Dave Ramsey Baby Steps Defined

tmmo.jpgIt seems a bit like a rite of passage for every personal finance writer to share their opinion of Dave Ramsey. That alone speaks volumes about Ramsey’s reach in the personal finance sector, but not all of the reviews have been glowing.

I personally consider his book, The Total Money Makeover, one of my all-time top three favorite personal finance reads. The book is not overly technical, and is written with an inspirational, “can-do” tone. It is hard to argue with his success in motivating people to finally pay attention to their finances.

Is it time for Ramsey to Update His Plan?

Just last week Jennifer wrote about her issues with Dave Ramsey’s plan in, Falling Off the Dave Ramsey Diet. I have my own issues with some of the numbers, but basically agree with the concept of following “baby steps” towards financial freedom. Here is a look at the original baby steps, as they appear on Dave Ramsey’s website:

What Are the Dave Ramsey Baby Steps?

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

It’s hard to argue with the simplicity of Dave Ramsey’s approach, however I have found by tweaking a few of the baby steps, and rearranging them slightly, the plan has worked well for our family. We tried the original baby steps as written several times, but struggled to reach beyond baby step 2. It didn’t take much of an emergency for us to blow through the $1,000 baby emergency fund, and large emergencies still required us to use credit cards to cover. We would restart our savings plan from $0, and kicked ourselves for turning to credit cards again. This also made us hesitant to get rid of credit cards entirely because it was our only safety net against a complete financial meltdown. Here is a look at the approach my family has taken.

The Baby Steps, “Frugal Dad” Style

1. Cut up all but one credit card. This card should have the highest limit, and lowest interest rate, and should only be used for genuine emergencies. The older the card the better, as keeping your oldest trade line active will improve your FICO score. I recommend removing if from your wallet and stashing it in a sock drawer at home. Do carry the card with you on vacations or extended trips, but again, only use it in an emergency.

2. Six months of expenses in an emergency fund. As I mentioned above, $1,000 just didn’t provide enough safety net for our family. A dead transmission, busted hot water heater, or serious medical emergency could easily wipe out your entire emergency savings, forcing you to turn to credit cards to keep your head above water. This is counterproductive. Instead, we are working to save a full six months of expenses in an emergency fund. Three months may be enough for some families, but since we live on just one income we have little to fall back on. A shaky job market, or general angst over the broader economy may influence the amount you decide to save.

3. Cut up the last (emergency) credit card. With six months of savings in place you are “self-insured” against emergencies and can cut up your last credit card. If you have a credit card with a $10,000 limit, but now have $10,000 in savings, you have essentially replaced the need for an emergency credit card by building your own personal line of credit.

4. Implement the debt snowball. For this step, we follow Dave Ramsey’s plan as written. Pay off debts smallest to largest, regardless of the interest rate. Some will argue this is bad math – higher interest rate cards should go first. Well, we’ve already experienced the momentum Dave Ramsey writes about by paying off several small debts, quickly. These quick wins motivate us to keep going. If you prefer to pay off high-interest cards first, do it. It’s really not worth getting heartburn over. The point is to get busy getting out of debt, one way or another. Get a part time job, snowflake every single amount you can find, have a yard sale, look for “wasted money” in your budget, and make getting out of debt a top priority. Whatever you do, don’t give up! There will be many obstacles in your path to debt freedom, but clearing each one will make it that much sweeter when you reach the finish line.

4a. Invest in your retirement plan up to an employer match. This step should be happening at the same time you are working baby step 4, so I have labeled it step 4a. If your employer offers a match of 401(k) contributions, invest in the minimum percentage to receive that match. Three or four percent of your income isn’t going to make or break your get-out-of-debt plan, and passing up “free” money from your employer just doesn’t make much sense, financially. You’ll also benefit from the added months of compounding growth.

4b. If your employer doesn’t offer a match, skip the 401(k), open a Roth IRA and contribute 3% of your income. The earnings grow tax free! Many people will say it is impossible to save and get out of debt at the same time. True, you divert some financial resources that could be used to pay down debt, but by getting into the habit of saving you are setting yourself up for a much brighter financial future.

