If you have ever searched good old Google for advice about personal finance you’ve probably stumbled upon a guy named Dave Ramsey.
He has quickly become the house hold guru name when it comes to financial principles for those interested in paying off debt quickly.
Dave Ramsey first started sweeping the nation with his “baby steps” method toward living a debt free life nearly 27 years ago.
When the Ramseys found themselves in serious unexpected financial hardships, he and his wife were faced with filing bankruptcy in order to settle their debts.
After this experience, Ramsey never wanted to be put in a position like that again and found a passion in teaching others how to escape the crippling fear of their own debt while living a financially free life.
With his new-found mindset around money, Ramsey made a game plan for tackling debt in the fastest way possible and has been living debt free ever since.
These days you can find Dave Ramsey writing best-selling books, creating courses, hosting his own radio show, and even touring to different cities sharing all of the wisdom he has learned on his own debt payoff journey.
Sounds great, right? Well, although Ramsey has been able to help thousands of people live a debt free life, there is a lot of controversy around his seven-step plan to getting out of debt fast, otherwise known as the Baby Steps.
Table of Contents
What are the Baby Steps?
Dave Ramsey’s coined method to paying off debt is called the Baby Steps method. The baby steps include seven individual steps which are outlined below.
Step 1: Start an emergency fund of $1,000
Step 2: Pay off all debt using the debt snowball (aside from your house).
Step 3: Save 3-6 months of expenses for your full emergency fund.
Step 4: Invest 15% of household income in a retirement fund.
Step 5: Save for your children’s college fund.
Step 6: Pay off your home early.
Step 7: Build wealth and give generously.
Breaking Down the Debt Snowball
After gathering together enough funds to start a $1,000 emergency savings fund you can then move on to the hardest and most intensive part of the plan, the “debt snowball”.
This method is the key step in his plan to help his students pay down their debt quickly and efficiently.
To use the debt snowball method you should organize all of your debts from lowest to highest balance. Do not take any other factors into consideration other than the balance on the accounts.
Then, you should pay as much as possible towards your smallest debt and pay the minimum balance as normal on all of the rest.
Once that first account with the lowest balance is paid off completely you then take the minimum you were previously paying on that closed account and put it towards your next lowest debt balance.
This way, you are building your payments up (like a snowball) and your debts will be paid down very quickly using the momentum from the compounding minimum payments.
During this period of time, Ramsey suggests getting as radical as possible with your debt pay off journey. He suggests selling anything and everything you can to put money towards your debt.
This includes having yard sales, getting out of housing leases that are above your price range and moving in with in-laws, selling your car and getting an older but reliable vehicle in its place, or consider living without a car completely and so on.
He also encourages his students to get second or even third jobs whether that be a small side hustle like selling your own products on etsy, dog walking, or cutting grass, or even a real part time position like waitressing or bartending.
The basis of Ramsey’s advice highly suggests putting all egotistical thoughts aside and focusing completely on paying off your debt.
He even suggests eating the cheapest of foods regardless of nutritional value—i.e. ramen noodles, rice, and beans. In his opinion, you’re broke therefore there is no room for luxuries of any sort as it is only temporary.
As expected, he also advises drastically cutting your expenses in all areas from going out to eat, paid forms of entertainment like movies, concerts, Netflix, unnecessary shopping, and of course vacations are an absolute no go when it comes to your budget.
Ramsey believes you should be getting down to the bare essentials in order to pay down your debt balance and finally get to the light at the end of the tunnel. In short, when following his advice expect to do anything short of selling your own limbs and your first-born child to pay off debt.
What To Do Instead
1. The Debt Snowball Method vs. The Avalanche Method
While most of these principles are very sound and useful advice for beginners, some of his steps are found to be a bit controversial. The most argued step in the baby steps is the debt snowball method.
This method is great for those that need the extra encouragement to get the ball rolling.
That is the essence of the whole idea behind the debt snowball: once you start gaining momentum you will typically get excited to continue paying off your debt, avoiding burnout, which is great for people just beginning their debt payoff journey.
The down side of the debt snowball is that you end up paying more in interest than other methods such as the avalanche method.
The avalanche method is almost identical to the debt snowball method but in comparison it is more financially effective.
Using the avalanche method, rather than paying the debt with the highest balance first, you would pay your debts from the account with the highest interest to the lowest interest account.
This way, you are not accruing nearly as much interest since your highest interest accounts are getting tackled right off the bat. These accounts will not continue to gain interest by letting them sit for a longer period of time.
With the avalanche method you may not see the pay off right away like you would with the snowball method, but this method will save you money rather than paying out unnecessary interest.
The most important thing you should consider when choosing between these two methods is how much self-discipline you have.
