Personal finance can be complicated and confusing. It’s tough to decide where to begin when there are numerous ideas and points of view. That’s why more than 5 million people have turned to the Dave Ramsey method for simple, useful money advice.
And what is the Dave Ramsey method? It’s a simple 7-step plan to help you get out of debt, make money, and be financially stable. Ramsey’s method is based on taking responsibility for your actions, planning ahead, and living on less than you earn.
This article will explain the main points of the Dave Ramsey plan so you can choose if it fits your needs. These steps can help you get control of your money whether you have a lot of debt or are just starting out.
Step 1: Save $1,000 for a Starter Emergency Fund
Putting away $1,000 as an emergency fund is the first small step toward getting out of debt. This will give you a safety net in case something unexpected comes up.
For many people, $1,000 seems like an impossible goal. But Ramsey emphasizes the power of momentum. Even saving $100 gets the ball rolling. By scraping together small amounts here and there, anyone can save $1,000 with focus and determination.
Once you hit the $1000 milestone it’s crucial not to touch it unless a true emergency arises. This fund protects you from having to go further into debt.
Step 2: Pay Off All Debt Using the Debt Snowball
In step two, it’s time to attack your debt using Ramsey’s debt snowball method. This involves:
- Listing all debts from smallest to largest balance
- Paying minimum payments on all debts except the smallest
- Putting any extra money toward the smallest balance
- Once the smallest is paid off, roll that payment to the next smallest debt
The debt snowball maximizes momentum. By focusing intensity on one small debt, you’ll knock it out fast. This gives a sense of accomplishment which motivates you to keep plowing ahead.
Ramsey emphasizes behavior over math. The debt snowball isn’t mathematically optimal, but it provides emotional wins that help you stick with your plan. Paying off entire debts feels better than chipping away at many debts.
During this step, pause all retirement investing and extra payments on your mortgage. The goal is to become completely debt-free outside of your home. This phase requires focus and sacrifice, but it’s temporary and leads to lasting freedom.
Step 3: Save 3-6 Months of Expenses in an Emergency Fund
Once you pay off all non-mortgage debt using the debt snowball, it’s time to bulk up your emergency cushion. In step three, you’ll save 3-6 months of living expenses in a fully funded emergency fund.
This provides peace of mind and stability. With zero debt payments and a sizable emergency fund, you’ll be prepared for any storm that comes along. Job loss, medical bills, car repairs, and other setbacks can be weathered without going into debt.
To determine the right amount for your situation, add up all household necessities like food, housing, transportation, insurance, and utilities. Multiply that by 3-6 months depending on your field of work. The higher your income volatility, the more you should save.
Some recommend saving up to a year of expenses for those with unstable income like commissioned salespeople or seasonal workers. The key is having a cushion large enough you won’t have to raid it except in true emergencies.
Step 4: Invest 15% of Household Income into Retirement
With zero debt and a fully funded emergency fund, it’s time to focus on wealth building. In step four, you’ll invest 15% of your gross household income into retirement accounts like 401(k)s and IRAs.
This ensures your golden years are funded while you still have decades for that money to grow. Waiting too long is one of the biggest retirement planning mistakes. The earlier you start, the more your investments will compound.
If you have access to an employer match, prioritize contributing at least enough to max that out. It’s free money on the table. Beyond that, choose Roth or traditional accounts based on your situation. And make sure you’re investing for growth, not just savings accounts.
If you’re later in your career, 15% may not be enough to adequately fund retirement. Use the guides and calculators on Ramsey Solutions to determine the right savings rate for your goals. The key is to make retirement an intentional priority.
Step 5: Save and Invest for College Education
With retirement on track, Ramsey says it’s time to start piling up college cash in step five. He recommends investing in a 529 plan or other education savings vehicle.
Pay yourself first each month by automating college fund contributions. Even small amounts add up over time thanks to compound growth. 18 years of diligent monthly deposits let you pay for school without debt.
Dave emphasizes saving for college after retirement because you can’t borrow for retirement. But there are lots of options for college costs like financial aid, scholarships, and student loans. Still, avoiding student loans altogether if possible is wise.