5. Max Roth IRA contributions. Now that you are debt free, use the money you were spending to pay off debts to fully fund Roth IRA contributions for you and your spouse. Check the IRS website for maximum contribution amounts and eligibility information. Again, if your employer offers to match 401(k) contributions, continue making the minimum contribution required to get the match. With any amount above that, fund Roth IRAs.

6. Save for kid’s college. With credit card debt behind you, and retirement savings on track, now is the time to focus on saving for your children’s education. Many people, myself included, feel compelled to move this step up in the process because we care so much about our children’s future. However, unless we want to become a burden to our kids in retirement, it is important to get our own finances in order before concentrating on saving for children. We are currently investing gifts and the occasional “found” money in 529 College Saving Plans for both our kids, and will ramp up these contributions when the previous baby steps are complete.

6a. Save for non-educational expenses for kids. In addition to college savings, we have also invested a small amount in single stocks for our kids, allowing them to help in the selection process and in monitoring the stock’s performance. My son now owns a few shares of McDonalds and my daughter owns shares of Disney. Both were purchased with birthday money from relatives. I don’t think they will ever become rich with their investments, but it has sparked an interest in saving and investing.

7. Pay off the mortgage early. Probably the most controversial of Dave Ramsey’s baby steps, this one causes math geeks to go into hysteria! And this hysteria runs even higher in periods of super-low interest rates. Trying to justify to a financial guru paying off a mortgage early at 5.5% versus investing in the market is like trying to pull teeth from a hippopotamus – it just isn’t going to happen! I generally like the idea because one day I hope to “retire” early, and to do that I’ll need to eliminate as many of my monthly expenses as possible. Without a mortgage, it is quite possible for passive income streams to cover our basic expenses, and we could live off a much-reduced salary or income from freelance jobs.

8. Build non-retirement wealth. The problem with only investing inside retirement accounts is that it is nearly impossible to get to your money before age 60. What if I don’t plan on working until age 60? Short of paying penalties, or turning to a 72t distribution (which is based on life expectancy and is nearly impossible to change or stop), there isn’t much choice other than waiting for the magical retirement age to arrive. When we reach this step I plan to invest money above and beyond retirement savings in low-cost, low-turnover index mutual funds such as the Vanguard Total Stock Market Index fund and the Vanguard International Index Fund. Both offer incredibly low expenses, and with low turnover, do not produce high capital gains taxes at the end of the year. It might also make sense to investigate other types of financial products such as low-cost annuities, or bond funds to hedge against fluctuations in the equities market. These funds may then be tapped early to allow for a comfortable lifestyle between an early retirement and the minimum age to access funds from retirement accounts.

I’ll wrap this up by saying that while I am a fan of Dave Ramsey and other financial advisors, no one should blindly follow advice they read in a book, on a blog, or on television (nope, not even on Frugal Dad!). I’ve shared with you what works for our family, but take time to investigate the different options yourself, and implement the best financial plan for you and yours. The great thing about finances is there is rarely only one way to do something, but opinions abound when it comes to money matters so take each one with a grain of salt.


  1. Great plan, Jason. Dave Ramsey has a lot of great ideas, but as you mentioned, it’s important to find what works best for your situation.

    The only thing I would add in step 3 is if you decide to cut up that last credit card, leave the line of credit open, as it will be good for your credit score to have established credit. This will make it easier to get a mortgage or a car loan at favorable rates.

  2. I’m not in debt, so I don’t follow the Dave Ramsey plan really at all.

    My thoughts on the mortgage thing are that if you invest the money sensibly instead of paying extra on the mortgage, when you want/are able to retire early, you can simply withdraw the remaining mortgage amount from your investments.

    This is what I’m doing and partly because it’s psychologically more fun to see an investment account go up, than a mortgage inch down slowly.

  3. What a fantastic synopsis. Great, GREAT job showing people how to adjust The Dave Ramsey Plan to their own personal financial situation.

    Too many times we DO blindly follow someone because they’re the first one we heard talk about the subject, or we like them, or a friend recommended them. Those are all good reasons, but we still need to be willing to cherry pick the ideas, tips, and techniques that will work in our own personal situations.

    Thanks for the link!


  4. On investing versus early mortgage payments, the idea for me is to invest at a rate better than 5.5% and then when I have enough in there to pay off the mortgage in one swoop, I’ll do that.

    • @Trent: I like your plan! This way you are taking advantage of compounding growth and using it to help you pay off your mortgage.

