Dave Ramsey, the leader in debt freedom Financial Peace University has created Dave Ramsey’s 7 baby steps to get out of debt and build wealth.
He is the author of The Total Money Makeover, as well as many others. He has a podcast, a radio show, a youtube channel, and a “cult following of sorts.”
He has helped thousands and thousands of people get out of debt.
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What are the 7 Baby Steps to Financial Freedom?
Dave Ramsey 7 baby steps is a personal finance tactic used to be debt-free, build a legacy, and live your very best life. He started Financial Peace, a class designed to teach these principles because he knew what it was like to be completely broke. He made millions and then lost it all due to what he calls his “stupid tax.”
Dave makes the steps easy to follow. Whether you take Financial Peace University through a local church, online, or just skip it and buy Total Money Makeover on Amazon, the seven baby steps are the bread that holds the butter.
Seven Baby Steps
- Baby Step 1: Save $1,000 for Your Starter Emergency Fund
- Baby Step 2: Pay Off All Debt Except the House
- Baby Step 3: Save 3–6 Months of Expenses in a Fully Funded Emergency Fund
- Baby Step 4: Invest 15% of Your Household Income in Retirement
- Baby Step 5: Save for Your Children’s College Fund
- Baby Step 6: Pay Off Your Home Early
- Baby Step 7: Build Wealth and Give
Baby Step 1: Save $1,000 for Your Starter Emergency Fund
It’s going to rain. We all know things happen. Being able to have a little bit of money set aside when something happens brings an amount of peace to our lives.
Getting out ahead of an emergency is an excellent way to prepare yourself and then let it go. Having that small safety net will let you focus on the real task at hand.
You only need $1,000 right now. More will come in baby step three.
How do I get the money to fund Baby Step 1?
There are a lot of great ideas for an emergency fund account in the baby step one. You want to create this fund as fast as you can and get the momentum going for debt freedom. The best way to do this is to sell stuff.
Take a look around your house, yard, and garage. I’m sure there are plenty of things that you aren’t using anymore. Have a garage sale, list them on Facebook Marketplace, or sell them on Craig’s list.
Where do I keep my emergency fund?
You can keep it in a savings account where you do your regular banking. You can also try a different bank, which would make it a little tougher to get to – both a good and a bad thing.
Many people chose to earn interest on it by using online savings like Capital One 360. This is where ours is, but its not the baby emergency fund anymore.
I heard once of a lady who framed the 10 $100 bills and hung it in her closet behind the clothes. She wrote on it, “In case of emergency, break the glass.”
Some strongly disciplined people will keep it in a safe in their home.
No matter where you put it, remember….its only for emergencies.
Baby Step 2: Pay Off All Debt Except the House
The best way to tackle all this debt is with the Debt Snowball Method. Simply list all debt from smallest to largest and start tackling them in that order.
No need to pay attention to interest rates as it’s not important at this stage of the game.
The purpose is to find those quick wins in baby step two. As you did with Dave’s baby step one, continue to cut costs and find things to sell to throw at this debt.
Save money on groceries, slash utility bills, and use a cash-only system.
Find ways to cut back or cut out whatever you need too to get gazelle intense.
Cut up credit cards and get rid of the credit card debt and student loan debt.
This is the time to live on rice and beans. Cut spending down to the simplest and cheapest alternatives.
Baby Step 3: Save 3–6 Months of Expenses in a Fully Funded Emergency Fund
After the debt is completely paid off and you do your debt-free scream (privately, on Facebook, in your yard, or you travel to the Dave Ramsey show), its time to build up that emergency fund in Baby Step 3.
I lean more toward the six months for my security, but this will depend on your thoughts and feelings.
Because you went through all of your expenses and cut everything that you could in order t get out of debt, you should have a good idea of how much your costs are. Its time to do some quick math and come up with a plan.
Now, take that same drive and motivation and get that emergency fund fueled so you can move on to baby step 4.
Baby step 3b: Save for a house
If you do not yet own a house and you would like to, this is the time to start saving for a down payment and closing costs.
If you’re feeling motivated and ambitious, you could save and pay cash for a house. That’s a little more complicated with a lot more patience. I’ve seen people do it and its a lot of fun to watch.
Baby Step 4: Invest 15% of Your
Household Income in Retirement
If your company offers a 401K, that will make this baby step four easy to do. Just head to your human resource office or log on to your company investment page to increase the contribution.
If your company offers you an employer match in your 401k, that’s free money. You should be doing anything you can to get as much of that as you can.
Now, if you are late to the investment game, you might have to go higher than 15%. We were, and I am finding my way up to 20% for my husband. He only has five years until retirement – I want him to retire in two.
If you don’t have this system set up at work, I would suggest sitting down with a financial advisor. You can find a trusted one at Dave Ramsey’s Smart Vestor Pro site.
There are also other ways to contribute to a retirement fund depending on your career. However you decide to do that, just do it.
Baby Step 5: Save for Your
Children’s College Fund
There are some mixed reviews on whether you should save for college education for your children or if that’s the responsibility of the child.
Giving them a leg up on life is a good thing if you can swing it.
The main goal here is, so they are not taking out loans to pay for college. The last thing you should want id for your child to start their adult life with a mountain of debt.
I know people in their 30’s that are struggling to buy a house because their student loan payments are as much as a mortgage. And they have YEARS left.
If you find yourself able to help your young adults and shoulder the burden, by all means, you should. However, if you are just coming into Dave’s teachings and they are teenagers, you just have to do the best you can.
The responsibility should also be on the student. Taking classes at a community college, getting a job, or applying for scholarships will all help disperse the finances of college.
If your child is still young, check with your state and financial advisors on the best options for college savings – like a 529 savings plan.
For us, we were able to get school paid for through the Excelsior Scholarship in New York State.
As long as the criteria are met, our son can go to school at minimum out of pocket costs, which means we didn’t even need baby step five.
Baby Step 6: Pay Off Your Home Early
Paying off your home has fantastic psychological as well as financial benefits to it. It’s incredible to know that my house is mine and nobody can take it away for lack of a mortgage payment.
Your home is the largest purchase you will probably ever make. Spending the majority of your life paying for it doesn’t sound like too much fun.
Paying it off as soon as possible gives you the freedom to fulfill all the other dreams you might have.
After all the debt is paid off, think of how much “extra” money you will have to throw at the mortgage. It will be paid off in no time!
Many people will do baby steps 4, 5, and 6 at the same time. You can do whatever you feel is the right thing to do but pay off your mortgage.
Baby Step 7: Build Wealth and Give
“You know what people with no debt can do? Anything they want!” Dave Ramsey.
There are fun and freedom here. It’s where you can spend the rest of your life and live happily ever after. Building wealth and giving to others.
Generosity and gratitude for what you have will give you the positivity to feel good about how far you’ve come. Be proud of yourself. It’s a HUGE accomplishment. The last one of Dave Ramsey’s 7 baby steps is the best.
Final Thoughts on Dave Ramsey 7 Baby Steps
When someone asks me, “what are the 7 baby steps to financial peace,” I always sen them the link to the Total Money Makeover. Without Dave Ramsey 7 baby steps, I would not be where I am today. I give this book away to everyone I can.
Finding your way through the cobwebs and stress of debt can be daunting and hard. These simple steps make it a little bit easier.