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 listen to recent episodes online.

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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  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.

  3. Daniel Felsted says

    Here are the 10 things I learned thanks to Dave Ramsey.

    Habits of the wealthy
    1. They read books. Millionaires read one nonfiction book a month on average.
    2. They are frugal. They look for bargins and rarely pay full price for things.
    3. They spend less than they make. They use their income to purchase assets before the purchase liabilities.
    4. They manage their time, energy (exercise) and money.
    5. They avoid debt. They save and pay cash for what they want. They never rely on debt.
    6. They budget. They save.
    7. They give.
    8. They set goals.
    9. They buy assets.
    10. They save.

  4. Kat says

    Credit card chaser you are dead wrong. I have heard that voice in my head while at the store planning to use my credit card. It sounds something like this…….”if I’m gonna put it on a card, I should make it worthwhile and get MORE of the things I want now!” I swear I don’t know where that rationale came from…I know it’s stupid…. But that’s what went through my thoughts anytime I was putting something on credit. Maybe you have never been at the end of your money before the end of the month like I have many, many times. I have learned this lesson the hard way and will never have another credit card again. Cash IS King Baby!!!

  5. Dan says

    Unfortunately, the rules have changed & following Mr. Ramsey’s advice will lead to a hellish retirement when you health is on the line.

    Medicare, something everybody in retirement has to have, is means testing now

  6. Joan Thilges says

    Our business will be paid off next year, increasing our income and taxes. We would like to start gifting our adult children who are unmarried and in their 30s. All have college loans. Is there any tax advantage for us if we pre-pay part of their college loans? I am unsure what types they have.

  7. Laura says

    I can’t find a date anywhere on this article, so maybe I’m not bumping a three year old topic, but…

    “Should You Follow Dave Ramsey’s Baby Steps?”
    Only if you are interested in becoming stress free and wealthy. Some of the effects of the Ramsey plan can’t be summarized into a “step”. Let me explain:

    We were dead broke and six figures under water, despite a meager income that should have been plenty. The happiness of our marriage was only interrupted by the weekly claws out, frying pan flying money fights. After finally taking the problem to the Lord we were introduced to the radio show. The second we decided to give it a try it was like a weight was lifted off our shoulders.

    It was NOT fun, it was NOT quick, we were NOT popular with our kids, who had to learn the word NO. We were viewed as extremists. “What? You’re going to keep driving this, this, this FOUR year old car instead of trading it in for a new one???”. Insane right? 🙂

    Somewhere along the way the chink in our marriage’s armor solidified and our financial progress turned into hope and wonder about what else we might achieve. We got healthier. Husband wasn’t always on his last dime, so he could afford to tinker with broken washers/cars without the fear that buying just one wrong part might drop the bank account so low that we couldn’t afford to pay someone else to do it right the first time.

    Now we’re six figures up instead of six figures down. We anonymously slip family/strangers/friends in need a little cash (yes even the ones that think us capitalist are evil). Life is good and we’re prepared for any unexpected storms.

    “Should You Follow Dave Ramsey’s Baby Steps?”
    I dunno, how happy/healthy/helpful/secure do you want to be?

    I like Ramsey’s saying “I like the way I get people out of debt better than the way you don’t”

  8. Ronald Spencer says

    Dave Ramsey uses a lot of catch phrases and humor to get his point across. He is an entertaining, funny, charismatic radio and tv personality (FoxNews), who does not pretend to be a rocket scientist. One of his most famous phrases is “Common Sense for your Dollars and Cents).

    I, for one, am a fan of the guy. His program has helped me payoff my credit card, auto loan and in a year or so, my remaining note (a pool). For Yoel: History has shown us that 95% of all 5-year periods in the stock market have made money. 100% of all 10-year periods have made money (this is to include the Great Depression. Further, the stock market, on average, earns 12% a year. My own portfolio (which is all mutual funds -I don’t invest in single stocks) is right about 13%, and there are so many that earn more than that.

    For everyone else, We live in america. Land of the Free, home of the microwave. Most people want what they want now! They don’t want to have to wait for anything. Delayed gratification is really a sign of maturity (something I am only now acknowledging -at 34). Children do what feels good (instant gratification). Adults make a plan and work it.

    As mentioned before, the baby steps (of which I am on #2 -as mentioned before) are a guide to true financial peace. $1,000 in the bank might be a daunting task (especially if you are just out of college with a rather low paying job). In that situation, perhaps $500 is more appropriate. The idea is that you want to have an umbrella, in case it rains. You start by putting $1000 (or $500, if you have lower income) in an account, and earmark it for emergencies, then when the car needs tires, or there is a leaky faucet, etc) you go there for the money to repair, and not to the Credit Card.

    Step 2, the debt snowball is, as mentioned before, about behavior modification and quick wins, as much as it is about erradicating the debt. Basically, you order the debts from smallest to largest -by balance owed, not interest rate (unless 2 debts have similar balances, then you would put the lower of the 2 rates first). There are a number of people who say that you order the debts from highest rate to lowest, but that will not provide you quick wins. (Lets face it, if you diet for 6 months and see no real progress, there is a good chance you won’t continue). Besides, as Ramsey says, It is not about the math, if we could do math, we would not be in this mess anyway. After you ordered the debts, you pay minimums on all but the smallest. The smallest one you attack with a vengence (all moneys you can scrape together). Once it is payed off, you attack the next, with the same philosphy. The idea is that as the snowball rolls over, it continues to amass more snow. By the time you get to the last one, you’ve likely freed up so much money (in payments that used to go to other things) that it will likely not be around very long at all.

    Baby Step 3 has you finishing off the emergency fund. Really, this is not as difficult now, as all the other payments are now gone (thus they don’t affect your monthly budget any more). Additionally, when figuring out how much to put away, many opt to not include discretionary items in that figure (cable tv, eating out, etc). The idea is that if there is an emergency, we are probably worried a whole lot more about just surviving that we are about having cable tv. As mentioned previously, with all those other bills gone and, possibly incidentals and a mortgage left, that number is probably less than you think.

    Baby step 4: ( oh that I would one day be there) says its time to start really planning ahead… Retirement. in Baby step 4 you put 15% of your income (pre-tax, preferably) in good growth-stock mutual funds. If your company offers matching-contribution 401k’s do that too, but don’t do you 15% in the company portfolio.

    Baby step 5: kid’s college. Because you, have no more consumer debt, because you have 3-6 months of expenses in a fairly liquid acount (think Money Market, with check writing privileges), because you are putting 15% of your income to retirement, you will likely be able to do baby step 5 at the same time. There are tax laws concerning where you can put money and how much you can contribute (given income, etc).

