Dave Ramsey’s Baby Steps: A Real Path to Family Financial Freedom

Family Financial Freedom

Have you heard of Dave Ramsey and his Seven Baby Steps for success in personal finance?  If not, you are missing out on a fantastic resource for achieving financial freedom for your family.

In a basic sense, Dave Ramsey’s teachings on personal finance are conservative, Christian-based and old-fashioned.

Dave himself often describes his advice as “God’s and Grandma’s ways of handling money” on his mega-popular daily radio show.  And he jokes about how strange it is that common sense has become so marketable within financial circles in the United States today.

It’s the simplicity of his message that makes it so appealing.  When you read anything written by Dave Ramsey or listen to his radio show or podcast, you can understand it.

More importantly, you can follow his advice and implement it quickly, not because it is easy (it’s not) but because it is sensible and simple.

Unlike so many of today’s financial gurus, Dave does not advocate a get-rich-quick path to financial success.  Instead, he offers common sense and provides the tools and motivation needed to achieve long-term family financial freedom.

At the heart of the “Dave Ramsey plan,” are his increasingly-famous Baby Steps.  These seven steps will get you on a budget and take you from a very vulnerable financial status to one of substantial wealth and the ability to help others like you have never dreamed possible.

The Dave Ramsey Baby Steps

Baby Step 1: $1,000 to start an Emergency Fund

An emergency fund is for those unexpected events in life that you can’t plan for: the loss of a job, an unexpected pregnancy, a faulty car transmission, and the list goes on and on. It’s not a matter of if these events will happen; it’s simply a matter of when they will happen.

Baby Step 2: Pay off all debt using the Debt Snowball

List your debts, excluding the house, in order. The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first.

Our family reached the milestone of completing Baby Step 2 in February 2008 after paying off almost $55,000 of debt!  I can’t express the level of financial freedom our family enjoys based on this accomplishment.

Baby Step 3: 3 to 6 months of expenses in savings

Once you complete the first two baby steps, you will have built serious momentum. But don’t start throwing all your “extra” money into investments quite yet. It’s time to build your full emergency fund.

It is recommended that your full emergency fund be saved in a high-interest (i.e. not your local back), easy-to-access (i.e. not a CD or bond) savings account.  Personally, we use and highly recommended an online “Orange Savings” account with ING Direct.  It is very easy-to-use, highly secure, FDIC insured and held by a company with a CEO that shares beliefs similar to Dave Ramsey (and myself). 

If you sign up via my referral to ING Direct and deposit more than $250, you’ll even receive a $25 bonus! Please note I receive a $10 bonus for referring you to ING Direct.  If you’re ready to sign up, just contact me using the Contact form or leave a comment and I’ll send you a referral code so you can get your $25 bonus!

Baby Step 4: Invest 15% of household income into Roth IRAs and pre-tax retirement

When you reach this step, you’ll have no payments—except the house—and a fully funded emergency fund. Now it’s time to get serious about building wealth.

Baby Step 5: College funding for children

By this point, you should have already started Baby Step 4—investing 15% of your income—before saving for college. Whether you are saving for you or your child to go to college, you need to start now.

Baby Step 6: Pay off home early

Now it’s time to begin throwing all of your extra money toward the mortgage. You are getting closer to realizing the dream of a life with no house payments.

Baby Step 7: Build wealth and give!

It’s time to build wealth and give like never before. Leave an inheritance for future generations, and bless others now with your excess. It’s really the only way to live!

There you have it…a simple, but not easy, road map to family financial freedom!  Obviously, there are a lot of details to be learned as you go through the process, and I hope to shed light on those as I continue to add posts related to personal finance.

I have been a member at Dave Ramsey’s membership site since 2003, so I interact frequently with like-minded folks and see/answer a lot of financial questions on a regular basis.  I also encourage you to check out another quality site devoted to teaching these principles at Enemy of Debt.

Of course, the most straightforward way to learn additional information is to read one of Dave Ramsey’s bestselling books.  His first book Financial Peace Revisited provides the background and answers “why” his plan is what it is.  His latest book The Total Money Makeover: A Proven Plan for Financial Fitness provides a clear plan for “what” to do along with many inspiring stories of families that have used these principles to achieve financial freedom.

Our family is currently doing Baby Steps 4-6, which are concurrent steps as long as you need to save for retirement, save for college, and pay down your home mortgage (provided you have decided to own a house).  If you already know about Dave Ramsey, please leave a comment to let us know how you found this message and state where your family currently is in the Baby Steps.

Here’s to long-term Financial Freedom for your family!

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Comments

  1. Can step one and step three be put in one account? Can you tell me more about ING Direct? Is it only online?
    .-= The Northerner´s last blog ..Cheap Finds =-.

  2. Hey there “The Northerner”! To clarify, once you get to step three, you are really only dealing with one “fully funded” emergency fund. Let’s say your 3-6 months of expenses totaled $20,000. After baby step two, you would need to save up an additional $19,000 (to go with the $1,000 you already had as a beginner emergency fund in step one) to complete baby step three.

