Dave Ramsey’s 7 Baby Steps – Financial Peace University Overview

Dave Ramsey's Baby Steps and Financial Peace University show how to build an emergency fund, get out of debt, save for retirement, and build wealth.
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Dave Ramsey is one of the most popular personal finance gurus in the United States.

He is renowned for his Christian background and no-nonsense approach to personal finance, especially when it comes to getting out of debt, staying out of debt, and living financially free.

About Dave Ramsey

Dave Ramsey is well-known for his radio show, books, and Financial Peace University program, which has been widely adopted by many in the Christian community.

The Dave Ramsey Radio Show. Dave Ramsey hosts a syndicated radio show heard across the US. His style is more about preaching and behavioral adjustment than pure financial information, which is a large part of his appeal. He uses a tough love approach to help people gain control of their financial situation. You can find out if his show is on your local radio station.

Dave Ramsey’s Total Money Makeover. Dave Ramsey’s most popular book is The Total Money Makeover, which went on the best-seller lists shortly after its publication in 2003. It’s a popular book, and for a good reason – it works! Total Money Makeover has undergone several revisions and updates since its original publication, but the core concepts remain the same. Below are a few concepts you will find in Dave Ramsey’s Total Money Makeover:

Dave Ramsey’s Baby Steps. Part of The Total Money Makeover is Dave Ramsey’s Baby Steps, which is a 7 step process to financial freedom. Notice it doesn’t say “wealth beyond belief.” Dave Ramsey isn’t a get-rich-quick guru. His teachings are bound by faith and common sense. And the fact that they work. Here is more information about Dave Ramsey’s Baby Steps.

Dave Ramsey’s Debt Snowball. The debt snowball is a strategy Dave Ramsey uses to help people get out of debt more quickly by applying additional money in their budget toward their debts to accelerate payments. Dave Ramsey’s method is to determine how much money you owe on all your debts and pay the minimum toward those debts while adding any extra funds toward the smallest debt to eliminate it more quickly. When you retire that debt, you add the amount you were paying on that bill to the next debt on your list and repeat the process until all your debt is paid off. As you can see, your debt payments “snowball” over time. The theory is that quick wins will help keep you motivated.

Gazelle Intensity. Ramsey uses the term “Gazelle Intensity” to describe how you need to attack your debt. He recommends that you live a financial life like a gazelle saves itself from an attacking cheetah – “outmaneuver the enemy and run for your life.” You can read more about your life’s pros and cons of gazelle intensity.

Financial Peace University Overview

My church hosted Dave Ramsey’s Financial Peace University. It was an excellent experience and I highly recommend this course if you feel like you can make some improvements with your financial management. At the minimum, I think this is a great course for teaching people the importance of saving, getting out of debt, and planning for the future.

About Financial Peace University

If you’ve been reading personal finance blogs for any time now, then you have probably heard all about Dave Ramsey and FPU, especially Dave Ramsey’s Baby Steps and the Debt Snowball, a popular method for getting out of debt.

While these are probably the aspects of FPU that most people are familiar with, there is much more to the course. Financial Peace University gives you a handbook for managing your finances and setting yourself up to be successful.

Dave Ramsey is one of America’s most renowned money gurus. He has a rabid fan base of followers whose main goal in life is to get out of debt and stay out of debt. Being debt free is the first step to financial freedom, and being debt free allows you to live your life the way you want.

Financial Peace University Baby Steps

Dave Ramsey has designed a 7 step system as part of his Financial Peace University. These steps are designed to be a broad road map to help people get out of debt and march toward financial freedom. Here is an overview of the 7 Baby Steps, a little background about them, and some more interesting points that Dave makes through his FPU course.

Step 0 – No More Debt!

Step 0 isn’t officially listed in Dave Ramsey’s 7 Baby Steps. But making a conscious commitment to change is essential before you can accomplish any of these steps. It is nice to say you will do something, but another thing entirely to follow through with it. Once you commit to living debt free, the following seven steps become easier to accomplish.

Step 1 – $1,000 to Start an Emergency Fund.

Emergency funds are quite possibly one of the most important things you can do for yourself financially. You never know when you will need quick access to several hundred or even a couple of thousand dollars to deal with a car repair or a quick plane ride to visit family who lives far away.

An emergency fund will give you the funds to take care of these expenses as they arrive and help you stay out of debt. The best place to stash your emergency fund savings is an online savings account where you can earn a high-interest rate and easily access your cash.

Step 2 – Pay Off all Debt Using the Debt Snowball.

Dave Ramsey advocates using a debt snowball to pay off debts. Some people refer to this as “snow-flaking,” which refers to taking small amounts of money (snowflakes) and combining them into a larger amount (snowball). Those small amounts of money can add up quickly, and a snowball is much more effective than a small snowflake.