    Baby step 6: Pay off the house. To do this puts you in a very elite group. Less than 2% of all americans own their home (free and clear).

    Baby step 7: Give like know one else, save like know one else, LIVE LIKE NO ONE ELSE.

  9. Alex says

    Hello Dave,
    In my particular experience, since I was 18 years old (now I’m 33), accumulated financial reserves while maintaining a simple lifestyle. When I got my first job in 1996, enjoyed the benefit of still living with my parents, and kept almost 90% of my salary into savings, living on just 10%. I did this for 5 years. Then in 2001, got married and bought an apartment building, but that was not delivered until today, but it was a great deal because I got a price below the market average.

    The property ended up not being delivered, and now – after almost 10 years – won a case in court and will recover almost 300% of the amount initially invested. Another detail is that I used public transportation until I was 30 years old, and only then bought a car – paying in cash. So, I saved on interest. The apartment where I live now was paid in part by fewer parents with bank financing. I managed to settle the debt using some of the money I’d saved, and this debt must be paid in 20 years.

    In short, today I have a good financial reserve, which allows me to be calm and not depend on an employer, who could dismiss me at any time (and have people calling steady job security). According to my experience, I would give the following advice to young people:

    – Maintain a simple lifestyle, and save as much as possible without giving up small pleasures. Enjoy the youth with caution;
    – Do not buy a car if you are not able to afford to be seen. Use public transportation, and meanwhile save money to buy the car in future
    – Do not enter into financing long (mainly property). If you can, invest in a property under construction, because they are cheaper and much faster value
    – Do not waste your time watching TV programs or unnecessary spending their time idly. Enjoy all the free time to learn new skills that will bring more money.

    Alex Dantas

  10. TheFinanceKid says

    I have created 1000$ account from start as emergency cash..not only that i have started my trading account from 1000$ as a recent challenge to make this account worth $15000 by the end of this year… hopefully i’ll keep my consistency rate.

  11. mike says

    Here is what I did (before even reading the post by Ron):

    1. I paid off the $15k Student Loan 1 (6.5% interest)
    2. I now have a reduced $10k in Emergency Savings
    3. I established a Home Savings Fund
    4. I did not take another $401k loan out to pay off the higher interest rate Student Loan 1; as I mentioned in #1, it was paid in part by my $30k savings. My rationale for potentially taking 401k loan to pay Student Loan was because the interest was higher on Student Loan and the interest on 401k loan goes to pay yourself. There are some notable consequences with doing this but I won’t elaborate.
    5. I backed down my retirement contributions (we did max 401k, now we will only do 1/2 max 401k) to focus on: a) paying off the 401k debt, b) paying off Student Loan 2, and c) saving for home. This is touchy subject, but I did make the call to focus efforts on (c) home saving versus debt reduction, however my opinion might change. This is an tactical execution move that contradicts all out debt reduction, but it is right for us.
    6. Our net income is significantly less than gross due to HSA funding, taxes, retirement, health/disability insurance, etc., but yes we should be able to put $4k toward goals.

    I appreciate your comments and the zeal in which it was provided. Thanks guys and keep up the good work.


  12. mike says

    I uncovered this article while searching for an answer to some questions I have based on my financial situation. Here is my situation.

    1. My wife and I have $40k in student loans ($25k at 3.25% and $15k at 6.5%)
    2. I have a 401k loan of $15k at 3.25%
    3. We have $30k in savings, $5k of which is in HSA accounts.
    4. We have $185k in retirement funds (401ks, Roths, Rollovers)
    5. We are both employed, grossing around $160k/yr.
    6. We are renting on the cheap ($1,200/mo.) and desire a home as soon as possible.

    There are 3 Questions I have:
    1. Should we pay off the student loans and the 401k loan as #1 priority (like right NOW, as in some suggest post establishment of an emergency fund of $1k)
    2. Should I simply let this debt ride (as others suggest since it is not “bad” debt)?
    3. Do I take out another 401k loan at 3.25% to pay the higher rate student loan?

    Your opinions in these areas to help me would be very much appreciated.

    Thanks much,

    • Ryan says

      Mike, it seems like you have a lot going on in your financial life, and I’m not qualified to give you the best course of action. I recommend taking the Financial Peace University course – many churches and local businesses offer the program on a regular basis – simply visit Dave Ramsey’s site for more information.

      That said, if I were in a similar situation, I would focus on paying off the 401k loan first, as those can have negative ramifications if you don’t pay them off – such as taxes and penalties, as well as missed investment opportunity. Here is more information about 401k Plan Loans.

    • Ron says

      I agree with Ryan. You should consider getting enrolled in Financial Peace University.

      But, based on the information you’ve provided, here are my 2 cents. Since the only debt you’ve mentioned is the 401k loan and the student loans, I’m assuming these are the only debts you have (no loans for cars, boats, motorcycles, etc.). These are just my thoughts and are not necessarily my advice to situation. I’m just thinking out loud and trying to provide a different perspective.

      You mentioned having $30k in savings, while about $5k is in HSA funds. Assuming the remaining $25k is liquid, let’s consider part of this your emergency fund.
      But while you are paying off debt, you probably don’t need an emergency fund that large. Even if the emergency fund was only $15k until the debt was paid off, you would still have $5k/month for three months—or $2500/month for six months—in the event of an emergency. So, if you took $10k from the liquid savings and paid it toward the 401k loan at the beginning of next month, the balance would then be only $5k. You make enough money (grossing roughly $13k+ per month!) to make another payment ($5k) the following month to have the 401k loan completely paid off. These numbers are examples. Maybe you want to play it more safe by only putting $7,500 toward the loan on the first month keeping your emergency fund at about $17,500), then another $7,500 the second month. Not knowing what your other expenses are it’s hard for me to say what you would really need. But since your rent is only $1200/month, I can’t imagine your monthly expenses for rent and ACTUAL necessities is all that much. My rent payment is similar to yours and I have no other debt, so it’s easy for me to ballpark what amount I need in my emergency fund. But everyone’s situation is different. If you maintained an emergency fund of only $1000 while paying off debt (like Dave Ramsey suggests), you could pay off the 401k loan in one fell swoop and pay about $9k toward the student loans…leaving you with only $31k remaining.

      The basic idea is this…Once loan #1 is paid off, the idea then is to combine the payment you were making on loan #1 with your payment you are making on loan #2 and pay loan #2 off faster than you were before. Then, combine payments from loans #1 & #2 to pay off loan #3, etc., etc.

