Dave Ramsey’s Baby Steps Explained

Joseph Meyer
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The Power of Focus

The self-made millionaire Dave Ramsey is the author of the best-selling book, The Financial Peace Revisited. Ramsey is also the host of an incredibly successful radio show and the founder of the Ramsey Solutions. The purpose of Ramsey Solutions is to help Americans take control of their finances and realize their dreams. The cornerstone of his program is the Baby Steps.

Baby Steps are five short-term goals that are designed to get you on the right financial path. Ramsey believes that everyone is capable of achieving his or her financial dreams if they take simple, enjoyable steps.

For Ramsey, the first step is to get out of debt. Once you have successfully eliminated debt, you move on to the next step of investing 15% of your income into retirement accounts. The third step is to build wealth through paying off your home and building a six month financial cushion. The fourth step is about becoming financially independent. Ramsey believes that it is essential to know a lot about the source of your money, which means you should start investing in income-generating assets.

The last step is all about giving. In this step, you determine your passions and use your resources to support your passions.

Steps 1 and 2: $1,000 Emergency Fund and Debt Snowball

Step 3: 3 to 6 months of Savings

When you reach Step 3, you should have between 3 to 6 months’ worth of expenses saved.

We recommend 3-6 months of expenses saved in the bank. It’s best to actually have the money sitting in your savings account. Plus, this is a good dollar amount for low-risk investments like CDs, a variable-rate savings account, and Treasury bills.

If you absolutely want to contribute to an investment account, shoot for a target of three to six times your annual expenses.

Squirrel away at least 3 to 6 months’ worth of expenses right now. You don’t have to plan to retire in your 30s, but it does give you a safety net to fall back on should you lose your job and allows you to take any career risks you want, knowing you can still pay your bills.

For a lot of folks, this step can be frustrating because they feel like they’re not making progress. But the point is that now you have money set aside for when the times get tougher. And you’re very likely going to need to dig into this stash at some point in your life for little issues. That’s what home equity or the equity in your investments is for, which will be Step 4.

Steps 4, 5, and 6: Saving for Retirement, College Funding, Pay Off Home

Step 7: Build wealth and give.

David Ramsey believes that if you pay your way through college, you’ll be better able to handle any situation, while still attending school. Living below your means and saving for college or any big expense is a key to financial success.

If one of your goals is to save for your children’s college expenses, you should start saving for it early.

The third step is a duplication of the first with a more adult focus. This is the step where you earn your way to wealth.