      @Ramsey Fan: I would generally agree with your comments, but be careful not to intentionally harm your FICO score in the name of anti-FICO rebellion. It could end up costing you more in the form of higher rates for the things you mention (if manual underwriting is not an option). I am indifferent when it comes to FICO – I don’t obsess over the actual number, but I don’t set out to harm it, either.

  5. Why would anyone want to take out a car loan after working so hard to get out of debt?

    Don’t leave the line of credit open, it will just tempt you to borrow. The credit score is only good for getting into more debt (and maybe car insurance rates). But both of those can be done without a credit score.

    Manual underwriting for mortgages, and good old face to face ask the insurance company if you are getting the best rate? If not, why not? If it’s your 0 credit score, but you can show that you pay everything on time and have no prior accidents you should be able to get the best rates.

    Credit scores are what banks want you to think need to be high so you will continue to borrow money from them and pay them interest. Or as Dave says “it’s an I LOVE debt score.”

  6. Thanks for this great common sense post. I know a lot of people just dismiss ramsey out of hand because they don’t agree with one or two of his points, when his whole theory is sound on the whole.

    Tailor it to your needs, stay out of debt, save, give and you’ll be alright!

  7. Great post. I agree, Dave has some great ideas that need to be applied to your situation. I used Dave’s plan years ago to get out of debt, but now that I’m out, I focus on other things.

  8. I’m a Dave Ramsey fan because following his plan has helped me become debt free. I think we should be careful making too many adjustments to the baby steps. After all, Dave has worked with a number of people very successfully over the years. If you just listen to his show on Fridays, you will hear several people that achieved freedom from debt following the baby steps.

    Another danger is that some might see this as license to modify the steps to the point that they are useless or even detrimental to their overall financial well-being. I don’t think Dave would be so successful if his plan didn’t work. I like the idea that if you do what rich people do, then you are more likely to get rich yourself. Dave has a pretty decent net worth that gives him quite a bit of credibility in my eyes.

    Having said this, I don’t believe in blindly following any plan. Everyone should apply commonsense to their situation. For instance, I agree that a $1,000 emergency fund may not be enough for some. However, I still believe that a baby emergency fund of $1,500 to $2,000 is adequate for most people assuming you are going to intensely pursue paying off your debt in 12-18 months.

    I think it is important to recognize the value the baby steps in their original form. They aren’t written in stone, but any change to the plan should be well-founded.

  9. Yes, thanks very much for this post. I’ve seen other references to Ramsey on your site and just caught his show for the first time this week. I’ve watched three or four episode and am very inspired. (And have been cutting my expenses down to practically nothing this week!)

    In general, I’ve been improving my finances throughout the past year on a plan roughly comparable to Ramsey’s baby steps. I was upside-down on a piece of property I owned out of state and had to dig the hole deeper (by increasing my credit-card debt) in order to get out from under it. But, I was thankfully able to sell the property earlier this year and have been able to apply the money I had been using for the mortgage payment to pay down my debt, and it is feeling great!

    The one adjustment that I have found is working for me is that I have found saving while getting out of debt to be a great motivator. I am in my mid-thirties and my job provides a pension, but I had not saved anything toward retirement until last year, when I started contributing to a deferred compensation plan offered through my employer. Even with the topsy-turvieness of the market, I’ve enjoyed watching my retirement balance creep up with every paycheck. (Sometimes it helps to have an anticipated retirement date just to make it through the week!)

    Since I’m maxing out at the allowable tax-exempt amount, while paying a considerable amount on my credit card balances each month at the same time, it means so much to me to know that I am building a secure retirement and that I’m working a plan to get myself ahead rather than only combatting the old foe of credit cards without building a strong footing to move ahead.

  10. Great post! Dave’s philosophy works – everyone’s personal situations on how “gazelle” they wanna get is individual, and that’s OK!

    On a side question (I always have one when I read something you write). Do you have any personal recommendations on books for personal investments for dummies (definitions of all options available – stocks, bonds, mutual funds, Roth-IRA)? You mentioned you let your kids pick out their own stocks. Are you just really good with that, or did you learn somewhere? Since this is a step in Dave’s program, I need to educate myself so when I’m there I can hit the ground running! If you have a referral link I can use to purchase it that would be even better!!