      When I read your post, I was curious why you would consider taking out an additional 401k loan to pay off an existing loan. I would absolutely AVOID taking out another loan. In every scenario (except maybe a mortgage, if you’re careful), the loan is the problem, not the solution.

      Dave Ramsey teaches people how to make a plan to get out of debt and stay out of debt. So the immediate goal here is to get out of debt. Thereafter, the goal should be to build and maintain your emergency fund and stay out of debt by paying cash for everything. You and your wife are making a fantastic income together! It’s time to make your money work for you and not hand it over to the lender. The way I see your situation, you could be out of debt by June (including the student loans) and rebuild your emergency fund to a comfortable amount and still maximize your retirement contributions for you and your wife…all before the end of the year. You have the means to do so. You just need a plan! And you sound motivated; otherwise, you wouldn’t have posted your questions. It’s time to get excited about financial freedom!

      Maybe you should take the Financial Peace University course. Me, I listened to all of Dave’s cd’s and I regularly listen to his podcasts which you can learn a lot from. The podcasts are free to listen to on his website and are updated almost daily. Once you and your wife sit down and make a plan to pay off the debt, which you both must agree on, you then just have to follow through. But paying off the loans will take a heck of a lot longer without a new plan/budget for financial freedom. So, start there and you can’t lose!

    • jim says

      Do NOT take out another loan on your 401! Just don’t go there. If you do that again (and I don’t think you should have done it even once), you are setting yourself up to do that over and over again. The problem with that is, besides the financial implications, is that you’re not in the right mind set. You aren’t treating that account as a retirement account. You’re treating it as a semi-ER fund. Please don’t do that.

  13. Yoel Cohen says

    Dave Ramsey has great deficiencies in knowledge and understanding of how to finance college education. His suggestion to open college savings when the child is born and invest the maximum allowed $2000 per year and with earning on this investment 12% to the child age 18 you should have $136,000 for college.

    What is wrong with this advise? first, were can your invest to receive yearly12% return on your investment every year for 18 years, with Berni Madoff? the S&P for the last 10 years did not produced any profit at all, and very low percentage by mutual funds.

    I have send my 3 children to college while earning less $100.000 a year and few years they were all in college at the same time, how did I do that? first, you take two year, prior of sending your first child to college, and learning how the FASFA application works in order to get the low EFC, position your child assets and yours to get the highest and as many grants which the school financial officer decide to meet the gap between your EFC and the school total amount they came up with for the year education cost, the balance to be in subsidized loans.
    Your children should not own a car or credit cards, work part time jobs while attending college.
    For 15 years I have advised friends and family and help them to use my system that cut their expenses by at least 70% I have managed to send my 3 children to college by paying not more then 10% of total of their education

  14. Jessica Luke says

    I love this article. I am inspired to follow the steps and it may even take ten years, but I am positive I can do it! I am a widow and single mom of three children, but I believe learning about money is my first step and anyone CAN do it. Thank you for the information.


  15. Carrie says

    My husband and I are 9 weeks into the program. I’m enjoying it immensely – I’m definitely the “nerd” of the relationship and have no debt. Dh on the other hand struggles with emotional money “issues” so I sometimes feel like I’m climbing an uphill battle. We don’t fight about it but we won’t make much progress as a couple until he gets completely on board. I’m glad it’s a topic of discussion however, for that we’re probably way ahead of most couples.

  16. Joe Plemon says

    Yes, I have been through FPU and have been coordinator for our church in several other FPU events. It has made huge differences in the financial lives of our participants. Our most recent group of about 15 couples and 5 singles had over $100,000 positive change in their net worths.

    An aside for Kirt: Dave Ramsey already has two programs designed for high school students: one for church groups and one for non-church. I have worked with our high school principal to get the Dave Ramsey program integrated into the curriculum for all high school seniors in our school district. This being said, your comment to Kirt is right on…some of them “get it” but most haven’t the life experiences to be able to digest the info. Still, if they can just grasp the concept of staying out of debt, the class is a hugely beneficial.

  17. Kirk Kinder says

    I like Dave Ramsey. I have never used any of his products although I listen to his free podcast. He is really helping a lot of people. But, I have a plan to put him out of business. Teach personal finance in high school. If they taught kids some very basic ideas in high school, Dave wouldn’t have a job, but I imagine he would be ok with that since his goal is to provide financial peace of mind.

    • Ryan says

      Great point, Kirk, and I believe personal finance and money management should be taught in school as well, but even if it were, it wouldn’t put DR out of business.

      Students wouldn’t internalize much of the coursework because they haven’t been exposed to it (insurance and credit are great examples), and personal finance is complex enough that most people would need refreshers every so often (or after they realized they messed up!).

      On top of that, it would only catch the new students coming through, and I’m sure you know there is a large gap of people between high school and retirement age who can stand to improve their financial situation!

  18. scott jackman says

    After reading your comments about tithing it becomes apparent that you don’t understand
    what Dave is talking about. Tithing is not an arbitrary act to be done on a whim.
    Dave is basing this on biblical scripture that God has given to the church. The first ten
    per cent of income is to be returned. It is not based on human instructions, but rather
    on God’s wisdom. In return God will honor this obedience and reward the giver.
    It is an act of faith and it is not just throwing money into a pot.

  19. Mike Jean says

    I believe in Daves baby steps and not using credit,why make someone else wealthy just to drive a new car or have the newest widget! Thanks Dave!

  20. Rick Shafer says

    Hey Dave
    I respect you for the way you live your life and your opinon on finances.So that said i have a question for you.What do you think about having to pay (SCHOOL and PROPERTY TAXES) on the value of property?Do you think it should be a flat tax just on income?Very frustrated!!!!Hope to hear from you .

  21. Tina says

    My family began DR’s plan in February 2009. We weren’t overwhelmed with debt, but we had the attitude that it was “just how it was”. That there was no way we would ever be out of debt, so we just plugged along making our payments and buying things on credit cards and payment plans. Since starting Dave’s plan we have paid off nearly $10,000 in debt. Our last debt will be paid off this month (November 2009) and I can’t even begin to say how good that feels! We haven’t suffered. Our daughters still do all the things they love. We live on a budget, but we still eat out and go to the movies, just not as often. There are several side benefits that I didn’t anticipate: our marriage is better because we no longer argue about money. We are healthier because we don’t “run through the drive-thru”. Our family talks more and we spend more time together doing simpler things (playing board games, hiking and playing with the dog). The best thing is Dave’s plan is not complicated. It’s common sense and approachable financial advice for average people.

