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Home » Finance Guru Commentary

Dave Ramsey’s Baby Steps: The Better Version

Last updated by on 72 Comments

“Dave Ramsey – that guy is extreme, man! He wants you to sell your extra cars and pay off your leases and stuff…”

As a personal finance blogger who isn’t always open about the fact that he is a personal finance blogger to new acquaintances, I occasionally come across gems like this about personal finance gurus like Dave Ramsey and Suze Orman being extreme.

The result is that I’ve almost entirely bitten my tongue in half.

Of course, even my loyal readers think I’m a bit extreme at times. I once received a “reply” of one of my email updates instead of a “forward”, where the sender made the comment,

“You might find this email (and his website) interesting. This is a 20-something yr. old guy who writes a lot of good articles.  I will have to admit he does over-do the cheap-skate business sometimes…”

There we go again with that cheapskate name-calling. Seriously though, one of my prouder moments as a personal finance blogger.

But this post isn’t about me, it’s about the de-facto face of personal finance, Dave Ramsey. Speaking of that face…awwww… look at it! Isn’t he cute?! A little scruff, sport jacket, the hip bendy, frame-less professor glasses, and a smile squint so hearty that it begets an instant man-crush… snap out of it, Miller!!!

dave ramsey baby steps

Who is Dave Ramsey?

If you’re not yet familiar with Dave Ramsey, where have you been?

He has a syndicated radio show on over 500 stations, a plethora of books, a TV show on Fox Business, Sean-Connery good looks, and all kind of online courses and seminars that you can find out more about at his popular website, Daveramsey.com.

He’s made millions preaching his 7 baby steps. So many millions, in fact, it allowed him to buy this 13,307 square foot compound, valued at around $10 million – twice that of the home of his neighbor, LeAnn Rimes. His 1,454 square foot garage is bigger than my entire home.

Dave Ramseys Home

Best part? His reported $1,285 monthly electric bill almost matches the combined TOTAL living expenses for my wife and I. An environmental steward, he is not.

Dave and I have a bit of a history (I’ve written about him once and he has no idea who I am). The fifth post ever on 20somethingfinance (and one of the most popular to this day) was a disagreement with Dave Ramsey’s view on credit cards, which I think is short-sighted and actually a bit extreme.

But his very popular 7 baby-steps? Extreme, they are not.

Dave Ramsey’s Baby Steps

Just about everything Dave Ramsey preaches comes down to his 7 baby steps.

So, I thought I’d highlight each of the mega personal finance icon’s steps and my slightly/vastly more extreme versions (and in my opinion, more universal and enhanced versions).

First, here’s an overview of Dave Ramsey’s baby steps:

  1. Establish a $1,000 Emergency Fund for Immediate Emergencies
  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 IRA’s and Pre-Tax Retirement
  5. College Funding for Children
  6. Pay Off Home Early
  7. Build Wealth and Give

While I can think of a lot worse plans than this, you must remember this when it comes to Dave Ramsey – his incredible success with middle America is largely driven by his acceptability and appeal to the masses.

That would be fine, if you consider yourself average and want to stay there. The average U.S. personal savings rate is 5% and average net worth for heads of household under age 35 is $3,662, for the record.

Of course, if you’re going to buy $10M homes like Dave Ramsey, or heck, maybe just settle for financial independence and a tiny home that’s paid off, you’re going to have to do better than average.

Here’s my take on each of Ramsey’s baby steps and how you can do a little bit better.

1. Establish a $1,000 Emergency Fund for Immediate Emergencies

I agree that establishing an emergency fund should be priority #1. $1,000 is very low, however. Most major auto repairs will cost you more than that. Any reasonably set home insurance deductible will cost you more than that. The goal is to avoid debt or running out of money when emergency strikes.

#3 calls for an expansion of that emergency fund, but I’d plan on having $3,000 in emergency savings before moving on to #2.

2. Pay Off all Debt Using the Debt Snowball

If you’re not sure what the “debt snowball” is, Ramsey suggests paying off your smallest debts first, regardless of interest rate. His reasoning is stated as this, “The point of the debt snowball is simply this: You need some quick wins in order to stay pumped up about getting out of debt!”

I’m a numbers guy. Unless we’re talking about a huge difference in debt balances (i.e. $500 and $20,000), I think it makes the most sense to pay off your highest interest debts first. Figure out the maximum you can put towards your debts and put it all towards the highest interest debt. After that debt is paid off, go to the second highest interest debt, and so on. This will allow you to save money on debt interest EVERY MONTH until you are completely paid off.

