Dave Ramsey’s Baby Steps Are Outdated!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

Find out why Dave Ramsey's baby steps are outdated!

It’s true, Dave Ramsey may be the king of the Baby Steps and the Debt Snowball, but his outdated techniques are a disservice to those trying to get out of debt. Dave Ramsey’s baby steps have remained unchanged for more than 25 years. Does the financial advice from the early 90s still apply today?

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 become debt-free and 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he created in 1992 are not as applicable today as they once were, yet he continues to profit from them and push his outdated advice onto people.

Dave Ramsey’s Net Worth

dave ramsey's net worth

Dave preaches financial freedom and to avoid taking advice from broke people. This makes sense, and it bodes well if you look at his net worth. Dave Ramsey is obviously doing something right.

An updated statistic from 2019 estimates Dave Ramsey and his wife Sharon have a current estimated net worth of 200 million dollars!

It seems helping people get out of debt is also a lucrative business strategy. Don’t get me wrong; I see nothing wrong with how much money he is worth. He works hard for his money, but he uses 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 a one size fits all for personal finance. While his way may work for some, it may not be appropriate for others.

Ramsey Solutions

It seems Dave is starting to realize he is getting older and has become the main face of his business. With this model, when he decides to retire, he runs the risk of his business exiting with him. Due to this, he struggles to transition his voice from “Dave Ramsey” to “Ramsey Solutions.”

With his daughter Rachel Cruz at the helm of Ramsey Solutions, the business may slowly start to morph into a more relevant financial services company. Another problem Dave is running into is his struggle to connect with the younger generation.

He has criticized the FIRE Movement and the idea of early retirement and financial independence and is unwilling to change his money mindset from old times.

One of the more successful strategies from Ramsey Solutions was the implementation of the EveryDollar app. To reach a more tech-savvy generation, this has been a successful venture that also cost him a significant amount of money to develop.

Ramsey Solutions is also expanding into multiple digital platforms. Even though Dave blocked me from his twitter account because I wrote this article, he remains active on social media, including Instagram. As a dynamic radio host, the Dave Ramsey show has been turned into a podcast as he answers questions as a financial expert. 

The Dave Ramsey Baby Steps Plan

Dave Ramsey created a simple 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 changed in his overall methods despite the increase in median household income and other personal finance changes.

While the old way of doing things may still be efficient and effective, gross household income has increased over the years which impacts the need for larger fully-funded emergency funds.

Dave Ramsey’s debt-free plan consists of his seven 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, let’s take a look at his Baby Steps to see where you may run into some issues.

The Cost Of Financial Peace University

Currently, it will cost you $129.99 a year for the Financial Peace University subscription. Ramsey Solutions will also throw in the EveryDollar budgeting app subscription, valued at $99 a year.

What Are Dave Ramsey’s Baby Steps?

dave ramsey 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 Step System

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.

dave ramsey baby steps infographic

Baby Step 1: $1,000 Emergency Fund

Dave Ramsey advises 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. For instance, two months ago, the check engine light came on in my SUV, and I took it to a local shop. The problem was an issue only the dealer could fix, 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 $1,200 to my total debt and took on unnecessary debt.

free budget printable

Dave Forgot About Inflation

When Dave created his Baby Step 1 in the early ’90s, $1,000 was sufficient for a starter emergency fund. However, more than 25 years later, if you factor in inflation, $1,000 has much less buying power.

Realistically, in 2020 you would need an emergency savings of $1,820.13 to have the same protection and buying power as Dave recommended in 1992. 

Updating Dave Ramsey’s Baby Step 1:

I completely agree that you need an emergency savings fund before you start paying off debt. Without money in the bank to act as a safety net, you’re asking for trouble.

You are your most significant defense against unplanned financial expenses.

To make Dave’s Baby Step 1 more relevant today, I would advise your emergency fund to be funded at least $1,500. However, most people should strive for an emergency savings fund of $2,000 to account for unexpected expenses and major financial emergencies. 

An additional update is to put your emergency fund in a money market account so it is still accessible to you but is earning money as well.

Baby Step 2: The Debt Snowball Method

debt snowball method

For the second step, Dave recommends using the Debt Snowball method, which consists of making minimum payments on all of your debts except the debt you are paying off first. He recommends using all of your extra money to attack the smallest debt with the lowest balance first. 

After the debt with the smallest balance is paid off, you move on to the next lowest balance and so on. 

While this is a good starting point, this debt payoff method is only focused on people’s psychology and motivation. This method is perfect for people who like to see immediate results and quick wins. However, for detail-oriented people, this method will drive them crazy.

Ignoring the highest interest rates will cause you to pay 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.

A friend of mine, Ben Tejes, recently developed an app that looks at the most effective and quickest way to pay off debt. Not surprisingly, the debt snowball was the most inefficient way.