  22. Ed says

    Dave is a shill for real estate. For the past 3 years he has been telling people to buy real estate. How’s that working out for those of you that listened to him and bought a house in 2006 or 2007 or 2008? He’s also a shill for stocks. It’s always a good time to buy stocks and real estate according to him. Again, how did that work out for you who took his advice and bought stocks a year or two ago?

    He’s right about debt. Getting into debt is stupid. But buying real estate in the middle of the biggest real estate crash ever is just as stupid.

    • Bryce says

      I disagree with you Ed, if you have the money then why would you not want to invest in Real Estate when it’s low? According to your philosophy it sounds like everybody should invest in real estate when it’s at it’s high point? Dave encourages you to invest in Real Estate with cash. If you do this, you won’t have to worry about horrible markets because you can wait it out till you can sell your real estate for a good profit.

      The same holds true for mutual funds. It’s better to buy mutual funds with a good long track record in down markets because it’s on sale. I’m glad i got such a good deal on my mutual funds last year.

  23. Buddystips says


    Thanks for the listing of DR Baby Steps. I listen to him on radio, but more for the experiences of those calling in then for his advice to them. I don’t agree with sequencing (e.g., step 1, then 2, then 3, etc.). This is especially true related to Step 2 and Step 4…I believe you should do both at the same time, simply because “time” makes a difference. If it takes you 3 years to eliminate all debt, that is 3 years you have lost in investment grow and compounding. So I promote doing both at the same time. In this way, you win twice over. Again, I really enjoy your Blog and the folks that participate in it. I look forward to reading the series. Thanks again!

  24. E.F. says

    Good for you, goddess. You are doing great considering your age. Not everyone needs Dave Ramsey’s course however. Many people, myself included, are already completely debt free.

  25. goddess1812 says

    Everyone here needs to go to a Dave Ramsey Financial Peace Course. You would then have a fuill explanation as to why he does things the way he does. It truly is an amazing course.

    I took the course and am in the process of paying off our mortgage early and I am STOKED! We have completed Baby Steps 1-4 (no kids so we don’t need #5).

    I am 27 Years old, have $50,000 in the bank and the only debt we have is the mortgage.

    Woo Hoo! I can’t wait to be debt free!

  26. E.F. says

    Hi Ryan! Great blog! I have pretty much always lived a debt-free lifestyle, but what I love about Dave Ramsey is that he has made this lifestyle cool. About step 6, I’d like to make two points: First of all, making more money in investments rather than paying off the mortgage only works if people actually invest the money. There is much evidence that most people just spend it instead. Second, looking just at the low interest rate is deceiving about the real debt load of a mortgage. The average homeowner with a 30-year mortgage pays back three times that amount. The true cost of a $200000 mortgage then is $600000! Perhaps some people can make this much in the stock market, but that was a gamble even in the 90s when I paid off my house. Most of my friends invested in tech stocks (and thought I was an idiot). Well, I ended up owning my home free and clear while they lost almost all their money. Living truly debt free (no mortgage) leaves enough money for savings, investments, and fun things like travel. Most of all, it gives me piece of mind.

  27. Michelle says

    It’s funny how controversial (and emotionally charged) some of the PF-blog commentary about Dave Ramsey has become. On one PF forum, my posting a simple comment about DR’s take on Social Security started a 10-page flame war with really really nasty comments about him and me for listening to him…so it’s nice to read a balanced post! I personally agree with your perspective. The programs (FPU, TMMO, The show on TV & Radio) are popular because they work for many, many people. He’s got the ‘personal’ side of personal finance down-pat – and his approach does address that aspect first, which I think turns off a lot of folks who think numbers rule the world! Also, even though Dave Ramsey is hard-core about his plan and his philosophy, you can customize his plan to your situation – you won’t fail if you attack larger interest-rate debt first, since overall, you are paying the debt and laying groundwork for a better financial future.

    • Ryan says

      Michelle, I don’t understand the polarization either. DR and other personal finance gurus aren’t like politicians in he sense that we vote them in and we are then forced to accept the laws and policies they pass. We are free to pick and choose the best of all worlds and find what works for our situation. Which is how it should be.

      • Michelle says

        Exactly – personal finance is personal and in our case, following a modified-DR approach has disciplined our spending and debt reduction. My family is in a position I truly did not think we’d ever see: within 18 months of paying off all non-mortgage debt. Thanks again for the good post!

  28. Rosa says

    The earlier you can get out of debt, the easier it is to stay out of debt. Those habits of always having “bills” are hard to unlearn after 10, 20, 30 years. (I love that phrase, “bills” – like credit card bills & student loans and electricity are all the same kind of thing) .

    And totally aside from any expectations or hopes you may have of being rich someday, debt freedom is *freedom*. You might want to travel, to be a stay at home parent, to help your siblings or parents, to work in a nonprofit or for a church…the less debts you have, the more freedom you have to choose what to do with your life.

    • Ryan says

      Rosa: Thanks for your comment. You’re right, there is a big difference between types of bills, but it is easier to just say bills than list them all out each time. And I love the idea of being 100% financially free. To me, not having any debt is a big part of that!

  29. Scott Evans says

    Dividend Growth Investor,

    Borrowing money to invest is stupid.

    1. Risk. Stretching the money over 30 years in order to invest will not put you ahead if lets say the stock market falls 50% along with home values…such as the situation that we are in now.
    2. Taxes. Paying 6% interest in order to make 8-12% in good markets may sound like a good idea, until you have to pay taxes on the capital gains and dividends which will more than likely increase greatly.
    3. Cash is king and a great asset. Someone making 50000 per year can build wealth with no debt while one making 100,000 per year with a mortgage and 2 car payments will not be able to build wealth or be able to not live paycheck to paycheck.

    • Tim M. says


      1. If you’re thinking short term, sure. But I don’t retire for 20-25 years. It can fall 50% because it’s going to go back up again, just as it has for the past 100 years.
      2. You don’t have to pay taxes on it in a Traditional IRA
      3. This is true, though if you’re dumping it in home equity, you don’t really have cash, do you? You’d have to borrow off that equity anyway. Your example about 50K vs 100K purely has to do with the expenses. You can have 50K in expenses even if some of that is debt, regardless of whether you make 50K or 100K.

      In summary, borrowing money to invest short term is stupid.. borrowing to invest (very) long term likely is not, especially when you’re borrowing at an incredibly low rate and you have a very steady job and large emergency fund.

