What Are the Dave Ramsey Baby Steps?

Dave Ramsey Baby StepsFinancial guru Dave Ramsey encourages those who want to get out of debt for good to start with these seven baby steps. This proven plan is designed to reduce the stress of debt, and it has done just that for millions of Americans.

1. Baby Step 1: $1,000 Cash in Savings

This new savings account will be the “baby emergency fund.” This will be your family’s cushion in case of unexpected events like medical bills or car repairs.

2. Baby Step 2: Use the Snowball System to Pay Off Debt

With this step, list all your debts from smallest balance to the largest. Start with the smallest balance and put all extra money toward paying it off. Once it’s off your shoulders, put all your resources into paying off the second largest debt, and so on.

3. Baby Step 3: Build a Full Emergency Fund

Ramsey recommends having three to six months of household expenses saved in a full emergency fund, so once your debt is paid off in full, work toward this goal.

4. Baby Step 4: Begin Investing

Have a fully-funded emergency account? Now it’s time to get serious about saving for retirement. Set aside at least 15 percent of your earnings and start planning the golden years you’ve always imagined. Matching employer 401K plans are your best bet, followed by Roth IRAs. Each should be invested in a mix of growth, aggressive growth, growth and income, and international mutual funds.

5. Baby Step 5: Save for College

If you have children, it’s never too early to put money aside for higher education. This should be the next priority after your retirement fund. Consider putting the money in 529 college savings funds or Coverdell ESAs (Education Savings Accounts), both of which have tax advantages.

6. Baby Step 6: Pay Off Your Home

You might have never dreamed of leaving a mortgage-free life, but with the first five steps completed, you’ll be able to get there by putting extra money into paying down the remaining principal on your home.

7. Baby Step 7: Build Wealth and Give

With the mortgage gone, you’ll be able to give generously to loved ones and passion projects, invest funds in businesses and accounts, and achieve your lifetime goals, whether that means travel, philanthropy, or relaxation.

These Baby Steps are the cornerstone of Ramsey’s popular financial course, Financial Peace University, which has helped more than 4.5 million people get out of debt, and stay out.