    Thanks for all the great content!

    • @Andrea: Actually, I am horrible at single-stock picking, and those two stocks are the only single stocks my household owns. I chose those primarily because they were places my kids were interested in, and it is easy to explain how more DVD or hamburger sales help their stock. Beyond that it is too complex even for me!

      I opt to invest in mutual funds, primarily stock index mutual funds such as Vanguard’s Total Market Stock Index fund and international fund. I just don’t have enough time to thoroughly research individual companies, so I opt for maximum diversity.
      If you are interested in learning more about investing from Dave Ramsey’s perspective, his book Financial Peace provides some good investment advice (in a little more detail than Total Money Makeover). The Boggleheads Guide to Investing is also a great primer on investing concepts, as is The Lazy Person’s Guide to Investing.

      Instead of trying to squeeze in affiliate links here, you can always follow my Amazon.com banner in the sidebar to do your shopping. Thanks for your question – and let me know if you decide to give these books a read.

  11. I really love your idea for getting kids involved in investing early. Such a smart idea and a great way to begin teaching them about managing their money.

  12. I love your #8. Retirement accounts are fab, but that money is *locked up* for the most part. A healthy balance is needed, especially for those anticipating early retirement.

  13. “It didn’t take much of an emergency for us to blow through the $1,000 baby emergency fund”

    Know that one, our emergency fund went up and down almost in the same month. Best advice I heard was to go 50/50. Fifty percent of your savings (reduction in your cost of living due to frugal living) should go to the debt snowball and fifty percent to savings.

  14. It’s wonderful that someone pointed out how to adapt the DR plan. My main beef with DR is that the baby steps are nearly TOO simplistic, and that people generalize his advice and follow it as religion. Although, truth be known, I’m not adding Total Money Makeover to my library any time soon.

  15. I think that point 4b. needs a caveat. I personally don’t think that it’s better to fund an IRA if the interest rate on debt is greater than 10% or so. If it’s less than that, then by all means, fund away. Many people complain about Ramsey’s plan not being mathematically the best way to go, and if you’re spending more in interest than you are earning in interest then something is wrong with the plan.

    I do agree that you should fund your 401k to the company match, because in many cases this is an immediate 50%-200% return on your money.

  16. Thank you for this post.

    My wife and I had the same problem with the $1000 emergency fund. We examined our emergencies historically by looking through repair bills and bank statements and saw that most of the times we really needed money it would have wiped out that fund and we would have needed to start saving up again and not be ready if something else hit.

    From that, we decided on $3000 as an initial emergency fund.

    We are also a one income family with me as the stay at home parent. With only one regular wage earner, a family’s options are a more limited. This is by no means a major hindrance, it just requires different planning.

  17. I just recently wrote an article discussing my issues with dave ramsey’s plan, from a recent college grads point of view. I agree with most of your points. Good post!

  18. I think alot of people have an issue with #3

    People love spending other people money, not thinking it will have an affect on their personal life.

    You have people with 5K in the bank and scared to use it toward debt

  19. good article. I’d add 2 things to think about.

    1. I have my baby emergency fund of $1000 in a savings account. I have my serious emergency fund (3 months of salary) in a Roth IRA Money Market account. Early withdrawals of Roth principal are penalty-free and it forces to me seriously define what an emergency is. That said, I’m single with no dependents so my emergencies tend to stay under $1000.

    2. I think the best thing you can do for kids is find some way to get them a job. A kid with income can open a Roth and getting a couple of grand in early can be HUGE. This is very specific advice but if your kid(s) ever get a paid acting/modelling gig when they are very little that can really be an easy way to fund a Roth. Imagine maxing a Roth at age 3. Check my math but with 9% returns that’s a million at 65. Now, you guys can figure out how to explain to a 19 YO that they shouldn’t touch their $20k in the roth to buy that totally awesome car.

  20. I’m going to mostly stick to Dave’s plan. Yours really wouldn’t work well for my situation. I have so much in monthly debt obligation, that it would take me forever to save 3-6 months emergency funds before even starting to attack my debt.

    At least by attacking my debt earlier, I can drop my monthly obligations (so I can make adjustments if a big problem arises)… and still have $1,000 to hold me over for smaller emergencies.

