Dave Ramsey’s Baby Steps: From Indebted to Independent in 7 Simple Stages

Building a secure financial future is a daunting task, especially if you’re starting from scratch.

That’s why personal finance guru Dave Ramsey created the 7 Baby Steps program.

Unlike many programs, which assume that you have plenty of capital to get started with, the 7 Baby Steps program walks you through your finance journey from square one.

Even if you have an empty savings account and a pile of debt, the 7 Baby Steps can enable you to rise above your fears, boost your net worth, and prepare a worry-free future for you and your family.

So just what are these baby steps, and what’s the best way to implement them into your life? We’ll explore those questions and more, but first, let’s meet the man behind the 7 Baby Steps.

Who Is Dave Ramsey?

Even if you’ve never looked into personal finance, you’ve probably heard of Dave Ramsey. He’s one of the world’s most prominent and most accessible finance gurus, largely because his story is so relatable.

Dave ran a multi-million dollar real estate investment company until 1988 when he was forced to file for bankruptcy. Rather than giving up after losing everything, he decided to channel his energy into rebuilding his finances — and helping others do the same.

Over the years, Dave has published over 15 books on personal finance that have been read by millions of people. He also hosts a weekly radio show with over 15 million listeners.

But his most versatile creation is the 7 Baby Steps program, which he designed with people like his past self in mind. The secret is in the name: start with small steps to build up strength, and before you know it, you’ll be running at full speed.

Dave Ramsey’s 7 Baby Steps, Explained

Let’s take a closer look at the 7 Baby Steps and see just what they entail.

Baby Step 1: Save Up a $1,000 Emergency Fund

Emergency expenses are inevitable, but most people are woefully unprepared for them: only 41% of Americans have $1,000 in their emergency funds.

The remaining 59%, if faced with a $1,000 emergency, would have to use credit cards, borrow money, or simply accept that they have no way to cover the costs.

That’s a terrifying prospect, especially when you consider all the $1,000 mishaps that could occur. Your car could break down, your dog could need an emergency vet visit, or your refrigerator could kick the bucket — and paying up will be the only way out.

According to Dave Ramsey, your number one priority as a finance newbie is putting together a $1,000 emergency savings fund as quickly as possible. It’s the most critical part of any personal finance plan, and it’ll set you up for success with the next steps, too.

Until you get that $1,000 squared away, you’ll need to cut back on or eliminate unnecessary expenses like eating out or traveling. Start clipping coupons, buying store-brand groceries, planning your meals, and selling any possessions you no longer use.

The money you save by taking these measures should go straight to your emergency fund. Once it’s built up, you can move on to baby step 2.

Baby Step 2: Use the Debt Snowball Method to Pay Off All Non-Mortgage Debt

Now it’s time to relieve yourself of any financial obligations that are dragging down your net worth. Paying off your debt seems like an obvious move, but the way you do it can make or break your success.

Dave recommends the Debt Snowball method, which makes your debts easier to manage and helps you stay motivated to pay them off. The idea is to pay off your smallest debts first, building momentum to help you pay off your larger ones, just like the broader “baby steps” concept.

Start by writing out a list of all your debts, arranging them from smallest to largest. Don’t take interest rates into account when putting them in order — only consider the actual amounts you owe.

And don’t include your mortgage, which you’ll tackle in a future step. But everything else should be listed, no matter how small: credit cards, car loans, student loans, and any other debt.

If you’re not already doing so, start making minimum payments on all of your debts, then put any extra money towards paying off your smallest debt. Stick with the money-saving strategies you developed during step one, and you’ll get it paid off lickety-split.

It’ll feel great seeing that debt vanish from your credit report, and those good vibes will keep you going as you pay off the next smallest debt in the same manner. Even if it takes many years, keep going until every debt is paid off — then move on to the next step.

Baby Step 3: Expand Your Emergency Fund to Cover 3-6 Months of Expenses

You’re newly debt-free (except your mortgage), which means it’s time to revisit the emergency fund you established in step 1. After all, there are emergencies for which $1,000 simply won’t suffice.

You could lose your job and end up unemployed for months while looking for a new one in a poor job market. Or you could total your car beyond repair, forcing you to spend thousands of dollars on a replacement.

