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A 2019 Analysis Of The Dave Ramsey Baby Steps

Since the 90's The Dave Ramsey Baby Steps have been synonymous with personal finance for middle-class America. I’ve listened to many podcasts and I've read many blogs, and Dave Ramsey's name stands out above most others.

Brad and I are a 6th or 7th generation media personalities. I don’t want to say that we are a dime a dozen, but there are a lot more of us to choose from. But Dave was one of these first-generation personal finance coaches. Nobody was doing this back in the '90s.

He had a million-dollar real estate portfolio and he crashed hard into bankruptcy. He pivoted and started with a radio show helping people avoid his mistakes. Around the same time, he created a small book called Financial Peace and started offering it as a free resource to his church. The radio show gave him a platform to sell the book and the Dave Ramsey Baby Steps nationwide and he turned it into a multimillion-dollar dynasty.

He based everything around seven baby steps and built a tribe of debt-free warriors. His product went viral in an era that predated social media and blogging.

I think everybody would benefit from listening to him and I would not be here today doing this blog and podcast if it were not for Dave. I owe him a debt of gratitude!

So now, more than 15 years later, we wanted to review and evaluate Dave’s teaching philosophies. We wanted to see where we line up and where we go our separate ways.

At ChooseFI we subscribe to the “FI” (Financial Independence) way of thinking. Which broken down to it's simplest explanation is to keep your expenses as low as possible, invest as much as you can in low cost, broad-based index funds, and when you have saved 25 times your annual expenses you are considered financially independent.

What you do at this point is up to you. Many people quit their day jobs to start businesses or reduce their hours to part-time. Others stop working entirely and travel, pursue hobbies, or just spend more time with their families. The point is, when you can live off your investments, your time is your own.

Summary Of Dave Ramsey's Baby Steps

Baby Step 1: Get An Emergency Fund Of $1,000

Dave says that this is to prevent Murphy from knocking on your door. You know the saying:

What can go wrong will go wrong.
-Murphy's Law

I think this is a Universal Truth. Accidents tend to happen when you can least afford it. I don't take the small stuff for granted. But I know people that don’t have a checking account and I know people that have been forced to take out a payday loan for an emergency. A payday loan will typically be a short-term loan for $600-$1,200 dollars. And the interest usually runs $200-400 per month

$1,000 can be enough to stave off financial disaster. So, as Dave says:

Keep your grubby hands off it…. Don't touch it. It's not so you can get your nails done, it's for an emergency.

We totally agree with the concept of an emergency fund. You won't get anywhere if you're scrambling every time your car breaks down or your child needs to go to the doctor. However, in our minds, how much you choose to save is up to you. Do you feel comfortable with $1,000? If so, great. If you want more or less, that's ok too. The point is to spend time thinking about it and make a plan. Know ahead of time what you are going to do when an emergency strikes will reduce the stress.

Baby Step 2: Pay Off All Debt Except Your Mortgage

In this step, Dave recommends using a debt snowball, which involves paying the smallest debt down first. Here are his steps:

  1. Make a list of all your debts.
  2. Rank the list in order from largest to smallest.
  3. Make the minimum payment on all debts.
  4. Throw every spare penny into the smallest debt.
  5. When you have paid off the smallest debt, then throw every spare penny into making extra payments on your second-smallest debt (which is now your smallest debt).
  6. Repeat until finished.

But, Mathematicians often favor the debt avalanche

This goes as such:

  1. Make a list of all your debts.
  2. Rank the list in order from highest-interest to lowest-interest.
  3. Make the minimum payment on all debts.
  4. Throw every spare penny into making extra payments on the highest-interest debt.
  5. When you have paid off the debt with the highest interest rate then throw every spare penny into making extra payments on your second-highest-interest debt (which is now your highest-interest debt).
  6. Repeat until finished.

I Favor A Hybrid

Try to tackle the smaller ones first. Group all debts below $1,000 together. As long as the interest rates are similar then use the debt snowball and pay off the smallest debt first.

Exception: If you have any payday loans with 200% interest rates pay those off first.

Group the remaining debt by interest rate and pay off your any debt that has over a 6% interest rate specifically let's get rid of consumer debt like credit cards anything that's making your life more expensive. Let's get rid of your car payments!

My Two Cents For Step 2

I have noticed that Dave really doesn't try to give you a whole lot of actionable tips to help to decrease the cost of your life–which can help you reduce debt.