  30. Brian says

    My wife and I have been working Dave Ramsey’s baby steps for a little over a year now (working toward accomplishing #3) and our whole perspective on money has changed. The challenges experienced through living the baby steps long term really stems from your view of money. If you initially approached these baby steps as one approaches a diet you will likely not have the will power to continue long after you begin. Dave Ramsey is trying to instill in people a life style change, not a diet. If you make $40,000 per year, your consumption must be something less than $40,000 per year or you will never achieve anything. This caused a paradigm shift in how we see money. We got off the earn-to-spend cycle, but that is a choice and I think you have to get mad before you make that decision.

  31. Writer's Coin says

    This is a great intro since he’s become one of those personalities you’re “supposed to know” about. Thanks!

  32. Ken says

    I coordinate his FPU program at my church. I can’t find anything out there as comprehensive and understandable as his stuff. I’m a huge fan.

  33. Kristen says

    I volunteer with my local Habitat for Humanity’s Family Support Committee. Any family that wants to purchase a Habitat house must first undergo a series of financial classes taught by our committee. The families must work with a mentor and prove that they can live on a budget that includes what their new home payment and utilities would be. We use the Financial Peace University as a teaching tool in this class.

    I definitely think that behavior changes are a crucial part of living on a budget and reducing debt. Mental victories are important to success. However, sometimes choosing the best financial solution over the most motivating psychological choice is important too. Sometimes the best course of action is a combination of budget and debt reduction lifestyles and techniques.

  34. Bargain babe says

    Thanks for the summary on Dave Ramsey, I’ve been wondering about him for awhile. He is becoming a household name – at least among the pf community.

  35. Pinyo says

    Very nice summary of Dave Ramsey. I think you pretty much got every aspects covered. Good job Ryan.

  36. babsnea says

    The first few Baby Steps are easy (do without, see progress, reach goal in a reasonably short period of time) compared to trying to live the Ramsey way later in the steps (keep emergency fund fully funded, save for cars, pay off mortgage, keep investments at 15%). There is very little discussion about this by Dave or anyone else. Is anyone else experiencing this? Can anyone make suggestions where to find some support for people like me?

    • Ryan says

      babsnea: This is where having a strong budget comes into play. You will need to consistently spend less money than you earn, and use the left over money for the things Dave Ramsey recommends. A lot of this will depend on your income and many other factors. Some people simply do not earn enough money to save very much. But if you earn enough to save, then you will need to create a solid budget and stick to it.

      • John says

        “A lot of this will depend on your income and many other factors” – exactly! …which are not well defined nor is there enough dialogue about who can actually afford to live on almost 30% less than they make.
        I’m not claiming it’s impossible, but I assume radical changes by most (selling down house, beans & rice diet, etc.) would be required to make it happen.

  37. Martina says

    Dear Dave,
    My husband and I are presently attending your Financial Peace University. We have completed baby step 1,2 and 3. I have a 30 year mortgage. Unfortunately we refinanced the house 3 years ago at a interest rate of 6.5% and owe about $320’000. The house appraises right now for about $400. My husband and I have been making 1 extra payment each year sense we refinanced the home. We divided that payment in 1/12 payments and added it to our regular mortgage payment and applied it to our principles. Right now we are in the position to make double payments each month. But this would really limit us from making any spontaneous decisions like going on short weekend trips and so on. What would you recommend?
    Thank you for taking the time of responding.

    • jim says

      My spouse and I are in a similar position. This is what we’ve decided to do. We owe about $150,000 on our mortgage. We are going to up our payment by at least $1000 in a few months when our son is out of college. We are also going to up our savings – an account set aside ONLY for the mortgage reduction. Once what we owe on our mortgage is down to say $75,000 and our “mortgage only” savings is up to $75,000 we’re going to make one large final payment and be done with it. That way, should something come up where we need the cash, we’ll have it. But, it will also force us to pay more on the mortgage too. Now it’s actually kind of fun because we’ve turned it into a game. When the mortgage statement comes in the mail, we immediately compare it to what we have in our “mortgage only” savings account and then try to figure out how we can add more to both. You’ll think twice about that weekend get away when you realize that what you’ll be spending on that could have gone to your mortgage or your “mortgage only” savings account. Seriously – this CAN be fun!

  38. Ryan says

    Dana: I agree, debt has a much larger impact on financial security than many people realize. There are many people that just accept debt as a way of life and never aspire to reach the point of being debt free. I don’t plan on working into old age just to be able to make payments on material things. I plan on living within my means and working to pay everything off so I can enjoy financial freedom and spend time with my family and doing things I enjoy.

  39. Dana says

    Everyone talks about the mortgage interest deduction but here’s the deal: it only makes sense to take the deduction if you itemize your deductions. Even some people who buy homes don’t have a tax situation that justifies this–they get more of a refund taking the standard deduction. I was in that boat with my then-husband when we bought our house in the late nineties.

    Even if you can justify itemizing, it’s not worth staying in debt just to get a measly tax credit. There are other ways to get tax credits that don’t risk the roof over your head.

    Because in the end that’s really what it’s about. One commenter from a year ago said that anyone who pays off a house is probably a little bit afraid of debt. Yes, everyone should be. As long as you owe someone money, you’re more or less their servant. (I’m not a Christian, but I agree with this idea.) If you’re going to go into debt to create wealth, it is wiser to incur that debt in an area that doesn’t risk your job, your health, or your home.

    People seem to get confused about these things when they talk personal finance. They think a personal home and a savings account are investment vehicles. Big mistake. Thinking of either as an investment vehicle leads to bad financial decisions that could cause you to lose more in the end. Think of all the people being foreclosed now, or of the people who bought into the idea of spending their emergency savings to pay off a credit card (“you pay more in interest on a credit card than you get in your savings account!”) and then lost their jobs.

  40. Ron says

    Jesse, let’s put a spin on it the way DR would.

    If your mortgage was paid off, would you go and borrow money against your house to invest?

    I hope not!

    (All of you loyal Podcast listeners know what I’m talking about.)

  41. tom says

    People do it every day and the quicker that your learn it the better off you will be. Oh if all of us that are older had only LISTENED when we were 24!

    Good luck… you really should read the book.