3. 3  to 6 Months of Expenses in Savings

3 to 6 months is Sooooooo pre-financial crisis. 44% of unemployed Americans (as of May, 2012) were at 27 weeks and over in unemployment duration. That’s almost half over the 6-month mark. 12 months should be the new standard for emergency funds, with 6 months being the absolute minimum.

Dave goes on to say, “Keep these savings in a money market account. Remember, this stash of money is not an investment”. I completely disagree. Invest those funds in something conservative like a bond ETF (bonus points if you make it a commission-free ETF) so that inflation doesn’t eat at your balance. If the market tanks and your balance drops below 9 months, look at it as a buy opportunity, and replenish it. If the market goes up, you’ve just increased your emergency fund.

4. Invest 15% of Household Income into Roth IRA’s and Pre-Tax Retirement

Ugh. This is the perfect example of over-simplifying with what sounds like a solid rule and making it a general rule for everyone, to their detriment.

Dave does not mention 401K’s at all in any of his 7 baby steps. Why would you put any money into a Roth IRA unless you’ve first completely absorbed your employers 401K match? That makes no sense. That is free money you are leaving on the table.

Get your employer’s full match, then put as much as you can into a Roth IRA, then put as much as you can into your employer’s Roth or traditional 401K, up to the maximum 401K contribution.

5. College Funding for Children

Dave doesn’t get in to specifics on how much you should save for college, what percentage of your kids college you should pay for, or any other particulars. It’s just assumed that you should save for your kids college (because everyone goes to college) and that you should pay for it.

I’ll call this one incomplete. My personal view is that college isn’t right for everyone. And for those who it is a good fit for, they should pay at least half to learn personal responsibility.

6. Pay Off Home

More assumptions. Not everyone should own a home. If you do, paying it off is a great thing (if interest rates are modest or high). And should this step come after funding your children’s college? Doing so increases the amount of interest you’ve paid significantly.

7. Build Wealth and Give

OK. Making money and giving it? Who can argue with that?

That smile won me over, I guess.

Dave Ramsey Baby Steps Discussion:

  • What do you think of Dave Ramsey?
  • What do you think of Dave Ramsey’s baby steps?
  • How would you improve on his (or my) baby steps?

About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


72 Comments »
  • Mike says:

    I think there needs to be a pre-baby step. Step 0. Add up all monthly expenses, and see what can be trimmed to fund baby step 1 of creating the emergency fund. A lot of the Dave Ramsey followers don’t even have a monthly budget when they first get started, if the money is there, they spend it.

    I disagree with baby step 6. I think the money could be better used elsewhere than paying off a house early. A house payment, with a fixed interest rate is a fixed payment, with a continuously decreasing loan balance. It is a good way to fight inflation. I either have to rent or buy shelter, that is the only two choices. If a person is renting for 30 years the monthly payment is always going to increase with inflation.

    Baby step 5 needs an asterisk. *If you have no children, invest as much as possible into your own further education or retirement.

    • Nick Hovious says:

      I totally agree that cutting unnecessary expenses is the first step to building wealth. Many people focus on paying “debt” but they don’t pay attention to the $100+ per month for their cell phone and $500 per month eating at restaurants. Cutting these revolving expenses is the easiest way to generate available money for emergency savings.

    • Brock Andrews says:

      How sad that you people just don’t get it and keep hitting your head against the wall!
      The entire point of what Dave teaches is to feel “secure” and be debt free! That’s it. There is nothing more to it. You people that disagree with Dave about baby step six and paying off your home early just don’t get it. Of course you could take that money and invest it in something with greater returns while you keep paying your mortgage. But then your not out of debt which is the whole point. Dave says walking on the grass in your “paid off” house is a “priceless” feeling that can’t be matched.
      Don’t you want to own your home and say and feel and know you actually own something? I got news for all you to smart for Dave’s advice people. If you have a mortgage on your home, not matter how small or large, you don’t own anything. The bank owns that home and you are a renter. You own nothing. Pay it off and quit trying to be some investing expert going against Dave’s advice.
      This reminds me of the recovering alcoholics who think its ok to have just “one drink once in a while. Its not ok. Pay off the home and don’t have “one” drink.