The entirety of his decreasing expenses plan can be summed up as:

  1. Have a yard sale
  2. Sell your car
  3. Work a second job (deliver pizzas)

This may have been enough advice back in the ’90s but I think it's a shame that he doesn’t go any deeper on how to actually decrease expenses. I think we can do better.

The members of our Facebook group have endless ways to save money. Everything from cutting your own hair to finding low-cost entertainment in your city. If you want ideas to lower your expenses head over and see what others are doing.

Related: Quirky Frugal Habits: Level Up Your Frugality

Other Points Of Contention In Step 2

Dave Ramsey tells you to hold off on the match with your 401K while you're paying off debt. I can’t recommend this. I have no problem with not maxing out your 401K, but we don’t walk away from free money. You always do the match.

He makes the case that you're being chased by the cheetah and it's short-term, usually less than two years. Maybe for some very specific situations where someone is close to the edge, like a payday lending situation, this would be good advice. But I think the audience is important. He is focusing on people dangerously close to the edge. You can’t apply that to everyone!

If you have some debt at 5% you don’t pass up doubling your money (100%) to pay down 5%. That's dumb math! My wife and I have always taken advantage of match programs and we have some significant savings based on that alone.

Baby Step 3: Get 3 To 6 Months Of Expenses In Savings

I agree with the importance of an emergency fund and savings but I have started to question the best place to keep the emergency fund. Especially for someone who is saving 20-60% of their income. Does this need to be in a basic savings account earning zero interest? I think it's so important to get your money working for you. We explored this in an episode with Big ERN. Don't misunderstand, I think it's incredibly important to be able to weather a financial storm and have a clear plan in place, but to be honest I skipped this step and went right to investing.

I Have Insurance

Insurance is a backstop; if I have a death in the family, or my house burns down, or the car is totaled. I have enough to cover the max out of pocket but after that, I am in the clear.

What If I Lose My Job?

This is where the personal factors come in and you have to weigh in how secure is your job? What would you do if you lost your job?

But it's important to play this out

Can you get another job?

Note that since this is an emergency you don't need to replace your income just cover your expenses, the lower your expenses are the smaller your cash emergency fund needs to be.

Do you have another source of income?

Side hustles are great for many reasons, one of which it can serve to cover some expenses if you lose your main source of income. Depending on the side hustle you may even be able to ratchet up the income and cover most if not all of your basic living expenses while you look for a new job.

Related: Why A Side Hustle Is FI's Secret Weapon

What If I Have An expensive emergency?

If I had an unexpected $10,000 emergency:

  1. I have a decent amount of money in my taxable accounts (for me it's Vanguard VTSAX) I could access within a week.
  2. I have a credit limit on multiple cards approaching $30,000 with a 30-day interest-free float.
  3. I could set up a HELOC ( Home Equity Line of Credit).
  4. I can access Roth contributions (contributions can be accessed tax and penalty free).
  5. I could sell something.
  6. I could cash flow it because my savings rate is so high. I can cut back on my savings and focus on paying for the expense.

Obviously, this is incredibly situational, and I don't think the emergency fund is a one size fits all answer. But too often it is taken as dogma. I guess more accurately I think everyone should have savings and the ability to financially survive emergencies I just question whether that massive emergency fund in a low paying savings account is necessary for everyone.

You should probably have some cash on hand, even if it isn't the full 3-6 months of expenses. If you do, you'll want to be earning as much interest as possible on this money. We recommend the CIT Saving's Builder account. Check out our full review here.

Investment Life Hack

I also like the idea of using a Roth IRA for an emergency fund because you can park it in VTSAX and you can withdraw contributions without penalty at any time. So, between those categories, you should be able to access 3 to 6 months of expenses. Keep in mind that withdrawing from your Roth will mean you can't max out your contributions for that year. The money you withdraw doesn't subtract from the money you contributed.

For example, if you contribute the max of $6,000 and then in November you withdraw $1,000, you can't just put that $1,000 back in December. You've already contributed the full $6,000.

Baby Step 4: Invest 15% Of Household Income Into Roth IRAs And Pre-tax Retirement

For most Americans, saving 15% sounds extreme. However, in the FIRE community, 30%, 40%, and even 70% savings rates are not uncommon because we understand the importance of your savings rate. We live far beneath our means, focusing on building passive income streams through investments, real estate, and business ventures.

Saving 15% will give you a 40-year career and a comfortable retirement. But here at ChooseFI, we are not interested in a 40-year career. We plan on putting a lot of work in now so it becomes optional in the future.