    It would likely take me years to get to 3-6 months salary before I could attempt to snowball my debt (My debt would decrease in this time, but much slower) and the whole process would likely take me much longer than if I saved $1000 then moved on to snowballing my debt.

    The only thing I’d likely alter is staying strict to the pay lowest balance first. If I have a $4k debt at 5% and a 5k debt at 29%. I think I’d like to take out the 29% first, even though it’s a higher balance. I may also consider other things like my obligation. If I have a 100/month obligation at 5k, but a $200/month obligation on 6k — I might want to get rid of the $200 obligation first, to make sure I have more flexbility if I need that extra money in a given month.

  21. I’m coming to the party late, but most of the critiques I see of DR are by people who don’t need his advice. People like me do need to follow his plan. I’m a compulsive overspender (and consequently, debtor). I’m finally on the baby steps.

    I agree that a $1,000 emergency fund really isn’t that much. It might have gone a lot further ten or fifteen years ago when he started his ministry. However, I believe the reason it’s like that is that people like me would lose motivation too quickly trying to save up the whole six-months amount first.

    Because it’s going to take us longer than we’d like to pay off all debt, I’m putting the remainder of our EF as a “debt” in the debt snowball after credit cards but before my law school debt.

  22. Sorry but I don’t agree with keeping a credit card for genuine emergencies. We kept one (and did get out of all debt) but gradually got back into debt. We read Dave’s book, attended FPU and decided Dave was right. We needed to have an emergency fund not a credit card. We’re out of debt again and this time by God’s grace and Dave’s wisdom, we hope to stay that way.

  23. Mary I agree, I’ve switched (pretty much anyways) over to cash. And there is nothing like cash in the bank. My sister in law while trying to get out of debt still runs everything through her HELC and I keep saying she´d spend less if she spent cash.

  24. Interesting blog. I agree people should never follow any “plan” without adapting it to their needs first. Ramsey’s “baby-steps,” (at least steps 1-3) are certainly very logical; but then, there is really only one way to pay off debt: PAYING IT OFF. The size of the emergency fund, of course, depends on each family’s circumstances. I don’t feel comfortable unless I have a 12-month em. fund (including Cobra payments) even though I enjoy high job security. Steps 4-6 make sense as well, but the order is not that important. I paid off my mortgage before really turbocharging my retirement savings (while my friends lost their money in tech stocks) and would have done so even if I had known about Dave Ramsey then. I also think that saving 15% for retirement is not enough. Step 7 (“build wealth and give”) is more an afterthought than any real “step,” and Ramsey’s investment advice is generic (”a good growth-stock mutual fund”) and flawed. Assuming the stock market returns 12% on average, he repeatedly tells people to take out 8% of their retirement funds annually. That is TWICE as much as anyone else recommends. Anyone following that “advice,” especially in this market, would definitely outlive his money. People seeking investment advice should read Money Magazine or Kiplinger or perhaps this blog.:-) Anyone knowing his way around the 72t distribution is more sophisticated than the average investor.:-)

    I’m surprised that almost everyone here seems ready to cut up his credit cards; I think Ramsey’s take on credit cards is illogical. Calling everyone who’s using a credit card “stupid,” is stupid. Sure, people with $30k cc debt and those who feel “out of control” around them need to cut up their cards, but people who pay off the balance every month can obviously handle them. I understand that it is possible to get by without credit and a good FICO score, but why make life more difficult than it has to be?! After all, even with the best intentions of living debt-free forever, there may come a time a loan is necessary.

    However, pointing out shortcomings in Ramsey’s approach does not mean that I don’t appreciate the man. Ramsey’s real strength is not the baby steps or their exact order; his strength is the enthusiastic support he provides to people hopelessly mired in debt. He acknowledges their struggle, gives them a “community,” and even provides a celebration if they succeed (debt-free scream). That is what draws people to his show. His compassion is quite apparent, and I believe he does change lives. Support communities for people who embrace debt-free living and frugality have always existed, and they are important. I was once inspired by the book “Your Money or Your Life” (by Robin and Dominguez), but I have never seen a champion of debt-free living like Dave Ramsey. In that respect he’s my kindred spirit, and I am thrilled that he is making this concept cool. He helps changing the attitude toward debt in this country, and that is definitely worth something!