  42. Jerry says

    It isn’t that people are afraid of debt. I understand the argument of why pay off my mortgage that is 5-6% when I can make 7-10% on my investments. (Tell me where in this economy) But what happens when you get laid off? I know rich guys thing that will never happen (Lehman Brothers anyone?) I’d rather make less for a few years while paying off my mortgage than be earning 8% on investments then having to withdraw them because I am unemployed. Just my $.02

  43. Jeni says

    Hi Ryan. I am a woman of 53, and I am debt free. My home, my cars (2 caddy’s), my mule, anything and everything you can imagine is paid for. I have just started an Avon business, because I am retired, I wanted to do something to make the world look and smell beautiful, so I chose Avon. I have investments that pay me $5,000 a month, and I use Edward Jones to invest the money I receive. My problem is….I love to shop, and if I don’t stop , I will lose my fortune. Any ideas of what to do? Yes, it is an illness, I agree. I need something to replace this addiction. Got any ideas??? Plz reply soon to my e-mail address if you would be so kind.

    thank you very much…Jen

  44. Ryan says

    Hello Scott,

    Thank you for contacting me. I do not know why you think I am not neutral in allowing comments that don’t agree with what I write. I welcome all comments that are on topic, so long as they are respectful and do not contain curse words, spam, or commercial links.

    I welcome dissenting views because that is one of the ways I learn best – to look at things from another perspective. (I love to play Devil’s Advocate when analyzing a situation and it drives my wife crazy!).

    Some comments are held for moderation. I have an anti-spam feature on my site which automatically blocks some first-time comments and other comments that may be questionable. I do this because otherwise I would receive hundreds of spam comments everyday – for things like pharmaceuticals, ****, payday loan companies, commercial websites, and comments filled with curse words. As you can imagine, these are unwelcome on my website and I do not tolerate them.

    As you probably noticed, your comment was initially held for moderation. I go trough my moderated comments once or twice per day and I immediately approved your comment. If you leave another comment it will probably go through immediately.

    I appreciate all visitors and I hope you will take the time to visit again.

  45. Debby Phillips says

    I have listened to Dave Ramsey since I was a child riding in the car with my parents. Now I am an adult and listen to him all of the time. I have read all of his books and try to catch his show on Fox. I love what he teaches and wish we could spread the word more widely about him.

  46. Ryan says

    Money Energy,

    I agree, tapping investments should be the last option.You can certainly start all improvements at once, and DR actually advocates this for the later steps in his program. Some of the steps are more important than others and should be accomplished first.

  47. MoneyEnergy says

    Interesting; I’m totally not familiar with Dave Ramsey though I’ve heard his name (maybe it’s because I’m in Canada and his media doesn’t circulate as much up here).

    I would add with regard to the emergency fund that it is really important in order that you don’t have to tap into any INVESTMENTS that you may have compounding for you.

    I’m not an advocate of paying off all debt first and proceeding to get one’s financial life “in order” in a linear fashion. I start all improvements all at once. But these steps are all still important, of course.

  48. Ryan says


    That’s a very good point. Paying off your mortgage early does tie up your money in equity, so it is a good idea to leave a large enough emergency fund so you won’t need to pull out a home equity loan or use other forms of credit.

  49. Ryan says


    That;s a very good point. Paying off your mortgage early does tie up your money in equity, so it is a good idea to leave a large enough emergency fund so you won’t need to pull out a home equity loan or use other forms of credit.

  50. Jeff says

    Paying off your mortgage is a 100% risk free guarantee return of investment. If you pay off a 5% mortgage, you are getting rate of return on money not owed. You will also pay less interest in the long run which will be better than any money market fund you can park your money in. The tax deduction is close to a scam. You pay 1,000.00 in interest to get a $250.00 tax break. If you have no mortgage, you can accomplish the same thing by donating to charity. That way, the bank isn’t getting your money.

  51. Ryan says


    Thank you for contacting me. I am not actually Dave Ramsey; my name is Ryan and I am a personal finance blogger. Basically, I am a regular guy who writes about my hobby – which is money and financial planning. Some friends and I wrote a series about Dave Ramsey, which is how you found my site.

    Regarding your new budget, congratulations! Yes, it can be intimidating, but it is an important first step toward becoming debt free. Congratulations on your new beginning, and if you need assistance finding more information about how to become debt free, don’t hesitate to contact me. I will do the best I can to point you in the right direction. 🙂

  52. Bonita says

    Dear Dave,
    My husband and I just started a budget. This is the most overwhelming thing that I think we have committed ourselves to do. Tell me, Dave, did you feel this way? Most of the problem is that we have never, in our 39 years of marriage, been out of debt. This is a new beginning for us. We have a long ways to go but we intend to stick with a budget and get out of debt. Thank you so much for your program and The Total Money Makeover. I can’t get enough I watch everyday to see if there is something to inspire me and it never fails. Thank you so much for helping us find a way to get debt free.

    Gulfport, MS

  53. Denise says

    I like the debt snowball concept and having the expenses of a few months in advance also helps. Just came across this blog, a very interesting read.

  54. Ryan says


    I can’t wait to get my house paid off either! There are two schools of thought on the topic: pay it off ASAP, or stretch it out as long as possible and invest for higher returns elsewhere. Right now I am of the first school of thought because having no mortgage gives me a different kind of freedom. But ask me again in a few years and I might change my mind. 😉

  55. Jim says

    All of your house interest is NOT tax deductable. The only amount that truely is, is the amount that is above the standard deductions. Myself I can’t wait to get my house paid off. I had a 15 year loan and in 4 years I only have half of it left.

  56. Olivia says

    Does anyone remember the name of the book that Dave Ramsey talks about from time to time, regarding co-dependency????

  57. Drew says

    I am also 24 years of age. These are called baby steps for a reason. Just take it one at a time. For your 1,000.00 Dave Ramsey advises a yard sale, (at 24 I don’t have much to sell) an extra job, cleaning cars, mowing lawns any thing to make extra cash. Lets say you can only put 100.00 a month extra. In that case congrats in 10 months that is taken care of. There is no time frame on the steps. The nice thing about the 1000.00 is you can keep from putting money on a credit card for stuff you NEED. Then take that extra 100.00 and put it towards your college loans. If I were you I would put more than 1,000 in my emergency fund if your loans are higher than 10,000.
    This plan does take years, by putting in your %5 that is a good start, if you are in a job where you get a raise avg I THINK is around 4%. Put that money into your account when you get the raise or take 1/2 of it. in 4 years you are done with your next baby step. if you are able to not take the raise at all you will be there in 2 years (I think Dave would tell you to take the raise and keep paying off debts first then start to invest.) Now you need to work more on the student loan. Getting out from under a new car always helps also Dave goes in to a large talk in his class about not having a car payment. Do you go out on Friday nights? Paintball, for me it is fishing and hunting, well put a cap on the $ you are able to spend and put the rest on your college loan. After that if you want to keep the car, start paying that down…. if you take the Dave Ramsey class it all makes more sense. It can be done, who gives a hoot if you don’t follow his plan 100% the idea is to get something going and take control of your own $ you will always need $ so it will always be a learning process.

