Dave Ramsey’s Baby Steps Are Outdated! [Find out why!]

Find out why Dave Ramsey's baby steps are outdated!

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It’s true… Dave Ramsey may be the king of the Baby Steps and the Debt Snowball, but his outdated techniques are a disservice to those trying to get out of debt.

Full disclosure – I love Dave Ramsey. He is that brash uncle who doesn’t pull punches and tells you like it is. He started a great movement for people to be debt free and to stop living in chains indebted to the banking industry. Unfortunately – the same steps he created in 1992 are not as applicable today as they once were, yet he continues to profit from and promote them.

what is the Dave Ramsey method?
Here’s hoping I don’t get sued by Dave Ramsey….

Dave Ramsey’s Net Worth

Dave Ramsey is obviously doing something right. According to Investopedia, Dave Ramsey and his wife Sharon have a current estimated net worth of $55 million dollars!
That’s a lot of money to make while helping people get out of debt. Don’t get me wrong, I have nothing wrong with how much money he is worth. He works hard for his money but he continues to use an archaic system to help people get out of debt.
One of the key issues with Dave Ramsey is his inability to recognize that personal finance is personal. There is not one size fits all for personal finance and while his way may work for some, it may not be appropriate for others.

The Dave Ramsey Plan

Dave Ramsey created a plan to help people get out of debt. He developed this plan in the 1990s’ and is still touting this as the best way to become debt free. Little has changes in his overall methods despite an increase in income and other personal finance changes.
Dave Ramsey’s debt free plan His plan consists of his 7 baby steps (sometimes referred to as the Total Money Makeover Steps) and the debt snowball method. 
In addition, his plan also focuses on purchasing the materials for his Financial Peace University. The Financial Peace University is a 13 week plan designed to connect you with other community members as you all tackle your personal finance issues together.
As we look at why Dave Ramsey’s plan is outdated, lets take a look at his Baby Steps to see where you may run into some issues.

What Are Dave Ramsey’s Baby Steps?

  • Baby Step 1 – $1,000 to start an Emergency Fund
  • Baby Step 2 – Pay off all debt using the Debt Snowball
  • Baby Step 3 – 3 to 6 months of expenses in savings
  • Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
  • Baby Step 5 – College funding for children
  • Baby Step 6 – Pay off home early
  • Baby Step 7 – Build wealth and give

Taking A Closer Look At Dave’s 7 Baby Steps

Before blindly following financial advice, we should always ask “why?” While Dave Ramsey himself has been extremely successful, there is a large amount of controversy surrounding his systematic methods.
Again, Dave’s plan has helped many people get out of debt, but it is certainly not the end all be all for everyone. For some it was the exact method they needed to take control of their finances. For others, Dave just seems to rub them the wrong way.

Baby Step 1: $1,000 Emergency Fund

Dave Ramsey advises that the first step to get out of debt should be the start of a $1,000 Emergency Fund. In today’s dollars, $1,000 does not cover many emergencies. 2 months ago, the check engine light came on in my SUV and I took it to a local shop. The problem was a dealer specific specialized issue which ended up costing me $2,200.
If I started with only $1,000 in my savings before moving on to my debt snowball, I would have added an additional $1,200 to my total debt and been right back in the hole.
free budget printable

Updating Dave Ramsey’s Baby Step 1:

I completely agree that you need an emergency fund before you start paying off debt. Without money in the bank to act as a safety net, you’re just asking for trouble. You are your biggest defense against unplanned financial expenses.
To make Dave’s Baby Step 1 more relevant for today, I would advise that your emergency fund be funded at least $1,500, but a much better amount would be $2,000.
For advice on how to actually start saving money even if you’re living paycheck to paycheck,  check out my article on budgets here.

Baby Step 2: The Debt Snowball Method

For the second step, Dave recommends using the Debt Snowball method which consists paying off the lowest balance first and moving on down the line to the highest balance debt.
Unfortunately this debt payoff method is only focused on the psychology and motivation of people. This method is perfect for people who like to see immediate results and small wins. However, for detail oriented people, this method will drive them crazy.
Ignoring the highest interest rates will cause you to end up paying more money in interest in the overall debt repayment plan. Dave Ramsey strictly looks at outstanding debt totals rather than the amount of interest you pay each month.

Introducing The Debt Avalanche Method

By ignoring interest rates, other balances can quickly climb while you attack a smaller debt with a small interest rate.
To be fair, I totally understand the psychology of this – people often lose motivation if they don’t see progress. For people like me who are determined and unlikely to quit, paying off the highest interest rate first (Debt Avalanche) makes more sense for me.
For instance, if I have $22,000 in credit card debt and $18,000 in student loan debt, Dave recommends paying the student loans first because that is the lower amount.
If the average interest rate on student loan debt is 5.05% – 6.6%, and the average credit card interest rate is 16.71%, why on earth would I spend any amount of time paying off that lower interest student loan? That credit card continues to rack up more and more debt at a rate of 16.71%!