  25. IndianaTeacher,

    See, it goes to show how everyone’s circumstances are different. My wife and I got into a real hole after she had lost her job and was pregnant with our son. She was out of work for nearly a year (people aren’t eager to hire a pregnant woman). Our finances were devasted. We racked up $45k in debt (all consumer debt) — about $30k of that in credit cards. We were barely getting by.

    When she finally returned to work, our debt obligation was so high, we barely had enough to cover costs. I sold a bunch of stuff and got a $1000 emergency fund — which came in handy, because I soon needed to do car repairs, then later I owed taxes.

    We currently only have $1500 in saving, which feels good. For us to save a years expenses would take us a 3 years! I’m not going to wait that long to get out of debt.

    In the last year, since we started paying down debt (and cutting up our cards), we’ve paid of over $11k in debt — about 25% of our peak balance. We’ve paid of one medical bill and one credit card completely and have not incurred any additional debt.

    I think Ramsey helped a lot with giving some practical advice and motivation.

    My goal is to have both my cars paid off in the next year — which would, alone, reduce our monthly obligations by a minimum of $420/mo.

    I definitely disagree with Ramsey about a few things. I will keep a credit card when our finances are better. I do want to keep a good FICO. I also think some debt is ok (mortgage and education).

  26. You write, “For us to save a year’s expenses would take us a 3 years! I’m not going to wait that long to get out of debt.” No, I wouldn’t either until the debt was gone, and I didn’t until my house was paid off. (Luckily, I never had too much debt to begin with. My parents paid for most of my education, and in Grad. school I worked as a Graduate Teaching Fellow and was able to get my Masters without debt as well.) I was just saying that I don’t feel comfortable with less in savings, not that everyone should set that much money aside. I’m sure the fact that I’m a single parent (widowed) and the major source of income also means that I need to have more savings than a two-income family. It seems you have done really well paying off debt, and I’m sure you will reach your goals. You seem pretty savvy when it comes to money, and you set goals – which means you’re half-way there. Well, it’s always nice to meet the real people behind those user names. You have a great blog here. I’ll visit from time to time, and perhaps we’ll talk on twitter. (I follow your messages there.)

  27. I have to disagree with these steps. It seems to me that if you are having to keep using ALL of your emergency fund and dip into credit cards, then you have the worst luck in the world, or as Dave says, you really dont have emergencies, you just use it as an excuse to spend. I mean really, how many times have you had an emergency that cost you over a $1,000 and then another RIGHT after that before you could build back up your fund?
    The 2nd step that is REALLY out of order is the debt snowball. The reason Dave says to do this number 2 to save you ALOT of money on intrest. The sooner you do this, the less you pay off. I know I would rather pay less than more.

    To sum this all up, I guess if you feel the plan works well for you, then go for it. “different strokes, for different folks.” However, although I agree with this author regarding being careful taking advice from certain sources, Dave said it right when he said, “Dont take advice from broke people! Now I am not saying this author is broke, but I would rather take advice from a proven millionaire and financial genious, then somebody that has a little extra time to post this….

  28. Personally, I think Ramsey is a total idiot and there are many sites that cite a long list of examples of that. Learn some simple discipline and use credit cards for everything! We do. We put our groceries, household expenses, travel, and even recurring bills like the telephone and internet all on credit cards. If you pay them off every month you pay no interest, so there is no cost. And, if you are smart you can save quite a bit of money. We receive checks from Chase and Citibank on a regular basis. Our rewards cards always give us 1% back, which is usually about $20 for free every month. But, two of our cards have rotating categories such as groceries or gas that pay 5% rewards. And, we get free rental car insurance when we travel, liability limits in the case of theft, and other perks that you don’t get with debit cards.

    Now, I know some will say: but, credit cards got us into this mess and I don’t want to risk charging on them again. If that’s the case, you probably don’t have the discipline for the Ramsey-style crash diet approach to personal finance, either.

    I just get so tired of people saying the first thing you should do is cut up your credit cards. The first thing to do is make a plan and maximize your end everywhere you can. That should include credit cards and the discipline that goes with them. Also, create a budget that results in positive cash flow, makes sound progress or a reasonable period of time, but leaves you with a life. The Ramsey/Orman/etc approach will just burn you out and you’ll binge.