        • Robert says:

          As long as there are property taxes, you’ll NEVER own the grass or any other part of your yard/home. As soon as you stop paying taxes, the government will step in and show you who REALLY owns the land and everything on it.

          • Mike says:

            Not if you are over 65 and live in Texas and don’t have HOA. In Texas, if you are over 65 and file an over 65 exemption, you can’t lose your home for non payment of property taxes. you can lose it for non payment on a mortgage or in some cases HOA fees, but not non payment of property taxes.

    • tannis says:

      Mike you obviously are ignorant with money. When you pay someone interest for thirty years you lose 10′s to 100′s of thousands of dollars for the privledge of being in debt for 15-30 years. You are a slave when you owe someone something. But we all learn in our own special way in time… Good luck with your plan!! You will need it.

      • Scott says:

        No, I’d say the jury is still out, because you’re only looking at half the question: what is return with the use of that capital? Mike thinks he can get a better return than paying off his mortgage – more power to him. But if he spends it on a vacation, then yes, he would have been better to pay down the mortgage. Ex: I have a $170k mortgage balance, recently refi’d 30yrs at 2.7%, but have $250k in tax favored investment accounts (Roth IRA, 529, etc), and $75k in a small business bank account. Under your suggestion, Tanni, I should pay off the mtg, so I’m not paying thousands of $ of interest, right? ~2% (after-mtg tax ded) return is my investment break-even, and I think that is a very low bar. Bottom-line: to make a judgement, you have to answer what risk/return are you expecting w those funds vs the “guaranteed” return of investing in your mortgage note.

    • Alexis says:

      I am always looking for ways to save money. Unfortunately tips people usually give are things like cutting luxuries such as cable, eating out just once a week.. ect ( when for us its more like twice a year, so eating out once a week would increase our spending ;p we also do not have cable, we don’t rent movies, once a week i get a code for a free rental from red box, i think we use it once a month.) We have nothing left to cut out, but we don’t have the “need” to do so more just my eagerness to see out savings grow. Now if only I could get my husband to stop buying books on the internet. (in his defense most of them are very useful to his degree and he finds great deals, he just found a book that sells in the discount book store here “Text Books For Less” for $100 he paid $15 for what was to be a used book and it came to us looking brand new.) okay off topic sorry

    • Mark says:

      As far as paying off your home quickly:
      Here we go again with the “some debt is good” argument. If you were to say some debt is acceptable, you can probably make that case. To suggest that debt is preferable over no-debt is silly.

      Yes, you may be able to beat the “spread” on paying mortgage interest versus what you can earn elsewhere, but you fail to factor in the risk involved. How much are you willing to risk for a couple of points of interest (assuming your investment goes perfectly?)

      People that choose to pay off the house early are removing the risk involved in having a mortgage sooner, and willing to give up the potential earnings to do it. If your rate is 3%, then you are effecitevly “earning” about 3% on the money you use to pay off early. That is a guaranteed rate of return, with zero risk of losing that capital, and zero risk of your rate of return going down.

      If you could earn a guaranteed rate of 6% investing somewhere else, with ZERO risk of losing principle, and ZERO risk of the rate of return going down, you still have to factor in the risk that you’ll lose your income and not be able to pay the mortgage. Death, Disability, layoffs, other possibilities exist as well that could reduce or eliminate your income.

      It’s your money to risk, but suggesting that your way is better is a very subjective thing. Your plan looks good on paper, until life gets in the way.

  • Danielle says:

    You noted in this article that the average net worth is $3,662, but that’s not actually correct. That’s the average net worth for households headed by someone under 35. Net worth for all US households according to the report you referenced (http://www.pewsocialtrends.org/2011/11/07/the-rising-age-gap-in-economic-well-being/2/#chapter-1-wealth-gaps-by-age?src=prc-section) is actually $71,635.

    • G.E. Miller says:

      Good catch. Updated the article.

      • Alan says:

        Also noted that the article referenced only gives data on median net worth, not average net worth. These are 2 different numbers. My understanding is that the more extreme outliers (trust fund babies, etc) would be on the high side making the average net worth even higher than the listed median net worth.

        • Mark says:

          Median does not tell you a whole lot. Also if we were to look at a real average, it would be useful to know if negative net worths were used, or simply zero for those with no real assets. With SO many people underwater on their homes, It would make a difference. Negative net worth will certainly bring down the average, versus counting them as zero, but it would have ZERO effect on the median.