Updating Dave Ramsey’s Baby Step 2:

I recommend picking the right debt payoff method that will work for you – but I would strongly recommend paying off the highest interest rate first rather than the lowest balance.
It all comes down to knowing what motivates you and your own personal preferences. If you lose motivation easily and have a problem with quitting, the debt snowball may be perfect for you.
However, if you are detail oriented and are not easily distracted, paying off the highest interest rate first, known as the Debt Avalanche, may be better for you and you will end up saving yourself money in the end.
Check out my related article where I detail the major differences between the Debt Snowball and the Debt Avalanche.
3 - 6 months of living expenses in cash

Baby Step 3: 3 – 6 Months Of Living Expenses In Cash

Dave’s the third step states 3-6 months of living expenses should be saved after your debt is paid off. This is for a worst case scenario of you losing your job and needing to live off these funds until you find employment.
Do you feel comfortable you will be able to replace your income in 3 months? With my current income level, I would not feel confident I would be able to replace it in only 3 short months.

Updating Dave Ramsey’s Baby Step 3:

Giving yourself only 3 months to find a job that will get you back on your feet may be a bit too close for comfort. In the event it takes you 6 months, those extra 3 months will put you deep in debt.
While he does recommend 3-6 months of expenses, he really should be more firm on the 6 months of living expenses number. Realistically, by the time you reach this point you will be debt free except for your house so saving up 6 months of living expenses should not take you very long at all!

Baby Step 4: Invest 15% Of Household Income Into Roth IRAs And Pre-Tax Retirement

This is where Dave recommends you start saving for retirement at a rate of 15%. He fundamentally disagrees with investing anything until you have all your debt paid off and your savings built up. I understand the thought process behind this, but you may be giving up a 100% return on your money.

Updating Dave Ramsey’s Baby Step 4:

How can you get a 100% return on your money? If your employer matches 3% or more (which is common) in a pre-tax retirement account, I recommend you contribute the match limit before you start paying off debt. Why? If you pay the match – that is a 100% return on your investment that will grow with compound interest.
Immediately taking advantage of an employer match makes much more mathematical sense and that should be your first step.
Also, with the increase in inflation and wages not keeping up as they once would, Dave’s advice to put 15% into retirement may not be enough.
While 15% is a good number to shoot for, do you really want to take a chance with your golden years? A more realistic number to live comfortably in retirement is 18%-20% of your income into your retirement. Money doesn’t stretch as far as it did in the 1990’s (the birth of Dave’s Baby Steps) and 15% may not be enough to live off of for the rest of your life.
Make the sacrifice of that extra 3-5% in order to have a healthy and secure retirement.
fund your kids college

Baby Step 5: College Funding For Children

Dave recommends investing in a college fund (529 or ESA) for your children.

Arrest Your Debt's Pro Tip:

Track your investments for free with Personal Capital. It's how I track my pension and retirement funds.

Updating Dave Ramsey’s Baby Step 5:

I recommend doing what works for you. Honestly, my wife and I are not saving for my children’s college at this point. We have no debt and are 2 years from having our house paid off. My oldest is 8 years away from college, so when the time comes we will have 2 options.
We should be able to cash flow college without going into debt and my children will also be working when they are in college. If we can’t pay for all of it on our own, our children can help fund their college education. It’s about teaching them responsibility. Also, I find kids value things more when they actually have to pay for it.
Before you call Child Protective Services on me, I can tell you that I worked when I went to college – and I think I turned out pretty good.

Baby Step 6: Pay Off Your Home Early

Pay your house off early.

Updating Dave Ramsey’s Baby Step 6:

No update needed! I completely agree with Dave on this one. Yes, mathematically it may make more sense to invest that money rather than pay the house off early. But just think about this. You’re already investing 18% of your income – what is more important to you? A paid off house and no debt what so ever, or making 8% extra on that money and paying a mortgage for another 15+ years?
Mathematically it makes more sense to invest – but life doesn’t always work out mathematically. Having no debt gives you peace and security to tackle just about any financial issue life throws at you.
pay off your mortgage early

Baby Step 7: Build Wealth And Give

Build wealth and give. I also do not have an issue with this Baby Step – except for Dave Ramsey’s investment advice. I won’t get into it on this post but there are much better investment vehicles to put your money in than those recommended by Dave Ramsey.