This is the crux of the Financial Independence community, and the biggest difference between us and Dave Ramsey. If you want an average life and retirement, then, by all means, save 15% of your income. But if you truly want to “live like no one else so you can live like no one else” then we suggest taking it the next level.

Let's look at the reality of Dave's plan by using two case studies. Let's say that our individual invests 15% of their household income into a Roth IRA and pre-tax retirement, earning an average of 8%:

Case 1

Tom makes $40,000 a year and invest 15% or $6,000 annually and does a combination of pre-tax and post-tax investment accounts. He does this every year for his working career, which is 40 years so from the age of 20 to 60. He never gets a raise, which is unlikely, and he never fails to contribute. He’s going to have about 1.6 million dollars.

Case 2

Amy decides to go to grad school. This is a 12-year path including four years of undergrad (age 18 to 22), four years grad school (age 22 to 26), and finally, four or five years pay down her loans (age 26 to 30). Amy earns a higher salary of $100,000 per year. But, because of school and student loans, Amy was not able to start investing until she was 30. Amy only plans on working/investing for 30 years till the age of  60. She invests 15% or $1,250 a month. At the end of 30 years, Amy would have about $1.8 million dollars.

Tom and Amy both retire at age 60 with roughly the same amount of income in retirement.

ChooseFI example

Paul decides not to go to college and at age 20 has a blue-collar career earning $60,000. He keeps his expenses low by house hacking, driving old cars, and packing his lunch to work every day. He also picks up a side hustle that earns him an extra $1,000 a month. He is able to save 50% of his income, or $36,000 per year. And he lives on the other $3,000 a month.

With his expenses being $36,000 per year, he would need to save $900,000 to be FI (36,000×25=900,000). Once he reaches this point, he could withdraw 4% of his nest egg and that would provide him with the $36,000 per year he needs to cover his expenses, and never touch the principal.

If he decides to keep his side hustle with it's $1,000 a month of income, then he only needs $600,000 in savings to be FI.

Investing his $36,000 per year, he would have $900,000 in 14 years–and $600,000 in just 11 years. 

Tom and Amy don't retire until they are 60. Paul retires at age 34! Big difference! He now has the freedom to do whatever he wants.

Baby Step 5: College Funding For Children

We all know that student loan debt is astronomical. The only answer to that is: teach your children about saving for college. This step no one disagrees with. But college has changed a lot in the 15 years since Dave Ramsey came out with his baby steps.

Also, college hacking can make a huge difference in the cost of paying for school. We can all do things such as:

  • Look into dual enrollment so your child can graduate from high school with an Associates Degree
  • Start looking into scholarships early
  • Work with your child so they do well on the SAT and ACT tests
  • Stay in-state, if possible
  • Set expectations that your child will work during college

Reducing the cost of college will go a long way to making it more affordable. Pair that with saving for college and you've gone a long way to reducing the burden of student loans. The goal is to graduate with zero debt–or at least as little as possible.

Related: Demystify College Scholarships With Brian Eufinger

Baby Step 6: Pay Off Your Home Early

This one we agree with–maybe.

What’s your interest rate and what’s the alternative?

Opportunity Cost

If we rely strictly on the math, it will make more sense to invest, rather than pay extra to your mortgage. $500 a month extra on your mortgage may save you

Assuming a mortgage balance of $200,000 at 4%, with 20 years left on the term. Paying the minimum payment will mean you'll pay $90,870.56 in interest. Adding $500 a month to the payment will save you $37,100.79 and will shave off about seven years.

The alternative is to invest that $500 a month. If we invest $500 a month into a low-cost broad-based index fund that averages 8% for the next 13 years (the time it would take us to pay off the mortgage with this extra money) will leave us with $134,994.85. A more conservative return of 6% would leave us with $117,442.07.

 You Can't Downplay Flexibility & Freedom

As you can see, the math leans heavily on investing over paying off your mortgage. However, there are other factors at play. Risk is one. There is zero investment risk when paying off the mortgage. You are guaranteed a 4% return, in this example. You are not guaranteed anything when investing in the stock market, no matter how well diversified.

Peace of mind is another factor. The security of having a paid-off home is something that allows for great peace. As Dave says, 100% of foreclosed homes had a mortgage.

Reducing your structural expenses is another reason people decide to pay off their home early. The FI community is huge on getting expenses as low as possible. You simply need less in savings if you have fewer expenses.

I go back and forth and clearly don't have the perfect answer. Mathematically it's probably suboptimal but the freedom and flexibility that not having a mortgage proves should not be discounted. I would never tell someone that they made a mistake by paying it off. It “may” be a mathematical mistake but that doesn't mean it's a life mistake.