          Also, if every person whose net worth over $75,000 was suddenly given 5 million dollars, the median net worth would not increase at all. The average would certainly increase.

          The only point is that the median number is virtually meaningless. It only tells you the value of the data point in the center of the sample. It tells you nothing about any of the numbers below it, and nothing of the numbers above it.

    • Alexis says:

      Holy buckets! that’s a lot! pretty sure our net worth is not even 1/4 of that. but we have no debt… so thats a plus.

    • Alexis says:

      Just after my husband and I where married we started an “e-fund”
      it has not exactly stayed that way. But things did happen where we needed the money, nothing life or death, but bills and such, I was whats the PC term again “in a transition period” for a few months. Now we are building it again. But its slow going and its tempting to put more into the “fly over sees to finally meet my in-laws fund” then the efund. Also I wonder aside from the efund being online and with a different, what would be the difference in just dog earing everything and keeping it in one account. the account we keep the efund in gets the best interest rate. does no one have self control? They only reason I don’t keep all the savings in that account is that some bank fees are waved for transferring money into (and keeping a balance in) a savings account, But I guess it is nice to have two saving accounts one for Emergency and one for the saving for things like plane tickets.

  • My son is 10 months old now. I think that my wife and I are on the correct financial path and have succeeded with most of these steps.

    The college funding part is the tough one for us. Right now, we are affording to save approximately 10% of our income as I have recently started a new business and have had to go through some savings. Income is not where we want it, but I am still managing 10% investment.

    I do like what you said about paying for 1/2 college tuition. You make a good point about teaching responsibility and placing a value on the education received. I had my entire education paid for thankfully, however, I’m not sure if that was a good thing now that I look back.

  • Clint says:

    Nice article. Always been a pretty big fan of Dave’s plan and your writings. I do disagree partly with step #3 in that the emergency fund should be an investment. I like your idea of making it an investment, but currently my wife and I like to keep our e-fund in a savings account because of the low amount of income we are bringing in. We are on baby step 2 and having that e-fund ready to access without any penalties is important to us right now. In the future when we have more cash and no debt then I can see us using your strategy because it wouldn’t matter as much to pay the minor fee v.s the inflation loss we are taking by having our e-fund in a savings account.

    • Dave says:

      I was a little surprised to hear anyone (especially on a personal finance blog nonetheless!) recommend placing their emergency fund in an ETF, even a low-risk bond fund. It’s difficult to stomach the low returns right now for standard savings accounts, but the money isn’t there to make money, it’s there for a dire emergency. Can you really count on getting your money out in time if there is an emergency? Perhaps investing say 50% of one’s emergency fund in this way would be a better idea.

      • G.E. Miller says:

        I didn’t used to think that way, but this day and age with quick liquidity, having your funds just sit there and erode over the years seems wasteful. It’s more about outpacing inflation than taking huge speculative risks.

        If you use a credit card to finance payment for the emergency, you would have between 30-60 days to cash out the funds and receive them to pay off the card balance. You could cash out same day, and a transfer of funds can usually be done within 5 days. Pay off the credit card with the funds, and you’re good to go.

        As I said, if your balance is depleted due to market movements, you can replenish shares at a lower price.

        I don’t see much risk, but if you want to do 50% cash and it helps you sleep better at night, don’t let my opinion get in the way.

        • George P Burdell says:

          I disagree with you about putting unemployment/rainy day fund in bonds. Interest rates are at historic lows. When rates go up (and they will), bond prices are going to tank. That’s fine if it’s a long term investment.

          You might need this money tomorrow not years from now. Also, it’s bad to assume you’ll have extra money to put in if the balance has a significant drop.

          In the grand scheme of things, this should be only a small percentage of a person’s overall portfolio; so it losing value to inflation is insignificant imho.

          If you save 12 months worth; then I could maybe see putting 25-50% in bonds, but I’d only do short/medium term to minimize impact of interest rate changes.

          • Nick Hovious says:

            I agree that bonds can be risky with the impending rate increases. Another option may be putting the money in CD’s with a ladder maturity date strategy. This requires a bit more work than sitting it in a money market fund, but in many cases you interest will be better able to counter act inflation.

  • JP says:

    On Step 4, you’re not correct. I’ve often heard him suggest (and read in one of his books) getting your company match in the 401K first, maxing out your IRA, and then use whatever’s left of the 15% in the 401K.