Here are more tips on how to get out of debt.

Step 3 – 3 to 6 Months of Expenses in Savings.

How and Why You Should Save. The how is a simple concept, even if it isn’t always easy to implement. Making saving a priority and pay yourself first. One way to do that is to set up an automatic withdrawal from your paycheck to go straight into your savings account. Dave lists three main reasons for saving: 1) to use as an emergency fund, 2) for making purchases, and 3) for wealth building.

So you have an emergency fund and paid off all your consumer debt… what’s left? Extended savings earn a high-interest rate. An emergency fund is great if you need new tires, fly cross-country to attend a sick or dying relative, or need major car repairs.

But what happens if you get laid off, or need a new roof, or you get injured on the job and are out of work for several months?

Unemployment and disability insurance will be of some assistance, but they aren’t likely to cover all of your expenses. Your roof? Unless you can cover that with cash, you will have to go into debt, erasing everything you worked so hard to accomplish in Baby Step 2.

Having 3-6 months of living expenses at your disposal will make it much easier for you to make it through an extended period where your income does not match your expenses. Having this money gives you freedom.

Freedom from worrying about one small slip forcing you back into crushing debt and the associated pressures that come with it. The best action is to save this money in a high-yield savings account where you can earn a solid return on your money.

Step 4 – Invest 15% of Household Income into Roth IRAs and Pre-Tax Retirement.

One of the best financial feelings I can remember was when I first saw some real growth in my savings. When I was younger, $10 represented over 2 hours of work for me. Then after I had been saving for several months, I looked at my bank statement. I had earned over $10 in interest. My money was working for me!

Nowadays, $10 doesn’t seem as much to me, but the concept remains the same. You need your money to work for you if you are ever going to be financially free. Saving for your retirement in tax-advantaged accounts is the best way to progress toward long-term savings.

Dave Ramsey recommends investing 15% of your household income (or more if you can afford it) into Roth IRAs and pre-tax retirement accounts. I agree with Dave that Roth IRAs are better than Traditional IRAs. If you are considering a pre-tax account, your options are generally a Traditional IRA, a 401(k), or equivalent. Whether you choose a 401(k) or IRA will depend on your situation.

Step 5 – College Funding for Children.

By Step 5, you should have an emergency fund, be out of debt (except for a mortgage), have 3-6 months of living expenses to cover major life events, and already contribute 15% or more toward your retirement savings.

If you have children, your next major expense will likely be college. Should you pay for your children’s college expenses? The answer varies from parent to parent, but you should be aware of this – when colleges process student loan and grant applications, they often consider parental income levels.

Whether or not you assist your children through college is a decision you will have to make on your own. But there is one thing I like – Dave Ramsey recognizes it is very important to place your retirement savings ahead of college savings for your children. You only get one shot at retirement and can’t borrow your way through it.

College, on the other hand… You can receive loans and grants, which can be borrowed and repaid. If you decide to help fund your child’s education, consider opening a tax-advantaged college savings account such as a 529 College Savings Plan or a Coverdell Educational Savings Account (ESA).

Step 6 – Pay Off Home Early.

Many people debate whether or not it is better to repay mortgage debt early, and there are strong arguments for both sides. Mortgage debt is generally inexpensive debt and mortgage interest is a tax deduction for most people. Investing the money you could use to prepay your mortgage could potentially earn you much more money in the long run.

On the other hand, mortgage debt is still debt. If you have already completed steps 1-5 and have additional funds every month, paying off your mortgage early will free up more money every month and allow you other freedoms that you would not have with a mortgage.

The freedom of no mortgage debt: A friend is in his mid-thirties and paid off his mortgage. This allowed his wife to quit work and stay home to raise their three children. They have no other debts, and he recently took a lower-paying job because it brought him more satisfaction at the end of the day. He wasn’t trapped by an enormous mortgage or saddled with other debt. Being debt free allowed his family to make these decisions to live the life they wanted, not live the life they are forced to live just to repay debt.

Step 7 – Build Wealth and Give! (Invest in Mutual Funds and Real Estate).

This is Dave Ramsey’s final baby step. In my opinion, this step is open to interpretation based on personal beliefs, needs, and situations. I understand each element, but in my opinion, it seems like a couple of different ideas was thrown together into one step. Let’s break them apart and examine them one by one.

Building wealth: I don’t think anyone will get rich from putting money in a savings account right now, not with interest rates hovering where they are. But savings is a big part of wealth building because it gives you the financial flexibility to make moves and, more importantly, avoid taking on debt.