After being honest with yourself, if you have noticed that you typically have trouble sticking with a debt payment plan and you need those small wins along the way to encourage you to stick with it then the debt snowball may be a good fit for you.
However, if you are committed to paying off your debt and know you don’t have an issue with self control, the avalanche method is the better choice as you will save more money in the long run.
Dave Ramsey: Pay off the account with lowest balance first and snowball from there.
Alternative option: Pay off account with highest interest first and snowball from there.
2. Emergency Savings Fund
While having $1,000 in your emergency savings is better than nothing, it is not very realistic for most people.
A proper emergency savings account would need to have enough to pay at least three months worth of bills (preferably more) saved up in case of a real emergency in which you would need to stop working.
We can all agree that $1,000 is a good starting place and it is great to make creating an emergency fund a priority, but some people believe that the baby steps method encourages people to only save $1,000 for the sake of getting on to the next step.
Saving that initial $1,000 may be hard for some people but unfortunately, saving such a small amount before moving on to putting all extra funds towards debt can be dangerous for a lot of people.
In an emergency, most people will find that $1,000 just doesn’t go very far, especially if children are in the picture. In fact, for most people $1,000 would not even cover one month’s worth of rent, staying current on debt payments, and food.
This plan can be especially bad for individuals who are self-employed. Being self-employed often means that income can be inconsistent and unpredictable. Because of this, having only $1,000 in an emergency fund can get someone who is self-employed into some serious trouble.
Imagine being an entrepreneur with an income that is established and steady but naturally, it is not always going to be as stable as a salaried position per say.
You expect that you’ll get $2,000 in income this pay period because that has happened for the last 6 months. But for reasons out of your control, when payday comes around you come up $1,500 too short.
Normally this wouldn’t be an issue and you could draw from your emergency savings fund.
But since you only allotted $1,000 to your savings account and have already thrown every extra cent towards your debt per Dave Ramsey’s advice, you find yourself coming up short.
In moments like these, $1,000 doesn’t seem like a lot at all, which is why it isn’t enough to have to fall back on.
Another issue with this savings plan is that it may work for a short period of time such as a year and a half (which is still pushing it). But anything past that is far too long to have only $1,000 in your emergency fund account.
Imagine all of the things that could pop up in a longer amount of time like five years while paying off debt.
Picture this: Your child needs braces, or you owe more back on taxes than you originally thought, maybe your phone or the laptop you use to pay bills goes out, or the furnace needs replaced, God forbid you get into a car accident and insurance doesn’t cover it, etc.
Not to mention the possibility of getting laid off from a job out of the blue or worse, a serious health issue comes about that stops you from working and making an income.
Some people say that the small savings plan motivates them to keep going since they don’t have a safety net to fall back on. but for most having only $1,000 to fall back on in a true emergency can be a scary time. There are a few alternative options that may be better than Ramsey’s savings model.
The first option is to wait until you have saved at least three to six months worth of bills for your emergency fund to start the second baby step.
For this option, you can find your emergency savings fund amount by considering every bill you may have including your rent, car payment, car insurance, phone, debt payments, food, etc. and add that all up (you’ll likely find that even a month of this is much more than $1,000).
Then, multiply this by three to six months and aim to save this amount before paying off your debt.
Another option is to save the original $1,000 as suggested but continue to put money in your savings account as you pay off your debt so that your emergency fund does not get put on hold until after you are debt free.
While these options may delay your debt pay off journey slightly, they do set you up for success in the event of an emergency and are more realistic financial plans.
Dave Ramsey: Save $1,000 for an emergency fund then tackle debt.
Alternative option: Save 3-6 months of bills for an emergency fund then tackle debt OR save initial $1,000 then start the debt snowball but continue to add to your emergency fund during this time until it is at the desired amount.
3. Focus On Debt Only, Ignore Other Savings Plans
Ramsey is not big on his students focusing on any other forms of savings plans when they are in the debt snowball step. This includes your retirement savings.
The issue here is if you have an employer that provides a high match to your contributions, you are missing out on quite a chunk of change since you are instead putting that money towards debt.
Do not skimp on your retirement account. If you’re getting matched, capitalize on that free money going into your savings account. You’ll thank yourself later.
Dave Ramsey: Focus only on paying off debt, do not contribute any extra towards your 401k.
Alternative option: Capitalize on your employer’s match, do not skimp on your retirement savings.
4. Paying in Cash
Dave Ramsey believes you should pay for everything you own in cash. Alongside this belief, he also has the opinion that there is no reason to have a good credit score or a credit score at all since you should never use credit to begin with.
In reality, having a high credit score is a safety net that adults may need in many circumstances outside of getting credit or loans.
Credit scores are checked in order to pass background checks for renting apartments or houses, renting a car on vacation, can cause your car insurance premium to increase, and even are often checked when applying for a new job.