The beauty of the FI journey is that you get to make you own choices. If you want to pay it, or if you want to invest that extra money–the choice is yours.

Related: Should I Pay Off My Mortgage Or Invest?

Baby Step 7: Build Wealth And Give!

This is literally the conclusion of Dave Ramsey's book. This sounds so boring. Why go through all these financial hoops if you are just going to sit back and count your money. Dream bigger! How would you spend your time if money were not a factor? Would you volunteer at charities close your heart? Would you travel? Would you move to another country? Do you want to start your own business?

What do you want to do with your life?

I think the reward of all this is freedom and flexibility. You get to design your best life now and maybe that's not opulence, but service and family time. Or maybe it's traveling the world and consulting on ideas that you love to think about. Maybe it's writing a book as you geo-arbitrage around the world. So many options and the only thing you are running out of is time!
This allows for extreme flexibility.

Explore Travel Rewards, which involves taking advantage of credit card sign up bonuses to earn 5-10K in free travel each year. Become an expert at putting these travel hacks together. Then use the flexibility of FI to have the time to take advantage of four-week vacations anywhere in the world with my family.

If you want to listen to the podcast episode that inspired this article, click the link below:

Dave Ramsey, Why Everyone Needs Him and Why You Should Ignore Him

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18 thoughts on “A 2019 Analysis Of The Dave Ramsey Baby Steps”

  1. Hey! Just found you guys from RPF. Great stuff.

    Quick correction on the Roth Emergency Fund – you can withdrawal contributions at any time, no need to wait 5 years.

    Looking forward to more!

  2. I can see where some of his plan is a bit of a stretch but I think it all ties together to make the steps following possible. Like getting rid of a credit card and score all together. If you have the money saved up and are secure enough to ditch it then why need it?

  3. Great site guys; thanks for making it available to the rest of us! My wife and I are taking Financial Peace University through our church and enjoying it immensely. To your point, there are some (many?) areas that aren’t black/white in finances, but some of us need to make them black and white until we fix our basic habits and ways of looking at money. Then (so my plan goes at least) we can make course corrections with our new FI navigation skills and explore new worlds…

    • Hey Travis, as you will hear when you listen to episode 5. We are not Dave Ramsey haters. In fact I am a huge fan, I think he helps way more people than we ever will *people that are at the financial cliff* I took the Financial Peace university. I’m a graduate 🙂 but he gives up after getting to debt free and there is so much more 🙂 Enter ChooseFI : because debt free is just the start and Build Wealth and Give is too vague 🙂

  4. Really like your podcast. It fills a definite need in the community.

    Your Dave Ramsey critique podcast/this article was interesting to read. I don’t agree with some of the logic conclusions.

    Main points –

    Step 4 – 12% and 18% returns. Dave mentions 18% returns for paid off rental real estate. Which is achievable. As for 12% returns, what is your time horizon? SGENX has returned 13.32% average since inception. Granted it’s 10 year is currently lower but it is one example that makes Daves position based on facts.

    Step 7 – you mention in the podcast Dave didn’t put much into this step. I would point to the Legacy Journey. The follow up book and class that comes after Financial Peace.

    You say that FI and Dave diverge widely at this point but I would say that they are not that divergent. Dave says keep working even if your considered FI because your work should be something you enjoy and brings value to your life. FIREs believe the same thing after they get tired of not working. Just look at MMM with his successful blog and now his new physical location. MrFreeat33 with his blog and now personal training.(just 2 examples among many)

    Keep up the good work!

  5. Y’alls plan to invest the step 3 emergency fund in a mutual fund is a high risk strategy. In most situations, you won’t need to touch that money. You should be able to cash flow a lot of things that are ’emergencies’ for the average person after you are out of debt and have your spending under control. If you are in this step, or beyond, you are most likely to need that money during a period of economic turmoil resulting in job loss. If you have your emergency fund invested, you may be forced to sell shares while they are worth less than you had expected. Also, you should be looking to put money into your Roth IRAs during this period of time, not pulling money out because you didn’t keep enough cash on hand. Keeping (a reasonable amount of) cash on hand allows you to take advantage of opportunities when everyone else is forced out.

  6. Found your site while googling Dave Ramsey baby steps… great article! I’m just starting to follow his steps to get rid of some debt. Not sure we like the idea of passing up the 401k match either. Our household income is over 150K and our debt under 50K so passing up the match doesn’t make sense. Secondly, I like your passive income stream mantra. That’s what I do in my spare time. Make some websites to get affiliate commissions. It’s nice having an extra $500-700 per month dripping in.