How much you need to save depends on the child’s age, state of residence, school choice, and more. Use Ramsey’s college cost calculator to estimate your goal amount based on realistic assumptions. Then develop a disciplined savings plan to make it happen.
Step 6: Pay Off Your Home Early
Once the first 5 steps are complete, it’s time to channel intensity toward your mortgage. Ramsey recommends making additional principal payments each month to pay off your home ahead of schedule.
This builds significant equity that can be tapped later in life or passed to heirs. Owning your home free and clear is also a major milestone on the road to financial peace.
Make sure retirement, college, and emergency savings are on track first. Then you can start pouring extra into your mortgage principal each month. Even an extra $100 or $200 will shave years off the payoff date.
Recast or refinance your mortgage when possible to lower the interest rate and payment. Discipline and focus will pay off your home well ahead of the 30-year schedule. You’ll save tens of thousands in interest in the process.
Step 7: Build Wealth and Give Generously
The final Ramsey Baby Step is all about living – and giving – like no one else. With all the previous steps complete, you can really start building wealth and leaving a legacy.
Dave recommends maxing out retirement contributions. Invest aggressively for growth. Pay off the house ultra-fast. And give generously to causes, churches, and charities you care about.
This is what true financial peace looks like. You get to enjoy the fruits of your labor and intentionality. With no payments or debt, everything you earn is yours to keep and share.
It’s also time to consider smart tax planning, estate planning, and leveraging all available wealth building tools. Managing money wisely will allow you to live – and give – outrageously.
The Dave Ramsey 7 Baby Step method provides a proven blueprint for going from stressed to financial peace. Millions have done it – so can you. Stay focused, stick to the plan, and let the momentum of small wins build upon itself. Your dreams are waiting!
What About the Interest Rates?
Maybe you’ve heard of the debt avalanche method, where you pay your debts in order from highest to lowest interest rate. But here’s the deal: If you start paying on your debt with the highest interest rate first (which is usually also your biggest balance), it could be a while before you see any progress.
Pretty soon, you’ll lose steam and maybe give up altogether. Why? Because it’s taking forever to gain traction! You’ve started with the hardest debt, instead of the easiest. Plus, you’ll still have all your other small, annoying debts hanging around that you also have to keep paying on.
But when you knock out the smallest debt first, you get a win much faster! That debt is out of your life forever. The second debt will soon follow and then the next and the next. Suddenly, you’re throwing a monster snowball of a payment at your last debts—instead of chipping away with bite-sized minimum payments.
When you see your debt snowball actually working, you’re more likely to stick with it. And the next thing you know, you’ll be screaming, “I’m debt-free!”
Save more. Spend better. Budget confidently.
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If you’re looking for a way to get out of debt for good, let me introduce you to your new DFBFF (debt freedom best friend forever): the debt snowball.
The debt snowball method is the fastest way to pay off your debt. It’s how I paid off $40,000 of consumer debt in just 18 months! And if it worked for me, it’ll work for you too.
If you’re following Dave Ramsey’s 7 Baby Steps, you know that Baby Step 2 is to pay off all debt (except your house) using the debt snowball. So, once you’re current on all your bills and have $1,000 saved for your starter emergency fund, it’s time to get that snowball rolling!
The 7 Baby Steps Explained – Dave Ramsey
FAQ
What are the 7 steps of Dave Ramsey?
Dave Ramsey’s 7 Baby Steps are a plan for taking small steps to get out of debt and get financial peace.
What are Dave Ramsey’s five rules?
Step 1: Save $1,000 for your starter emergency fund. Step 2: Pay off all debt (except the house) using the debt snowball. Step 3: Save 3–6 months of expenses in a fully funded emergency fund. Step 4: Invest 15% of your household income in retirement. Step 5: Save for your children’s college fund.
What is the Dave Ramsey formula?
Dave Ramsey’s money tips are based on a set of steps called the “7 Baby Steps” and a way to make a budget called the “zero-based budget.”
How does the Ramsey method work?
Ramsey advocates for using the debt snowball method to pay off all debt except for the mortgage. With this method, you pay off your smallest debts first, no matter how much interest they charge, and then move on to your bigger debts.