Wrapping It All Up

All in all, I agree with much of what Dave Ramsey preaches. He has the heart of a teacher – unfortunately his material is getting a bit dated. In my Debt Payoff Playbook, I have a similar yet updated set of phases to help you become financially secure:

  •  Step 1: Build a budget (Get your free budget printables here!)
  • Step 2: Save $1,500 – $2,000 for emergencies
  • Step 3: Attack your debt (using the Avalanche method)
  • Step 4: Cash reserves for 6 months
  • Step 5: 18-20% of your income into retirement
  • Step 6: Save/Invest for future specific plans – not necessarily college
  • Step 7: Get rid of that mortgage
  • Step 8: Invest for success

As you start this journey, keep your head up – there are many obstacles that will come your way. You can get through all the steps if you refuse to quit. Keep the goal of a financially secure life in the forefront of your mind. You can do it!! You work too hard to be this broke!

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About The Author

Ryan Luke is a father of three, a husband, finance blogger, and a full-time police officer. Through proper budgeting and money management, they have been able to live off one income and build wealth at the same time. As an active member of the personal finance community, his goal is to educate and help people get out of debt and build wealth!

21 thoughts on “Dave Ramsey’s Baby Steps Are Outdated! [Find out why!]”

  1. simplefinancelessons

    Very well put! I think Dave Ramsey’s steps are somewhat oversimplified for those who do not necessarily understand the ins and outs of personal finance. I like the improvements you’ve suggested here!

    1. Thank you! I started out my journey years ago with Dave but I’m a little disappointed he hasnt adapted his strategies as the years have gone by. I’m also not a fan of his investment principles but overall, he started me on this journey so I owe him that.

  2. This post is brilliant Ryan. I loved Dave Ramsey and his honesty in his books. Sadly you are correct on so many of these things being outdated. Times have changed a lot since then and his thinking needs to also.

  3. This is a good post, but I don’t agree with some of the bold claims made against Dave’s baby steps. Primarily because the changes you offer are not logical for all financial situations (whereas Dave’s plan is more universal). Now I don’t follow the steps exactly myself, for example, my emergency fund is being built up as I go and I’m saving to start a business). I am doing the smallest to largest as Dave suggests because I believe that the motivation improves with getting things off the list, but here’s an example of why I disagree with the interest concept you suggest. My debt was in order, invisible braces (0% for a year), car (2.3%), student loans (5.5%). By your method, I should have started with my student loan first; however, those are more than $140,000. That would likely get discouraging quick given that I’m new to understanding the workings of personal finance. Plus I’d have a car payment and a bill for the braces that hinder my ability to pay off the student loans effectively. By doing it Dave’s way, I have paid off the braces ($1300) and will have my car paid off in January (Which had a $9800) balance when I started my debt free journey in August. That’s over $11,000 being paid off in ~5-6months. Then all I’ll have to focus on is my student loans. I’ll stop now, there’s no shade because you make a lot of good points (ex. having a bigger emergency fund); however, I didn’t think it’s fair to attack a plan that has helped so many without giving a little resistance.

    1. Thank you for your rebuttal Johnzelle! In my post I talk about the motivation and psychological factors that can influence a debt payoff. I very much understand Dave’s Debt Snowball method when it comes to psychology, but as far as math and interest goes, it isnt the quickest way. With that being said, if someone quits because they lose motivation, the mathematical approach doesnt make sense.
      In my article I recommend taking the approach that better matches your psychological makeup and I’m so glad you found the plan that works for you and your success!
      For me personally, watching that student loan grow at 5.5% unchecked would drive me batty. Thanks for the thoughtful and personal response!!

      1. The 5.5% loans on minimum payments is quite daunting. I played with some repayment calculators today and if I did my current minimum payment for the next 28 years, I’d end up paying over double by the time I was eligible for “forgiveness” PLUS the balloon payment. I’m excited that my smaller debts are almost out of the way (did I just call a car a small debt!?) and I’m actually excited to show my consolidated student loan who’s boss!

  4. As a mathematician, I do agree that the Math does not favor Dave Ramsey steps. Also, his steps cater mostly to the middle class. 5% is where i draw the arbitrary line of bad debt and good debt. The emotional component is the common excuse. This is one of the reasons to separate emotions from finance in general. I wrote 12 toddler steps as a rebuttal. Here are the steps below
    Pay all credit cards
    Have the minimum required emergency fund >/= 1000 dollars.
    Refinance your loans
    Pay off any loan with interest rate >5%
    Utilize your employer 401 k up to the match and if you have money left, then Invest in Roth IRA.
    Now pay off the rest of your debts
    Maximize your retirement savings
    Boost up your emergency savings to 3-6 months of living expenses
    Invest in your children’s future education
    Build wealth – Save 1/3 of your income or at least strive to. Go a little wild, diversify.
    Give – at any stage above too if able to
    Optional pay off mortgage
    There is a great debate on whether mortgage should be consider debts also and to pay off your mortgage early, i fall on the former. There are more use for that money in investments. Here is a link to my full post if you want to tear it apart. https://drbreatheeasyfinance.com/12-toddler-steps-to-financial-freedom/

  5. I’m a Dave Ramsey fan so I was ready to disagree with you. But, I totally agree with you on step 1. I have a rental property so I felt more comfortable with a 10k emergency fund. Also agree forgoing the employee match is leaving income on the table. That was a fun read… thanks!

