Does Dave Ramsey’s Baby Steps Really Work?
If you’re familiar with Dave Ramsey, you may not find it surprising that he’s been in the headlines more than usual in the last few years. As one of the most famous authorities on personal finance, Dave Ramsey touts his inspiring rags to riches story as the catalyst for building a multimillion-dollar media company and inspiring millions of people to change the way they handle money.
Ramsey has a solid group of well-known tenets that have garnered substantial attention. Many people oppose his hard-line stance on everyday money topics such as the best debt payoff method, how much money to save for emergencies, and which mutual funds to invest in for retirement.
RELATED: Click here to watch our take on Dave Ramsey’s Baby Steps.
The Baby Steps System
Perhaps the most well-known of Ramsey’s teachings stem from his financial framework, the Baby Steps System.
The Baby Steps are as follows:
- Save $1,000 for a starter emergency fund
- Pay off all debts (excluding your mortgage) using the debt snowball system
- Save a “fully funded” emergency fund of 3-6 months of expenses
- Invest 15% of your income for retirement
- Save for your children’s college fund
- Pay off your mortgage
- Build wealth + give
While many of today’s money experts find fault in Ramsey’s “proven plan,” the growth of his company and millions of loyal listeners may beg to differ.
Debt-Freedom or Bust
If we had to boil Ramsey’s advice down to one specific point, it would likely be that “debt is dumb.” Ramsey despises debt in any form. He hates car loans, student loans, and payday loans; he hates any scenario that requires you to give your income away to someone else. He hates everything about debt and will take every opportunity to tell you as much.
Credit Cards Are a Big No-No
If it wasn’t clear, Ramsey vehemently opposes debt (the only exception being the 15-year mortgage). He also forbids the use of credit cards altogether, claiming there is no way to use a credit card responsibly and assumes their use, however infrequent, will inevitably lead to the cardholder finding themselves back under a mountain of debt.
So, if you never use a credit card again, what are your other options? Ramsey insists that cash or debit cards (which Ramsey insists are just as good as credit cards and are interchangeable in any scenario.)
Ramsey demands encourages people to pay cash for anything and everything, always.
And while paying with cash will keep you from accruing credit card debt, going to the bank to withdraw money every time you get paid seems to be an inconvenience in this age of digital banking. If using cash feels challenging, the cash envelope system – a method of organizing your money over different budget categories – may be helpful but often becomes tedious over time.
15-Year Mortgages Are a Must
While trashing the idea of committing to a 30-year mortgage, Ramsey condones taking on a 15-year mortgage when purchasing a home.
The advantages of a 15-year mortgage are:
- You’ll pay significantly less interest over the life of the loan
- You’ll be in debt for only half the time (only 15 years) vs. a 30-year mortgage
- You’ll build equity more quickly.
He also recommends a 20% down payment when purchasing a home to avoid PMI insurance. Ramsey even adds Baby Step 3b into the mix to serve as a pit stop between working the debt snowball system and investing for retirement, where the goal is to stockpile money for a down payment. He also strongly encourages people to spend no more than 25% of their take-home pay on their total housing costs.
Debt Snowball vs. Debt Avalanche
Ramsey backs up his debt-free battle cry with another step-by-step action plan called the Debt Snowball System. The Debt Snowball System is a debt payoff method that takes a similar approach to the Debt Avalanche System with one significant difference: how you prioritize your debts. The Debt Avalanche System calls you to order your debts by interest rate, beginning with the highest interest rate.
In contrast, the Debt Snowball System calls you to order your debts by total balance owed, beginning with the smallest debt balance. You make the monthly minimum payments on each debt while focusing all extra money on paying off the debt with the smallest balance. Rinse and repeat until you have paid all debts in full and officially slain the debt monster.
Now, raise your sword high in victory and solemnly swear to never take on any debt again, under any circumstances, sign your name in blood, cross your heart, and hope to die.
While using the Debt Avalanche System as a debt elimination strategy will save you money in the form of avoided interest, Ramsey still believes the Debt Snowball Method is superior. He credits the psychological advantages of the Debt Snowball System for keeping people engaged and motivated along the long (and tedious) road to debt freedom.
While it will likely cost you more money in interest paid over the length of your debt-free journey, paying off your debts with the smaller balances first does guarantee you some “quick wins.” If you bore easily or struggle with overspending and a lack of self-control, the Debt Snowball System may appeal to your personality even if it doesn’t appeal to your bank account.
Give Every Dollar a Name
Ramsey believes a significant factor in achieving financial freedom is learning how to budget your money, and while you’re at it, he’d prefer you use a zero-based budget. If you’re brand new to budgeting, it can take some time to get the hang of it. However, learning how to create a budget you can stick to truly is the first step in gaining control of your money.
The zero-based budget method was initially developed by Peter A. Phyrr (source) yet became synonymous with Ramsey’s name. He decided to call his digital budgeting app Every Dollar. “Giving every dollar a name” means that every dollar of your income is accounted for when creating your budget.
A proper zero-based budget will follow this format: INCOME – EXPENSES = 0.
Criticism and Controversy
We all know the three major topics that seem to get everyone’s panties in a twist: money, religion, and politics. When you’ve built your mega-successful business on two of the three, you’re bound to face some criticism along the way. And face criticism he does.
If you’ve ever read one of Ramsey’s books or caught an episode of his radio show, you know he doesn’t, ahem, mince words. There is no gray area, and matters of how money should be handled are linear with zero room for negotiation.
Ramsey has a large army of extremely loyal fans who can quote his Ramsey-isms at the drop of a hat, but he also has his share of critics who work tirelessly to remove him from his patriarchal throne. Read: You either love him, or you hate him.
Ramsey is as conservative as they come, and he isn’t afraid to show it. A devout Christian can often be heard quoting bible verses and cursing out callers for their “dumb mistakes”…without actually cursing.
Inadequate Emergency Fund
Ramsey’s recommendation of saving $1,000 in what he calls a “starter emergency fund” is often controversial among online financial circles. Sure, $1,000 may have covered most emergencies in decades past, but many people question whether it would be much help present-day as much of the world continues to experience record inflation rates.
Leaving Money on the Table
Ramsey is strictly against investing until you are free of all non-mortgage debt. His reasoning echoes his belief that focusing any extra household income on a single goal is more powerful than dividing it amongst your student loan debt, credit card balances, Roth IRA, etc.
According to Ramsey’s Baby Step plan, the next baby step instructs you to invest 15% of your income once debt-free. Ramsey offers specific information on how to execute this plan, including what type of mutual funds he thinks you should be investing in.
Many financial advisors criticize Ramsey’s insistence that you avoid or completely stop all investing – including any 401K or pension contributions – while you’re carrying debt. Investing is a long-term game. The longer you wait to invest, the more likely you’ll be missing out on compound interest you could be earning. When it comes to saving for retirement, the best approach is to start as early as possible to maximize growth and time in the market.
Depending on how much debt a person has, it may take years before their debt payoff journey is complete; according to Ramsey’s plan, that would mean years without investing a single dime leaving many people financially vulnerable in retirement.
Form Your Own Conclusion
To many, he’s “America’s trusted voice on money”; others would prefer not to hear his voice at all. Yet whether or not his tough-love approach to money and life lessons resonates with you, there’s no denying Ramsey and his life’s work have made a significant impact in the lives of many families.
Dave Ramsey may have one of the largest platforms (and the loudest voices), but other financial experts are waiting to share their equally impactful messages with you if his principles are a turn-off.