  7. Recently found your podcast last week. I love it! Fairly new to FIRE community, but on my way! I really enjoy breaking down DR’s baby steps in this way. Keep up the great work guys!

  8. I had an ex who avoided credit cards at all costs… but thought it was okay to use pay day loans.

    I could never figure that one out.

    She was also always several payments behind on her car, which she bought brand-new without even checking if she could afford it.

    Come to think of it, she used the pay day loans a lot to catch up on her car loan.

  9. Great article – I love Dave! I don’t agree with him 100% (I use credit cards and take the cash back), but I don’t think I would be in bad shape if I did follow his advice 100%. One fine point of clarification – Dave does indeed advise his listeners that it is ok to take on debt in the case that it is for a home mortgage that is 15 year, fixed rate, with a payment of less than 25% of their income.

  10. This is a great article! Dave is a great place to start..but… the ER fund is outdated, saving 15% is not enough, investing in managed mutual funds is stupid, credit card benefits are too good to turn down, and a paid off house is not financially free. Even a debt free home requires utilities, maintenance, and taxes to be paid. Home debt is the best kind of debt to have that a person can get at the best rate and terms. FI really takes it to the next level.
    JT Money

  11. With all due respect, and I promise I am not trying to just whine all over your very thoughtful article but you really missed a big point, and it is one that many DR naysayers gloss over. You listed Baby Step 7: Build Wealth and Be Outrageously Generous but you almost ignored what that actually means. Unless I am mistaken, I haven’t heard a whole lot from the FIRE crowd (please correct me if I am wrong) about doing this with their financial independence. It feels very self-centered to me. You could build the kind of wealth that could lead to being outrageously generous and literally help to change lives, but instead people are choosing to simply be minimalistic to travel or chase their dreams. It is great to dream, and it is great to enjoy your life, but many of DR’s “followers” are Christians and we seek a path that glorifies God. Part of that is giving. How can you be outrageously generous with the FIRE plan when you “retire” in your 30s or early 40s and then live off a tiny income derived from early investing for the rest of your life? Again, it just feels self centered to me and it just isn’t for me or my family. That is what I LOVE about DR’s plan. I don’t dream about owning a mansion or being a world traveler. I dream about sponsoring 30 kids through Compassion International, or starting a non-profit, or helping my church to explode in its effectiveness by having the flexibility to generously donate my time and my money. Maybe I have misunderstood the FIRE concept, and I welcome further clarification if you would like.

    • FIRE concepts would allow you to reach those goals much faster than Dave’s 15% savings plan.

      Dave’s concepts are mostly on the right side of the coin, but they aren’t extreme enough to work really quickly.
      If you FIRE retire (quit a job if you hate it, and go start a side hustle or do whatever it is you want to do) it gives
      you years of your life to better spend on serving your family and people around you.

      I’ve heard the ChooseFI hosts talk about giving before, so I know they are pro-giving to people.
      I think of the ChooseFI walk as a really “focused” several years of savings, etc., and then after that you have
      a lot more flexibility to do whatever you want / work at whatever you want…after all we can all use these
      tools to do what we decide to do with them 🙂

      I don’t think it’s selfish to enjoy your money and give at the same time, either.
      There’s probably more room for enjoyment of money later on in the ChooseFI journey,
      rather than at the beginning.

      Dave advocates the typical evangelical 10% rate of giving, which is a lot more than most.
      This is a great amount, but also, during / after FI, it may be possible to give more.

      The only thing I really dislike about Dave is that he says people should always give 10%,
      100% of the time, and I think there are circumstances (kids + very low-income job, etc),
      that make it wiser to put a temporary hold on giving 10% until one has gained traction /
      a better job / got their money under control / FI / etc.

      Maybe throttle it down to 3-8% if one is on the struggle bus. This is directed at
      readers, not at you. Granted, there are religious views associated with the 10% so
      not everyone is as flexible on it as me and I get that too 🙂

      I think a big part of the minimalism is realizing that stuff doesn’t matter; but heck;
      minimalism frees up financial space to be more generous to other people so win-win 🙂

      I guess what I’m trying to say is adapt it for your personal needs, and your comment was
      very interesting so I wanted to reply with a wall of text for fun’s sake.

      Don’t hesitate to continue this thread if you have questions or a point to address! 🙂


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