Not to mention, if you actually do want to open a credit card or get a loan, you will have difficulty with this having little or bad credit or worse, you may get one with an outrageously high interest rate.
Additionally, while no sort of debt is ever good there are ways to use credit cards to your advantage as long as you have the discipline needed to not let things get out of hand, i.e. paying off credit card balances before interest gets added.
In fact, using the right credit cards can be a viable way of creating a passive income for yourself. If used correctly, you can earn free flights, earn cash back on gas, groceries, and at certain restaurants and stores, and even bonuses like gift cards that you would not have earned otherwise.
The largest issue pointed out with Dave Ramsey’s logic is that his methods are based around the students being irresponsible and undisciplined. This isn’t always the case for people in debt.
Many people get into debt because of student loans, medical bills, or some other accident that was out of their control.
Due to this his methods focus on small wins rather than looking at the bigger picture at hand. Dave Ramsey teaches great basic principles for budgeting and saving, however, his advice is not always appropriate for everyone.
The fact of the matter is that Ramsey puts entirely too much focus on debt being evil and that debt is the problem rather than the true issue at hand: self-control.
His advice does help students to get rid of debt and stay out of debt, this is true.
But his students would likely be better served learning true discipline with their finances rather than teaching them to run away from debt that way they can have a more positive relationship with money and truly learn to build wealth.
Dave Ramsey: Pay off all debt then close credit accounts and never open one again.
Alternative option: Pay off all debt then only keep credit cards if you have the self-discipline to pay them off before they accrue interest. Find cards that have good rewards programs and use them to your advantage while also raising your credit score but never let them carry a balance.
5. Live Like No One Else
Another thing you may have heard if you know Dave Ramsey is his motto which is, “If you will live like no one else, later you can live like no one else.”
What he means by this is if you live in extreme moderation now while paying off your debt, later you can live like no one else in a financially free life with no debt and you will be able to build wealth and give generously.
Who wouldn’t want that kind of life? Most people do, however, sometimes Ramsey’s way of getting there can be a bit extreme.
This is why many people have an issue with Ramsey’s incredibly strict savings model. He suggests if you’re broke, having any fun you need to pay for (vacations or entertainment) or eating more than the essentials is out of the question.
Sure, that plan is good on paper but realistically it does not take into account mental health which is a huge issue in adults (especially those in debt).
Depression and anxiety can come out in extremely detrimental ways if we aren’t careful.
Sometimes, this can show up in negative ways in our relationships with our partners, friends, and families, poor performance or attendance at work, or even getting sick due to holding ourselves to the impractical standards of the “all work, no play” mindset.
In an ideal world, we would all be able to stick to the strictest of budgets and never think about stepping outside of that lifestyle. But the fact of the matter is life happens.
Mental health is important, relationships are important, and staying committed and consistent with a too strict budget is unrealistic.
This is why people often get burnt out on their debt pay off journey and give up, falling back to where they started. You can think of your budget like a diet—people start out with the best of intentions.
They want to lose weight, be healthy, and of course, happy. So, they make a super strict diet plan, promise they won’t slip up this time, and it works… at first.
Then, life happens, people get frustrated, and they get burnt out. And at that point they fall off the wagon and are back where they started or sometimes in an even worse place because they are so discouraged from their perceived failure.
Well, just like a diet, finances are all about balance.
Yes, saving your money just like saving those calories would be ideal but sometimes you have to look at the bigger picture and realize indulging is sometimes a necessity in order to stay committed in the long run.
Instead, a better option is to look at your finances and make small budget just to spend on fun. Then, take that money out of the bank in cash.
Spend the allotted money on whatever your want but once the money is gone, there is no more room in your budget to pull out more.
This way, you are able to satisfy that part of you that is craving some fun whether it be junk food, going out with friends, getting your nails done, etc. but you are not compromising your budget to do so.
Dave Ramsey: No room in budget for “fun money” or luxuries of any sort before paying off debt.
Alternative option: Set aside a part of your budget specifically for “fun money” that is a reasonable amount each month and spend no more than what is allocated. This is good for your mental health, helps debt payers not give up due to burn out and frustration, and it also teaches self-discipline.
So, Dave Ramsey’s baby steps: Can it and does it work? Absolutely, there are thousands upon thousands of students who have found great success using his method and are in much better places because of him.
What matters most is that his advice gets people to take action and encourages them to transform their relationship with money.
But are there better plans out there? Yes, definitely. There are many modified Dave Ramsey plans that work well for people and this is just one of them.
But it’s important to remember that no single financial plan is perfect for every person and every circumstance.
At the end of the day, what is important is making sure your budget works for you and that you find ways to stay consistent while building positive financial habits.