    • Sorry Charles… I think a look in the mirror is in order.

      Using credit cards for “everything” although convenient is not really that “smart” financially speaking. What Dave preaches is to use cash as a tool for negotiating. True, it may be a little difficult at the local Walmart trying to buy the kids clothes and getting a discount waving cash but for other purchases, everything from TV’s to shrubbery at the local nursery, cash is king. Why? Because credit card companies charge the vendors who accept them fees to process transactions and in turn, these costs are passed along to you – and me.

      So the “cash back” you receive using your cards ain’t free… far from it.

    • Bravo. I 100% agree. I have a large monthly cash flow and get $1000 plus per year cash back from my cards. I am 100% debt free and credit cards are a great tool. I also payed my debt off highest interest rates first, regardless of amount. Now with a net worth of over a million and no debt, life is good.

    • I used to use credit cards for everything, too, and then pay them all off each month; however, there came a time and circumstance where I had to start charging with interest, and this coincided with my retirement date, the Credit Card Act, etc. I then let this go for a while because I’d always had enough money before, but after a couple of years, I realized it was quite serious (100’s of dollars per month interest). Since I’d never loaded my charge cards before, I had no experience with paying off debt, nor motivation, nor patience. It was a new thing for me. Now I understand the full effect of this ugly beast called “credit,” and I’m bailing out as fast as I can. You may not understand because you’ve never been there before. It’s almost like you have to be mired in it to “get it.” One big thing…perhaps a medical bill, and you’ll find yourself in the same spot!

  29. I’m a little behind in reading Dave Ramsey, but it is nice to know that there’s someone else out there that had to tweak the steps a little to fit their situation! I linked to this post in my review of the TMMO.

  30. Wow, I love your refined baby steps. You should repost this! I have been struggling with not putting anything in a 401(k) not even to the match. Today, I decided for the New Year to go the 3% since we match 100% to 3%. This really helped solidify my decision. Thanks!

  31. I really like what you wrote here! After listening to the audio of the book I wondered where Dave Ramsey found a mutual fund with a 12% return and a term life insurance policy that’s only $7.00. Even though his numbers may be a little off he still has the right idea of “sacrifice” to live better.

  32. I agree with your modifications and would even add that once you develop the habit of living well below your means and becoming a regimented investor (meaning $ goes into an investment account for every dollar earned), then I really don’t see the harm in utilizing credit cards or delaying the paying off of a low interest mortgage.

    In case anyone is interested, I’ll share our story on how we applied these concepts in our lives.

    I had not heard of Dave Ramsey until about three years ago when I won a copy of his book at a men’s group for our church. Funny enough, the reason I won the book was for having the most credit cards in my wallet.

    To make a long story shorter, my wife and I can look back on just a few decisions we made when we were just out of college that have literally changed our lives forever.
    1. My wife (girlfriend at the time) decided she didn’t like writing a check for her only debt, a student loan, so she decided to see how quickly she could pay it off. Since she was paying hers off quickly, I decided to pay off mine faster as well.
    2. I convinced her to max out on the 401k investment and a stock purchase program at the company we worked.
    3. We wanted to start a habit of taking nice vacations every year, so we had an automatic deduction into a separate savings account to accumulate funds for the vacation. This turns out to be a decision that changed our view of money as we just got excited to see the account grow and we became very focused on avoiding ‘un-needed’ expense to watch this total grow each month.
    4. I guess I still didn’t have total control over money management as after saving some money, I had made the decision I was going to buy a used Porsche 944. I had picked out the car and it was at a shop being inspected as a condition of the sale so I was literally a day or two away from writing a check for a car I really should not have been buying. As fate would have it, my wife ended up getting in a car accident at that time and we made a great decision to buy two used cars for the same amount as I was going to spend on the Porsche. Looking back, this really was a great financial move that happened just because of timing/luck.
    5. Finally, as we got raises during our first couple years of working, we decided to not change the way we were living and instead, every dollar of the raise amount went into our savings/investment account.

    I can still remember how excited we were to reach the $10,000 mark in savings, then $50,000 and finally $100,000. It wasn’t too many years later that we realized we had reached a net worth over $1m.