    Now, where you put your emergency fund is a good question. I recommend (as does Dave) that you put a small portion of it in your local bank or credit union so it is VERY easy to get to. You could even keep some of it in cash at home for super-liquidity. For us, we keep $2,000 at our local, brick-and-mortar bank and the rest at ING Direct. When you withdraw money from ING Direct, it is electronically deposited into your local bank account and that can sometimes take a few days.

    ING Direct is only an online institution. They do have not physical branches, and that low-overhead approach to their business is how they afford to offer higher-than-average savings rates to their customers. They are fully FDIC insured, however, so that peace of mind is there.

    Any other questions?

  3. Amanda (Garibay Soup) says:

    This is right up my ally in the things I’ve been interested in reading about. Right now I’m reading The Power of Focus. LOVING IT! I’m adding this to my list.
    .-= Amanda (Garibay Soup)´s last blog ..Just a Motivating Monday – Blueprint Your Days =-.

  4. Good stuff Dustin, I enjoy your work!

    Dave
    .-= Do You Dave Ramsey?´s last blog ..Too Smart For Their Own Good =-.

  5. Thanks, Amanda! I read both Financial Peace and Total Money Makeover in only a few nights. They are great reads…then again I am a nerd. :)

  6. Thank you, Dave. The feeling is certainly mutual!

  7. vicky johnson says:

    lovely please send me more info thanks

  8. Vicky,

    Thanks for stopping by! Did you have a specific question about the Dave Ramsey plan or family financial issues? I’d love to help you out, but it’s a big topic!

  9. Vicky, thank you for contacting me directly. First of all, I have to say it’s very cool to hear from someone from South Africa and someone with a lot of great life experience at that. As you’ve probably noticed, my primary strength is in the marriage arena, and I like write about how financial strength is vital in that regard. However, I don’t hold myself up to be a financial adviser or expert that can responsibly answer specific retirement questions.

    My advice would be to speak with a Dave Ramsey-like adviser in the UK or SA to get some solid advice for the important decisions you have coming up. As Dave would say, be sure you are dealing with someone that has the heart of a teacher and don’t make any decisions that you don’t fully understand.

    Thanks again for reading, commenting and contacting me. You made my day, and I thought I would put a copy of my thoughts here in the comments section.

  10. vicky johnson says:

    thanks dustin…

  11. Just stumbled upon your site off of a Facebook post you left on Dave’s page. I hit my financial ROCK BOTTOM a little over 5 years ago. Since then, I have paid off over $65k in debt, have a paid for truck and motorcycle and have been blessed with an amazing fiancée who is in complete financial agreement with me. We are excited for our March 2010 wedding (which we’re paying for in cash) and what lies ahead.

    Dave Ramsey’s Baby Steps are the ONLY way to financial freeeeeeeeedom!

  12. Troy,

    I’m glad you found Engaged Marriage! I love to hear from fellow Dave fans, and we all have such varied and motivating financial stories to share.

    Congratulations on your engagement! I hope you find some information here that you’ll find useful in the marriage preparation process and in your new marriage next year.

  13. Hey Dustin, yet another great post, which many should find useful. How honest of you to put the disclosure. I’m sure people just trust you more for it, so well done.

    I’d say that people from outside the USA should consider the above carefully. In Australia, for instance, property is a great investment and retirement (superannuation) funds have had issues. I guess that if you’ve cleared your debt and managed to put money aside, finding a good local advisor might be a good idea before making serious investments.
    .-= Family Matters´s last blog ..Handy Family Tips (2): Pre-Marinating =-.

    • Thanks @FamilyMatters! You make a good point in that my experiences in finances are definitely limited to the United States. Thanks for that clarification!

  14. Good article, I am a Dave Ramsey fan also and (maybe not) co-incidentally using ING Direct for my savings. I too can recommend their service. In addition to their savings account I have their electric orange checking account with bill pay service. Currently the checking account pays a better interest rate (as they try and promote the account).

    I don’t agree with Dave 100%, he is against owning credit cards. Used with discipline they can further the frugal lifestyle. Like 5% cash back on gas (Discover) and 1-2% on all purchases (Capital One). Just having had to buy a new heat/AC unit, I will charge it, pay it off on the first bill, and at the same time get a $60 cash back bonus. Of course we never carry a balance, that’s where the discipline comes in (and why you need that emergency fund).

    Another area I diverge from Dave’s advice is that during these economic times, I keep considerably more than 6 months expenses as our emergency fund. Job searches can easily extend past 6 months these days. This may seem impossible, but it can be done. We have now got to step 7, so it makes most things easier to do :-)

    JP
    .-= JP White´s last blog ..My Top Ten Droid Applications =-.

  15. We’re on Baby Step 2, so we’re just starting out. We have about $30,000 in debt but no kids or house. I know our goal is attainable, but it’ll be probably two years before we are out of it. So that’s where we are. :o)

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