    • G.E. Miller says:

      OK. His elves need to update his site then, b/c he is pretty specific with “Dave suggests investing 15% of your household income into Roth IRAs and pre-tax retirement plans.”
      http://www.daveramsey.com/new/baby-step-4/

      No mention of company matches on 401K’s before IRA’s.

      • KC says:

        Pre-Tax Retirement Accounts is a term that includes 401K’s. Remember that not all occupations offer a 401K, this does not mean that they do not offer any pre-tax retirement savings vehicle to its employees.

      • Thomas says:

        If you actually take the FPU class or buy the DVDs, he says that you can include your employer’s match as part of the 15%.

        • Mark says:

          I agree, but don’t forget that the more you put in, the more you will get out. By counting your company match as part of the 15% you are contributing 5% less than those who do not, which affects the amount you have at retirement.

          There is no right or wrong answer, I’m just pointing out that someone who contributes 10% plus their matching 5% will have a LOT less at retirment than someone who contributes 15% plus their matching 5%.

          Most companies with 401K plans will match you up to 5% while requiring you to contribute (usually) 5% of your pay. That’s a 100% gain from day 1! Who could possibly turn that down if they understand it?

          Just food for thought, not saying anyone is right or wrong for what they contribute in their 401K. It’s your money, and your life, so do as you please.

          I see it as deciding to live “larger” now or live “larger” later.

  • mdenis39 says:

    Dave’s Baby Steps are essentially an outline, especially for the financially illiterate. I’ve listened to his radio show on & off for 4 years and he really gets into the details of his plan tailored for each caller.

    I paid off my credit cards before listening to Dave and I did so using the mathematical method vs Dave’s snowball. But I agree with Dave – most of these people are so desperate that they need some quick wins to keep up the drudgery of getting out of debt.

    3-6 months of emergency fund – I agree that 6 mos should be your goal, 12 mos is a little extreme when you are trying to save for retirement, kids college & paying off the house. Also, 6 mos of unemployment benefits should cover at least 3 mos home expenses, that gives you 9 months.

  • David Schneioder says:

    GE, I LOVE Dave Ramsey. I think that 50-80% of America would be better off if they followed all of his advice. But that is because 50-80% af America has it’s collective financial head up it’s a$$. There are some incredibly smart people in the world, it just never ceases to amaze me how many smart people are financially illiterate.

    I am a huge fan of your website as well as Brave New Life and MMM. I consider these sites to be more in line finacial graduate course and for people who actually have a clue about their finances. Ask 80% of Dave’s listeners what a DRIP is and they could not tell you. They just know that they make $4000 a month and their payments are $4200 and want to know why they cannot make it.

    Dave has great advice, but it really is finance 101. It is meant to spoon feed some of the very basic ideas to people who let their lifestyle inflation spin forward ahead of their finacial abilities.

    I know you are not bashing Dave and probably feel he is generally helping people. When I talk to people about finacial stuff I usually tell them to listen to Dave and get out of debt as the biggest priority they have in life. Once they get that far, I tell them to start the next chapter in your finacial plan and introduce them the better site like yours.

    Keep up the good work sir. You are 20 years ahead of me.

  • Mommynator says:

    Dave Ramsey’s Financial Peace University saved our marriage and our sanity. You can disagree with him, but what he says works. It’s been two years since we took the course through our church, and we have managed to not only stay above water and pay off 95% of our debt, but we have also saved money and contributed more towards our retirement funds.

    At times it felt like we were trying to turn the Titanic using a rowboat, but the more we worked at it, the easier it got.

    It’s fine to disagree, but don’t discourage people from using this system. It does work.

    • Mary says:

      I don’t think he’s trying to discourage anyone from using Dave Ramsey’s method. He’s just adding some color to it from his perspective. Whether or not you agree with the specifics, the overall plan of building an emergency fund, getting out of debt, and saving for your future is the core of what both Mr. Ramsey and Mr. Miller are saying.

      In any event, I’m really happy to hear that you and your husband were able to tackle your debt so successfully. Congratulations!

  • Hannah says:

    I’m personally a Dave fan because his plan worked for me. I’ll echo what others say, Dave’s Baby Steps are meant for the financial illiterate.

    I agree with you though that it’s very cookie cutter and personal finance is unique for everyone. Once I was out of debt ($27k in 17 months), I created my own plan.