    • Tim K says

      I am 55. I was reckless for the first 15 years of my adult life. I spend the next 20 years rebuilding my financial life and fixing what I didn’t do in my early years.
      Here is my situation now

      I have zero debt.
      Paid off home.
      6 months of living expenses.
      Save 15 percent in my retirement account.
      Save 10 percent in a savings account.
      I want to increase my retirement account to 25 percent in the next year or so. Like I said because of the first 15 years I have catching up to do.

      It was painful and I regret the way I handled money in my younger days. I took me most of my adult life to recover from that.
      Now, when my taxes are due. I write a check. My kids needed braces. Two kids, 11,000 dollars. I wrote a check and moved on with life. I hated paying those things but there is so much freedom in that. I can never imagine going back to the other life.
      I find it amazing anybody would. I find it amazing I lived any other way.

      It can be done. I’m living proof. I have a residual income of 40,000 per year and my own business now, which is also debt-free. I don’t deserve it the way I lived in my younger years.

      That is really what Dave is trying to get across. Not to be some investing guru but having real peace and freedom. That is what being debt-free is really all about.

  58. ConfusedYoungster! says

    Ramsey’s baby steps seem to be common sense and easy to understand, but as a young person(24) it seems unrealistic even without a house note. (Granted my salary isn’t as large as one would hope to have after graduating college) How can one save $1,000 for emergency funds plus 3-6 months of wages, give 10% to charity, AND put away 15% to retirement? All of my money goes towards loans from college, car notes, and car insurance (thankfully my job has a mandatory retirement plan, in which I only put in 5%!). I just don’t see how these baby steps are plausible with all the other extra bills in life. Please help me understand…maybe it’s just my age and my starting in the “real world”? Or this plan takes years and years to achieve?

    • SamsMom says

      All I can tell you is to do what I did when I was your age and in the same position… additional income. I worked two jobs for 5 years to pay off some stupid credit card debt from college, early pay off on my student loan and put myself in a better position long term. Twenty years ago my only real options for that were retail and babysitting. Don’t kid yourself about retail, some of them pay pretty well you just have to figure out where that is. Babysitting kept me in cash. I went from graduating in debt with a low paying job to 15 years later having ZERO debt (including my house and car) maxing out my 401K and being able to help out family members who needed it. I married late and fortunately my husband had no preceeding debt other than a car and his house. I now stay at home with our child, we still have no debt and continue to consistently put away money for retirement, tithe and help out family members on both sides (we paid off his car too, and I’m still driving the same one). It can be done if you are willing to work hard enough. Financial security was the highest priority for me, you have to decide if it’s a priority for you.

    • Bob says

      You do the steps ONE AT A TIME.

      It is not possible to do all those things you listed, at the same time. Just do one. Step Zero agree that debt is dangerous and do not ever use it again. That cost you nothing. Don’t buy a car with a car loan, but instead save up $1,000 and buy a beater from Craigslist. Don’t get a credit card and go out to dinner on it. Just make the decision that that is dangerous and you don’t want it in your life. Step Zero is now done

      Baby step 1 is save up $1,000 in emergency fund. After you do Step Zero and baby step one, then worry about the rest. Good luck. Bob

  59. Steve says

    As is the case with any public figure, there is always someone else with something bigger, better or faster. Fact remains, Dave Ramsey is a genius. He is the first person to not only come up with a simple (not easy) plan, but has the marketing prowess to garner such adoration from his audience. Teaching people how to live within their means. Beyond the math, he also influences us in a way to be happy & content once we reach that pinnacle.

  60. River Rafting in California says

    I have listened to Dave Ramsey on the radio for years and I am debt free and it was definitely his influence that has me where I am financially.

    Not that I am rich, but I have been able to withstand some financial hardships with little impact by being debt free.

    Definitely a great man to pay attention to. Entertaining too.

  61. Ryan says

    Erik, I agree, there is a huge personal element in finances that has absolutely nothing to do with pure numbers. Perhaps the best example of this is the prepaying mortgage issue. Some people look at the raw numbers and determine they can probably get a better return by investing extra money in the stock markets. They probably can over the long term. However, the freedom of not having a mortgage payment is HUGE, and one that many people are willing to forgo extra returns to be able to live their dream of not owing anyone anything.

    Self-discipline is another matter entirely! 🙂

    • Mike says

      You’re taking a 75% loss in the first year to get your savings, assuming you’re in the 25% tax bracket. Tell me how you make more money in the long run investing that money when EVERY YEAR you’re taking that immediate 75% loss? See the above comment under “Jesse” for math details.

      This scam of keeping a mortgage and staying in debt for the tax savings needs to be killed, and you should be helping to do so. Part of being an “advisor” is killing myths/scams and telling people the honest truth and teaching them what’s a scam and what’s smart money.

  62. Erik says

    I’m a big Ramsey fan. One thing you need to realize about him is that he knows some of the advice he gives doesn’t coincide with the math. You have to keep in mind his philosophy that he believes personal finance is 80% mental and 20% about the math. I agree with this. The decisions you make have so much more to do with how much money you will have rather than being a whiz about the math. Understanding the math and actually being diligent and self-disciplined are two VERY different things.

  63. simple mom says

    Something must be in the water. Last week I started a personal finance 101 series (my blog’s about simplicity in general, not necessarily just pf), and today I wrote about baby step #2.

  64. CiaranFromChance says

    Looks like JD read your mind with his post this morning. I’m sure that that was planned in advance, funny timing.

    I tell you one thing, it can’t hurt Dave Ramsey’s book sales…

  65. Frugal Dad says

    I consider myself a Dave Ramsey junkie, and really enjoyed this post as it is a great overview of his Baby Steps. Nice job!

  66. Laura says

    I’m excited to follow this series. I just finished reading Total Money Makeover. I like a lot of his thoughts on changing your behavior to get a better financial outcome. I;m now going back and checking the statistics he references. (I have an older edition.)

  67. Ron@TheWisdomJournal says

    Trust me, when the time comes to pay additional on MY mortgage, there will be zero hesitation.

    Someone please explain how it is to my advantage to pay a mortgage company $12,000 in interest just so I can deduct that $12,000 from my taxes.

    The spread is too small to bother with. The mortgage is compounded daily, the savings account quarterly or monthly.

    I’m a PAY IT OFF guy. I don’t think anything could compete with that peace of mind.

