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People are often amazed that my family and I were able to pay off over $90,000 of consumer debt in only a few short years utilizing Dave Ramsey’s Baby Step’s to Financial Freedom.
After declaring bankruptcy himself after several failed real estate transactions in the 1980’s, Dave Ramsey rebuilt his financial life by prioritizing his family’s needs vs. their “wants”. He vowed never again to utilize debt as a tool (often citing biblical versus to bolster his case).
After years of counseling other families in his strategies, Dave Ramsey eventually consolidated his system into 7 easily digestible “Baby Steps”.
The following is an in-depth and expanded list of Dave Ramsey’s baby steps compiled by his fans and updated frequently in his personal finance forum “Money Talks“.
Dave Ramsey’s Baby Steps:
0.1: Commit to NEVER borrow $$$ EVER for ANYTHING other than possibly a house.
0.2: Talk with spouse and get him/her on the same page as you concerning finances.
0.3 Do a written budget
0.4 Temporarily stop all retirement contributions
0.5 Get current on all bills (You MUST have Shelter, Food, Utilities, Basic clothing)
0.6 Get Health insurance NOW (chances of getting sick w/ major medical bills are larger than that of death), especially if you have children.
0.7 Get Life insurance NOW if you have considerable debt/your family couldn’t make it financially if you died. Especially important if you have children !! Social Insecurity provides only a small amount of coverage if you have dependents.
0.8 Amputate “toys” (bikes, boats, ATV’s etc) if they will keep you from completing the snowball within 12 months
0.9 Cut lifestyle (Cut CATV, Cellphone, Regular phone “extra’s”, Internet, Eating out, etc) and/or take second job if $1000 EF will take more than 30-90 days. (depending on income)
1.0 Save $1000 In baby EF
1.1 Chop up CC’s (You have an EF now, no NEED to keep those CC’s !!)
1.2 Amputate cars that you can’t pay off within 24 months (You have an EF to fix the “bondo buggy” if something should happen)
1.3 Consider raising insurance deductibles to $500 or $1000 and dropping full coverage on paid for “bondo buggy” (You have an EF ya know)
2.0 Do debt snowball: (Not familiar with the Debt Snowball click here)
2.1 Start car replacement fund (do not PURCHASE car until step 3 is done or old car dies)
3.0 Save 3-6 months EXPENSES in EF
3.1 Start furniture or other non-essential stuff replacement fund
3.2 Move up in car if you still feel the need to (must pay cash for it)
4.0 Contribute 15% to retirement
4.1: Take your first vacation since finding Dave if you can pay cash for it (no using the EF !!!)
4.2 Save up 20% for home purchase OR pay down existing mortgage to the point you can drop PMI.
5.0 Save for kids college fund (if you have kids)
6.0 Pay off house
7.0 Live like no one else since you have lived like no one else
I know it sounds like “snake-oil” but I can personally vouch for the Dave Ramsey system! It works!
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I have a question about these baby steps. I have a student loan that is larger than half my annual income. Should this go in baby step 2 or 6? I’ve heard Dave say that a second mortgage goes in 6 if it’s more than half your annual income, but I don’t know about student loans.
If I put it in baby step 2, it will be probably 4 years before I’m done with step 2.
If it matters, the value of my home is worth more than my mortgage + the loans. So one way I can look at the student loans is that they’re a low-interest, unsecured home loan. But I realize this might just be me justifying paying them off with step 6.
Thanks for your help!
Jill
I have heard dave recommend to move the student loan to baby step 6 if it is more than half of your annual income.
I like this version of the Baby Steps expanded… but I have some questions. I will move in 1 year. #1 Where do I fit the savings for the new house stuff (everything from fridge to bed)? We have a pretty complete budget and small CC debt (just 1 CC and we are trying to pay it ASAP), our only big debt is just student loans ($25k) that will start paying when we start in our full time jobs (I guess we will eliminate this debt as soon as we can). #2 How other people pay for their student loans? it is well explain how to tackle CC debts but not on loans…
Thanks for any insight!
also, we will rent until we get the 20% down payment. But when should I start this savings? (I mean I secretly started) but when is best to do it..
Confusing! :S
Under Dave Ramsey’s method (and many other advisors), student loan debt should be tackled in the same manner that credit card debt should be handled.
List ALL debts from smallest to largest and begin paying them off in that order disregarding the “interest rate” of each loan.
Some people prefer to not pay off their student loans because the loans usually have low interest rates and often times the interest on student loans is tax deductible.
However, we chose to pay off all of our student loans before we bought our house and even though we had to wait an extra year or two, it was absolutely worth it!
Especially amongst all of this financial “turmoil”, reducing your outstanding debt MAY be the best thing for you right now.