Tally up your monthly expenses (rent, mortgage payments, utilities, food, gas, insurance, childcare, etc.), then multiply the result by 3 (if you’re in a two-income household) or 6 (if you’re the sole earner). That’s the new target for your emergency fund.

Dave suggests redirecting all the money you were putting towards debt payments into your emergency fund. Treat it as if it’s another debt, not an optional contribution — the emergency fund is a debt you owe to your future self, and it’ll help your future self avoid debt.

Baby Step 4: Invest 15% of Your Income into Your Retirement

You can accomplish steps 4, 5, and 6 simultaneously, and you may not need to do steps 5 and 6, depending on your lifestyle. But step 4 is unskippable, and it takes priority: regardless of your current age, you need to get ready for retirement.

With a solid emergency fund and almost all of your debts paid off, you may be tempted to put your spare change towards some new toys or fun vacations. But those won’t do you much good if you find yourself broke during retirement.

If you’re not already doing so, take full advantage of your employer’s 401(k) matching. Contribute the maximum amount each month and watch the account grow as your company pitches in as well.

However, this alone isn’t likely to get you to your goal, which is investing 15% of your gross income into retirement. And your employer’s match doesn’t count towards that total, either.

It’ll take a little extra initiative to get your retirement savings in good shape. Dave recommends maxing out your 401(k), then putting the remainder of the 15% into a Roth IRA.

At this point, you may wish to hire a financial advisor to help you manage your retirement accounts. Proper investment of these funds is key to ensuring your financial stability into old age.

Baby Step 5: Build Up College Funds for Your Children (If You Have Any)

If you don’t have children, or if yours are already financially independent, this step won’t apply to you. But if you have kids (or are planning to have them), now’s the time to start investing in their futures by saving for their college educations.

Think back to step 2, when you were paying off all your debts. Chances are, your student loans were among the larger ones, right?

That means that they were a huge part of what was holding you back from financial stability. And if your kids need to take out loans of their own to go to college, they’ll likely end up in that same situation.

It seems a bit counterintuitive, but one of the best ways to ensure that your kids achieve financial independence is to help them pay for their education. The more you invest into their college funds, the less debt they’ll be in when they graduate — and the more wealth they’ll be able to build throughout their adult lives.

There are several types of college fund accounts, but Dave recommends a 529 college savings plan or an Education Savings Account (ESA). The right one for you will depend on the age of your kids and the amount you want to contribute, so consult a financial planner to help you choose.

Baby Step 6: Pay Your Mortgage Off Early

Some people believe that it’s better to stick to your original mortgage term rather than paying it off early. According to them, you’re better off growing that extra money through investments than you are handing it over to your mortgage lender.

But when you take into account your mortgage’s interest, the story changes. There’s a good chance you’d accrue more in interest than you’d gain through investing, not to mention the fact that you’ll still be indebted to your mortgage lender.

Besides, the only thing standing between you and total debt elimination is your mortgage. Getting it paid off now will free you from those monthly payments for the rest of your life — doesn’t that sound amazing?

Look into refinancing your mortgage to get better rates and avoid prepayment penalties. Switching from a 30-year to a 15-year, for instance, lets you pay the loan off faster without getting punished for it.

Dave suggests making biweekly, rather than monthly, payments if your lender allows them. But even if you can only swing one extra payment a quarter, you’ll still pay your mortgage off 11 years early and save over $65,000 in interest!

Baby Step 7: Build Wealth and Spread It

You have no debt, your kids are set for college, and you’ve funded your retirement. Congratulations! You’ve made it to the final baby step, and this one’s by far the most fun: keep building wealth, then pass it on to those who deserve it.

Continue living frugally and growing your retirement accounts, but consider putting your extra cash into other investments.

Mutual funds and real estate are excellent options, but they’re far from your only ones. You may want to start that business you’ve always dreamed of or take a gamble on the exciting cryptocurrency market — the sky’s the limit here in step 7!

Investing isn’t the only opportunity that’s now open to you, either. Take that vacation you’ve been dying to go on, splurge on your dream car or pursue that hobby that’s always been priced out of reach.

And most importantly, spread the wealth to those who need it. Donate to your favorite charities, fund community improvement projects, and give back to the people in your life who have helped you get to where you are.

This part of the journey embodies Dave Ramsey’s ethos: build yourself up, then help others do the same. It starts with taking that first baby step — and there’s no better time to take it than now.