With no consumer debt, a large fall-back fund, 15% or more of your income going into retirement accounts, your children’s college paid for, and your mortgage eliminated, you may have extra funds to play with every month. If so, wealth building is the next logical step. Of course, by investing for retirement, you have been building wealth all along. But, I suspect Dave Ramsey is referring to building non-retirement wealth.

Ramsey mentions investing in mutual funds and real estate. I would prefer to invest in index funds over mutual funds because the fees are generally much lower, but the idea is the same. As for real estate, I believe he mentions that to grow an alternative income stream, something that will bring in income outside your normal job.

I commend this thinking, but real estate is not for everyone. However, I believe alternative income is important for everyone to strive to achieve.

Invest to build wealth, but make the types of investments that suit your needs.

Giving: Dave Ramsey is big on giving and advocates tithing 10% throughout all the baby steps. Giving, by his definition, is anything about 10%. Giving is a very personal thing and not something you should rely on someone else to tell you how or when to do. You should do what you believe to be the right thing to do.

I should also note that if you are tight on money, there are other ways to give. Giving your time, energy, talents, or other forms of giving can often make a greater difference than just throwing some money in a pot.

Should You Follow Dave Ramsey’s Baby Steps?

Dave Ramsey isn’t recommending you do all of these steps simultaneously – rather, you should do them one at a time until you complete them all.

The most important steps are step 0 and step 1 – deciding to live within your means and setting up your emergency fund. Once you have your emergency fund in place, start working on eliminating your debt.

Do you have to use a debt snowball? No, you don’t. The debt snowball may or may not be the most mathematically correct way to eliminate debt. Using it is the psychological advantage of making quick wins and seeing steady progress. As long as you eliminate your debt, you stay true to the program’s purpose.

3 -6 months of living expenses. Once your $1,000 emergency fund is in place, and you have eliminated your debt, a larger emergency fund is a great idea. This gives you additional wiggle room if you face a more expensive unexpected expense or series of unexpected financial situations.

Investing 15% of household income. Again, this is a great idea – especially if you can max out a Roth IRA or TSP. But not everyone can put away 15%, especially when he or she is right out of school. Put away what you can, but don’t forget to live in the present.

College savings, mortgage payments, and wealth building. You are probably not yet at the stage of life where these are applicable. That’s fine. If it doesn’t apply, then don’t stress about it. But it is a good idea to understand how these things may affect you in future years and to understand debt repayment, saving, and investing. Other financial matters will help you with important decisions such as buying your first house, saving money for college, building wealth, etc.

Dave Ramsey’s Baby Steps are Not Designed to Happen Overnight

This plan can take years, and its effectiveness depends on many variables. But you are young, so you have a great advantage working for you – time. Starting now will make it much easier for you to become financially successful and live the life you want to live.

The good news is that as a college grad, your income should increase through the years. As long as you are living within your means and aggressively repaying debt, it should become easier with time – especially if you can use a portion of your annual raises to help make this happen.

Dave Ramsey’s 7 Baby Steps: Wrap-up

Overall, I think Dave Ramsey’s plan is a solid plan to get out of debt, build wealth, reach financial independence, and, ultimately, have financial freedom. There are a few caveats, though – this plan should be viewed as a rough guide and not an absolute road map.

Everyone has different personal and financial situations and goals. But if you can use this guide as a rough outline, your chances of meeting your financial goals are very good.


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About Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Illinois Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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  1. Tonia says

    I am 45 and a hot mess. I have over $70K in student loans. Recently withdrew $20K from my 401K and did not withhold taxes. I owe $2200 on my vehicle. I haven’t paid taxes in 3 years. I am divorced and make $60K a year. I need help and don’t know where to start. I am overwhelmed by my decisions but I don’t want to drown in debt. What should I do first?

    • Ryan Guina says

      Hello Tonia, you’ve already taken the first step, which is taking stock of your situation and looking to change your habits by taking on no new debt. After that, just start working the Baby Steps, with saving up your emergency fund. From there, you can work on your Debt Snowball. It may take some time, but if you remain consistent, you should begin seeing results very soon. Good luck and best wishes!

  2. Prudence Smith says

    My husband and I are now middle-aged and we have not achieved debt freedom. We wasted so much money and time and now we are still working mediocre jobs at age 56 and 63. But we are sick and tired now and don’t want to leave these debts on our children and grandchildren. And we still have a ton of living to do, we are still in great health besides being a little overweight, but nothing diet and exercise cant change. We never bought a house and I don’t think we should now but my husband wants to. I don’t think it’s a good idea. But I am ready for a drastic change. I am ordering your book 7 Baby Steps. I don’t want to take charge, how can I get hubby on board? But if I can’t I will take charge.

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