation.
If you’re younger, you may choose to invest more aggressively. That’s because, if things go south, you’ll have plenty of time to recover. And, if you’re older, you’re more likely to invest conservatively, since you’re closer to retirement at that age.
Baby Step 5: College savings for kids
Saving up for college for the kids is another step that is just a percentage of your monthly income going into savings.
There are several options out there that you could use to start saving. Dave Ramsey recommends plans like the 529, ESA, or UTMA.
I’d recommend looking into all of your options to find what’s right for your family! Some plans can only go toward education (and therefore, there a
Of course, if you do not have kids, this is a baby step you should skip until you do.
Baby Step 6: Pay off your mortgage
The big one!
Paying off your mortgage is a huge deal. One that many people can’t or don’t do.
It’s tough to look at something as big as a home mortgage and think that you can get it paid off. But the great thing here is that you don’t have to put the same force into it as you did for Baby Step 2 (paying off debt).
Baby Step 2 is getting rid of all debt except mortgage because the interest and payments are stopping you from becoming wealthy. A good chunk of your money is being poured into these payments.
On the other hand, once you get to this baby step, you have gotten rid of the monthly interest and debt payments, you’ve built a sizable emergency fund, and you’re working toward your savings. This puts you in a great position to pay off your house!
What about the tax write-off if I keep my mortgage?
This is the number 1 retort I’ve heard from people when we talk about the baby steps.
Yes, you do end up getting a tax break if you have a home mortgage. But it’s not as simple as that, and the numbers, in most cases, do not work out in your favor.
The Tax Cuts and Jobs Act that passed in 2018 essentially doubled the standard tax deduction for your mortgage interest. The standard deduction for single filers and married filing separately is $12,000, and married filing jointly is $24,000.
I really like Investopedia’s explanation:
…a taxpayer spending $12,000 on mortgage interest and paying taxes at an individual income tax rate of 24% would be permitted to exclude $12,000 from income tax liability, resulting in a savings of $2,880. In effect, the homeowner paid $12,000 to the bank in interest to get less than a fourth of that amount excluded from taxation.investopedia.com
Numbers vary, yes, but in most cases, the math works best to pay off your mortgage.
Baby Step 7: Build wealth!
At this point, you have absolutely no debt. You owe no one. How good does that sound?
You’re saving up for your future here. And for vacations. And for whatever else you want.
All of your income is yours, except for a few utilities and things to get by each month.
You could give to charities. Or retire early. Or save up for an even bigger house. Or do them all at once!
If there is one word to describe this baby step, it’s freedom.
Those are Dave Ramsey’s 7 Baby Steps!
What baby step are YOU on? Do you have any advice for someone who might not be as far along as you are in the 7 baby steps? I’d love to hear from you in the comments!