“When we created the Savvy Debt Payoff Planner app, we compared how much our planner would save folks, and it was astounding to see that the Debt Avalanche and our Debt Savvy method (which combines the two but relies more on Avalanche) saves on average over $2,000 compared to Debt Snowball method. The big banks must love the Debt Snowball method.”, stated Ben Tejes, Co-Founder and CEO of Ascend Finance.

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. Ignoring high-interest debt while chasing smaller financial goals can significantly delay your debt freedom date.

I understand the psychology of this – people often lose motivation if they don’t see progress. The best method to get out of debt is a personal decision. For people like me who are determined and unlikely to quit, paying off the highest interest rate first ( Debt Avalanche ) makes more sense.

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 it is the smaller debt.

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 the student loan first?

The high-interest card will continue 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 smallest balance.

It all comes down to knowing what motivates you and your personal preferences. If you lose motivation quickly and have a problem finishing tasks, the debt snowball may be perfect for you.

However, if you are detail-oriented and not easily distracted, paying off the highest interest rate first, known as the Debt Avalanche method, 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 significant differences between the Debt Snowball and the Debt Avalanche.

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

3-6 months of savings in cash

Dave’s third step states 3-6 months of living expenses should be saved after your debt is paid off. These extra funds are for a worst-case scenario, such as 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 three months? With my current income level, I would not feel confident I would replace it in only three short months.

Updating Dave Ramsey’s Baby Step 3:

Giving yourself only three 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 six months, those extra three months will put you deep in debt.

While he does recommend 3-6 months of expenses, he really should be more firm on six months of living expenses for a nice buffer. Realistically, by the time you reach this point, you will be debt-free except for your house, so saving up six 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

baby step 4, investing

This is where Dave recommends you start saving for retirement at a rate of 15%. He fundamentally disagrees with any retirement investing 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 full employer match before you start paying off debt.


If you pay the match – that is a 100% return on your investment, which will grow with compound interest. Immediately taking advantage of an employer match makes much more mathematical sense and should be your first step.

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 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 fund. Money doesn’t stretch as far as it did in the 1990s (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 an extra 3-5% to have a healthy and secure retirement based on financial stability.

Baby Step 5: College Funding For Children

college funding for children

Dave recommends investing in a college savings plan (i.e., Education Savings Account/ESA or 529 plan) for your children.

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 we paid off our home in only five years.

My oldest is seven years away from college, so we will have two options when the time comes.

We should be able to cash flow college expenses without needing a personal loan, 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 was in college – and I think I turned out pretty good.

Baby Step 6: Pay Off Your Home Early

baby step 6, pay off home early

Dave recommends paying off your mortgage as soon as you are debt-free and fully investing for retirement.

Updating Dave Ramsey’s Baby Step 6:

While Dave recommends paying for your home in cash and avoiding a mortgage altogether, realistically most Americans will never be able to achieve this feat on the front end. He advises getting a conventional 15-year loan if you must take out a mortgage.

I recently read this article in Money Magazine where they analyzed 16,000 data points to find the best mortgages available to borrowers.

As far as an update to Dave’s Baby Step 6 – No update is needed! I completely agree with Dave on this one. Yes, mathematically, it may make more sense to invest that extra cash 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 mortgage debt what so ever (financial independence), 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. Without a monthly house payment or home mortgage, you will have the financial peace and security to tackle just about any monetary issue life throws at you.

The financial freedom with a paid in full mortgage is a peace I never knew existed.

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.

Updating Dave Ramsey’s Baby Step 7:

Dave repeatedly tells people to invest in good growth stock mutual funds, and you will receive a 12% return on your money. To this day, I still have no idea where he comes up with these numbers. Historically, the stock market has provided a return of 7.9% in the S&P 500. 

Actively managed mutual funds are notorious for having hidden and high management fees. In theory, if Dave were getting an annual return of 12% (which is doubtful), he would be paying at least 1-2% in fees, which would lower his return to 10%. Dave also does not disclose which actively managed mutual funds he invests in that provide high returns of 12%.

This investment advice can leave people with a false sense of security and disappointment when they realize they can’t achieve 12% returns year after year.

Dave Ramsey’s investment advice is by far one of his most controversial positions, which he refuses to address. Perhaps it’s because he pushes his Smart Vestor Pro program which pays him a commission.

By touting the Smart Vestor Pro program as a way to connect with a reputable investment pro, Dave charges investment advisors a fee to be part of his program. In a similar fashion, my wife and I also met with one of his Endorsed Local Providers and did not have a good experience.

Wrapping It All Up

wrapping up dave ramsey's baby steps

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 financial journey, keep pushing forward even as obstacles come your way. You can get through all the steps if you refuse to quit. Your financial future depends on it.

Keep the goal of a financially secure life at the forefront of your mind. You can do it!! You work too hard to be this broke!