    We’ve never really taken on debt other than a mortgage on a residence or investment property and have always paid off our credit cards every month. We’ve never been concerned about over extending on the credit cards because of what we learned in our 20’s about how to think about impulse buys and what should be discussed or thought about before buying even though we had the money and credit to easily afford the purchase.

    Most people that know us have no idea on our financial position as we don’t live in a real expensive house or drive fancy new cars (funny enough – my car has 130,000 miles and my wife’s van has 250,000 miles on it.)
    At this point, we have a net worth in the neighborhood of about $4-5m. We turn 50 this year and my wife has not worked outside the home for a company in over 20 years and yet our success has not been through any incredible earnings success story or stock play but instead is a story of disciplined small success duplicated over the last 28 years.
    I do hope there are other young couples that get serious about their financial future and dedicate themselves to a disciplined plan on keeping expenses low and continually growing the amount of their investments each month as their earnings grow rather than increasing their lifestyle.
    We truly feel blessed to have made the decisions we made without any formal training or really even understanding the long-term effects of the decisions we were making. In reading the TMO by Dave Ramsey, I can now look back as see how closely our decisions parallel his teachings.

  33. I haven’t found anyone who is actually and truly debt free. Even though you have paid off all your (created) debts, there is one debt that will never go away and keeps getting larger if you own your own home. Property and school taxes! I live in eastern PA, and I must save $600 per month so I can pay my combined property/school taxes every year. This number will continue to rise until I die or move away.
    This is based on my house value of about $275,000. How do people who have million dollar homes afford to pay the taxes? Is there a secret??????? In his book, Dave doesn’t seem to deal with this issue?

    • Not everyone lives in a high tax area like you apparently do. I’m paying about $150 a month in R.E. tax for a house valued at $280,000. The VAST majority of people live in areas that tax quite a bit less than your area.

      Also, don’t forget your home may be $275K in your area, but that same home in another area of the state could be had for much much less.

      My home and land would sell for about $800,000 if I was located just 45 minutes away in Potomac MD, and around $150,000 if I was located an hour away in different direction.

      The taxes in Potomac would be able 50% higher per dollar of property value, but since the house is valued more, they would run probably probably close to your $600 a month.

      If I was an hour west, my taxes might be $80 a month.

  34. My husband and I are on Dave’s baby step #4; debt free except for our mortgage. What Dave doesn’t seem to address is they priority of necessary large expenses – our next car and our next house. I know it’s probably best to stay in our current house, but our family will one day ideally relocate back to our home state. Our current house depreciated the 20% we put down as a down-payment so we don’t have that to count on.

    Since paying off our vehicle, we put that monthly payment amount in savings so we have a bit of a nest for that account (not nearly enough for a decent car). But where in the baby step process do we prioritize for the thousands needed for 20% of our next house?

    • Planned large expenses are budgeted into a “sinking fund.” As an example, I plan to drive my current car for at least 4 more years. I plan to be debt free (other than my house) in about 13 months. As soon as I am debt free, I’ll begin putting $300 into a separate checking account that is dedicated to my car. In about 3 years I’ll have a little over $10,000 in that account. At that point I’ll sell my current vehicle, getting about $10,000 for it, and will be then looking for a good used vehicle for about $20,000. I may wait 4 years, too. Depends on how my car is doing at that time. I’ve been adding a bit extra to that account already for an repairs that are needed, so assuming this is as reliable as my last car of this make and model, I should actually have another $5000 in that account by that time.

      As he always says, it’s your choice, it’s your money, it’s your life, and you can do what you want. He just tells you one sure-fire road to financially being in a place very few people are. You can of course modify any part of his plan, but know that anytime you spend a little more now, you’ll have a lot less later. It’s up to you if it’s worth it. For some people it IS worth it, of course.

      I manage a group of technicians at work. There are two guys who drive beat-up old pickup trucks. One has 3 ex wives that he pays alimony to, and he can’t afford a higher priced vehicle, and he has no money. The other guy is extremely frugal, and is loathe to spend a dollar on anything that is not 100% necessary. The second guy has been just saving like a madman, and last year he suddenly started taking 2 week vacations 3-4 times a year. (He had saved up his vacation time as well…) He’s been travelling the world.

      I’d say he’s been living like no-one else, and now he lives like no-one else.

      It’s all food for thought, do what you like. There is no right or wrong answer.