    • Tim M. says

      Ron, think of this example: a 4% interest rate and in the 25% tax bracket (granted, you’d also need enough other deductions to reach the standard deduction level before you get the full tax deduction). But anyway, that’s a 3% effective interest charge, while the stock market averages 10% over the long term (and arguably more than that when you’re investing during a bear market).

      It doesn’t stop there.. rates are currently near the lowest they will ever be.. so it’s very conceivable that inflation is higher a decade from now, which will increase savings yields above that 3%, where you’d automatically be covering the interest payment even if you just left it in an MMSA.

      As long as people are prudently refinancing, the only benefit to paying off your mortgage early is if you’re not going to invest the extra you would’ve paid it off with, or you really want the satisfaction of being debt free (both may be very likely, but not a given).

  68. Money Blue Book says

    I’m glad he also encourages and advocates charitable giving. I think it should be part of everyone’s portfolio to give some to charity, whether it be for church or other reasons. It’s not only honorable and helpful to society, it’s also a move with some wise tax benefits as well.

  69. CiaranFromChance says

    Hey Ryan nice summary here. I’m looking forward to reading the series.

    I often write about the positive psychology behind many decisions (it’s often more important than what the numbers tell you)… I like what your friend did in paying off his house… it worked for him and his family which is great.

    It could be different for someone else, that’s why everyone’s plan will be different and should be. You start with a blank canvas and customize your plan to your tastes, your family’s tastes and what works best for you.

    No 2 snowflakes are ever a like…

  70. Dividend growth investor says

    I agree with Jesse on #6. I do realize though that for some people it makes sense in their heads to pay off the debt early, and sleep tight at night. But in my opinion people who are afraid from debt would not end up with a lot of assets in the long term.

    My thinking is that the longer you stretch your payments, the better, because eventually inflation would significanlty erode the purchasing value of your fixed payment at year 30. And in the meantime, you could have put those extra funds in stocks gaining from all the time you have on your side and the power of compounding.

  71. Jesse says

    Ryan: great article. His one step that I disagree with strongly is #6. For most people with mortgages the interest rate is so low (5% in my case) that it is a waste of money…there are SAVINGS accounts with higher interest than that. That doesn’t even take into account tax savings via deducting interest. For me it is huge at least. I remember reading a while back a book called “never pay off your house” or something like that. Random note, but it was an interesting read.

    • Mike says

      The tax savings is huge? How about this, you pay off your house and send me half the interest, and I’ll pay however much of the tax saving you were getting. There’s pretty much no reason for you to not do this, because you’ll be saving on interest paid to the bank and still getting the tax savings. Unless it’s over $13,000, you won’t have to pay gift tax either. If you’re in the 25% tax bracket, you’re immediately taking a 75% loss in one year on your money. In numbers, if you pay $4,000 in interest, you get $1,000 in tax savings. How exactly are you going to make gains off of that?! If you invest that $1,000 and get 1% return per month on that (12.68% annual, good luck finding that), it’d take you 140 months to bring your $1,000 tax savings to $4,027.10. So you paid $4,000 in interest 140 months ago (ELEVEN AND TWO-THIRDS YEARS) to make $27.10…. oh yeah, and the $3,027.10 you gained on that $1,000…. all taxable….

      This scam that keeping a mortgage for the tax deduction needs to be killed. There’s no arguement or debate about it, it’s just flat wrong like saying the earth is flat.

      • Tim M. says

        Mike, you’ve got some serious mathematical tunnel vision going on. The idea is not to take your tax savings and invest to get back your interest. The only relevance of stating there is tax savings is that when comparing your mortgage interest rate to other investments, you can deduct your tax bracket in the calculation.

        So my interest rate is 3.5% right now.. if I’m in the 25% bracket, my rate is really only 2.625%. So if I have an extra $1000/month, I could either pay down my mortgage and make an effective 2.625% return on my investment for the life of the mortgage, or I could invest it somewhere (like an IRA) and if I make more than an average of 2.625% over the same duration, I’ll come out with more money at the end of the mortgage term than if I had paid it down early. It’s as simple as that. It just becomes even better than that when you consider historically low rates right now and the fact that they could be guaranteed for 30 years and wall street will likely return far more than the 2.625% a decade or two from now.

    • Bob says

      You guys who are saying don’t pay off your mortgage early are missing a huge point. Dave is trying to teach people how to protect themselves, on a good day or a bad day. If you become disabled, or unemployed, having your home paid off is a huge win. If you become hurt, pregnant, disabled, unemployed, laid off you will always have a roof over your head. And having no monthly mortgage payment makes it incredibly easy to invest in your retirement on all the good days. There is no math you can show me that will protect someone as well as owning their own home outright

      • Tim Kozlow says

        Totally agree with Bob. My home has been paid off for four years now.
        I have zero debt
        Save 10 percent in a savings account every month
        Save 15 percent in my retirement account
        I buy 7000 cars and drive them into the ground. My last 7000 car I have had for 7 years. Never been stranded. That’s another myth. If you take care of them they last a lot longer than people think.
        I look at the paid-off home as insurance. Bob is right. If you become disabled or sick and can’t work, you will have a roof over your head. My kids won’t be thrown on the street.

        There is more to having some peace of mind that way than making a few percentage points extra investing or getting some kind of tax break.

        I have done all this never making more than 70,000 per year. Which in today’s economy is not middle class.

  72. Ryan says

    Jesse, paying off mortgages early is one area which people may not ever agree. Going by pure numbers, it may make sense to keep your mortgage payment because of the low interest and tax deductions. But on the other side, there is the psychological effect of not having any payments. I know that when my friend paid off his house and no longer had any debt, he and his family had a new outlook on life.

    I think the rationale behind paying off your mortgage is to be completely debt free. That has to be an amazing feeling knowing that you don’t owe anyone anything.

    I can see it both ways.

  73. Ryan says

    Ana, Thanks for the comments. I do not confess to be a Ramsey follower… To be honest, I had to go out and research the baby steps. I’ll make the corrections. Thanks!

  74. Debt Free Revolution says

    @Jesse, now I’m really curious. Just where are you getting a SAVINGS account with better than 5% interest? Especially with all the Fed rate cuts, and more expected?

  75. Debt Free Revolution says

    Just a few points:
    Dave Ramsey does not use the term “snowFLAKING” that one was coined in the pf blogosphere 🙂

    Also, DR says to be tithing (10%) throughout the Baby Steps, and “giving” is anything above that 10%.

    Baby Step 4 is capped at 15% of income until you have the mortgage paid off.

    Steps 4, 5, and 6 are to be done concurrently if income allows.

    -Ana (the “rabid” Ramseyite)

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