  6. Good thoughts. I’m sure a lot of people have benefited from Dave Ramsey but to me it’s kind of like AA for debt addiction. Super valuable if you can’t control drinking but if I’m a two glasses of wine a week with dinner person, do I have to the AA route and quit drinking? I’m 58 and in good financial shape Ive never been in major debt in my life except for my house which is now paid off. Yes, I use a credit card. Several in fact. We always pay them off each month and I earn $500 -800 a year in points and cashbak and pay absolutely no interest or card fees. Is this a good idea if you have a problem with spending? Probably not. Debt snowballs don’t mean much to us because we have seldom had multiple long term debts. We’ve paid cash for the last few cars we’ve owned. We have nice sized retirement fund and have done pretty well in the stock market for the last several years. We are frugal and live within our means and sometimes have been just plain lucky. We run our own business and just work a bit more for a while and save up when we want something. But if I saw a tremendous bargain on something I was saving for, I might go ahead and finance it for a few months while I finished saving. I don’t think debt is a terrible thing if you aren’t a debt addict. Sometimes it’s a necessary evil but you think before getting in and get out as soon as you can.

    1. Jayne, thank you for this feedback! I very much agree with you. We also use credit cards because we have trained ourselves how to avoid overspending. Unfortunately, not many people share your and my willpower in the credit card department.
      It sounds like you have been amazing with your money and retirement planning! Keep up the great work, you are an inspiration to others!

    1. Anne, the steps are the same. If you can work another 10 years, you certainly can get out of debt and start building enough wealth to live comfortably the rest of your life. You just need to start today 🙂 Please email me at ryan@arrestyourdebt.com if you need help my friend. It’s not too late!

  7. Hello and thank you for making sense! I am wondering if anybody else is like me and does not have a mortgage to begin with. These steps you’ve outlined are certainly an improvement from Ramsey’s but I wonder if you could comment on the pros and cons of big mortgages in big cities – should young people even get them? Step 7 implies I’ve been paying one all along, but many people aren’t even able to get in the race these days. Myself included. I live in a city where the housing market is very high. Where does saving to obtain a mortgage fit into these plans? Is a mortgage a prequalifier?

    1. Thank you for this question Karen! I wrote an article early on about renting and if it’s a waste of money but I should definitely update it! Also, I think the best time to save up for a downpayment would be once you are out of debt and ready to save for specific things. The part where Dave says save for college would be a good time to save for a down payment.
      Thanks for your comment and I’ll work on a related article!!

  8. Hi Ryan!
    Wonderful post! I could never quite put my finger on why Mr. Ramsey’s advice never jived with me…but you put it quite well. Particularly in the beginning, about personal finance being personal. What works for me doesn’t necessarily for you. Regarding your above comment to Karen (May 2019): I have been told at many times in my life, now and decades ago, that renting is wasting your money, never rent, always buy, etc. But honestly, I disagree. Having a place to live is not wasting money! No, it’s not a financial or market-valued item that I have in my portfolio but I gotta live somewhere! My family is military, so we have to move rather constantly. There’s plenty of us that do buy, but I just can’t deal with all the headaches that come with it, particularly if it’s rented out. For me and my family, renting not only gives us the invaluable place to live, but also takes away a lot of stress that we’re not in a place to deal with. Maybe in some time, perhaps, but not right now. And that’s ok! That’s where the personal side of personal finance comes in. It doesn’t make math sense to rent forever but for some people it does.
    Thank you for this insightful post and I’ll be checking out the rest of your posts!

    1. Thank you for the thoughtful comment Melinda! Dave Ramsey has helped a ton of people but personal finance is not always one size fits all.
      P.S., thank you for your families military service!

  9. Ryan, I like this article. It has some good points. Ramsey Solutions is evolving as they now have a 9 week FPU Class that incorporates Every Dollar app to use with the program. Being that my spouse and I went through FPU and are currently on the baby steps, I believe it’s important to know that it is a guideline to help people get out of debt. Because everyone has their own personal finance journey, they can choose to work the plan with what is best for their family. Not everyone will do everything just as laid out in the 7 baby steps, but there is proof that the plan works as noted in the thousands of “debt free” screams we hear on the Dave Ramsey Show.

    1. Hey Chrissy, it’s great to hear that Ramsey Solutions is evolving. In the past, Dave has touted that if you don’t do it his way, you’re not doing it the right way. I’m glad they are starting to realize that personal finance is personal and there are many paths to the finish line. Thanks for the feedback!

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