    For instance, I do use credit cards (which is a big no no for Dave), don’t follow his retirement savings percentage, and when I buy my house I’ll probably go for a 30-year mortgage.

    Dave’s house “baller” by the way and he deserves it.

    • G.E. Miller says:

      Well…. they are called “baby” steps.

      Maybe I should have called mine, “adolescent steps”?

      I think some Dave-lovers have interpreted this as a slam on Dave. It’s not at all. His impact is a net positive on the world. My version was for those who want to take it to the next level.

      • Andy says:

        I like your blog too, and I know you are not bashing Dave but come on…the guy brought the baby steps to the world and has probably contributed more than anyone one person has in reducing the national debt. He may live large, but he gives large too. I’m not bashing you either, but this seems a bit tacky. Kind of like taking the 10 commandments and making small adjustments to them and making them your own 2.0 version. From listening to Dave, far too many times people try to make their own rules (I was one of them) that differ from Dave’s and fall off the wagon, so to speak.
        Please, don’t underestimate the power of debt snowballng by smaller balance first.

      • jim says:

        I know this is a little off topic, but I couldn’t find another way to email you. Sorry, I’m an old guy, so bear with me. Our son recently graduated with 3 majors (history, political science and russian) – ha! So now, of course, he’s living at home and delivering pizzas. His goal is to get another job (or two) and save all his $ for law school next fall – (I know! I’ve read all the “don’t do it” articles”, but he’s hell-bent on doing so. Spouse and I are finishing up paying off our house and fully funding our retirement so we are not in a position to help him with law school and I don’t want to see him take out humongous loans. Can you do an article on this? I’d LOVE to hear from 20-somethings that have been there, done that. Thanks much.

  • warren says:

    About item 3. The money is indeed not an investment, it is a type of self insurance. The goal of insurance is to get the worst possible rate of return – outlive your term life insurance and get no money back, don’t get sick so the medical insurance doesn’t pay out for you, … The insurance is a product that you pay for, just as you pay for food.

    People tend to get laid off more when the economy has problems. So if the money is invested then there is a greater likely hood of there being less value when it is actually needed.

    Curiously enough, I know someone who only keep 3 months liquidity but at the same time has the longest range backup. For many years he bought bonds every three months so that now every three months some bonds mature and are rolled over. In a financial crises he would simply stop rolling them over. The way he described it, these bonds are his early retirement if there is never a problem and a temporary retirement if there is a problem.

  • Andrew says:

    I love your synopsis of Dave’s Baby steps. I read one of his books – Total Money Makeover a few years ago, and that has been the single most life changing financial book I’ve ever read. After that, I have a significant distaste for debt. I’m currently in between steps 3 and 4: set to max out my 401k contrib. for first time :). I ascribe to most of his teachings, but not all – I still own a credit card, but I agree with his advice around financing a home (No less than 15 yr mortgage, and no more than 25% of take-home pay).

    Your twists on some of his steps resonate with me: The ETF bond index alternative to the emergency fund is one. I’ll still keep the “step 1 emergency fund” as cash (And you’re right, it’s more like $3000 than $1000), but having a credit card to bridge the gap towards liquidating the ETF is added insurance.

    I love the thought around having kids pay a portion of their college education. I don’t have kids, but mentor a high school age kid. This is a glaring understanding gap at his age (it may have been true for me as well) – The value of money, and the concept of money as the reward for hard work to the benefit of something in society.

    I like one of the earlier comments on funding additional education for yourself if you don’t have kids. Life-long learning a huge desire for me, so making sure you’re able to do that long-term is a good one.

    The only revision I’d have on his steps is Step #7. Maybe it’s meant to be a life-style type thing being that far down. But I think it’s important to mark every financially positive step by Giving. The thought of improving one’s self while contributing to society in a positive way is foundational to how I think life should be lived. There’s no better feeling than giving, and it’s great to have that interwoven into any financial improvement plan.

  • Brian G says:

    Baby Step 4:
    Dave does say to use your employers match on the 401k, but not to go higher as they can have high fees (see your post today about rolling them over to an IRA).

    Good post otherwise. You may want to add at the beginning that he did ‘make it rich’ through real estate and lived on Credit Cards before it all hit the fan and they went bankrupt.

  • Holy crap…I never realized that the average net worth of sub 35 year olds was that low! Would you believe I’ve never heard of Ramsey before =P

  • Nicholas says:

    Dave Ramnsey is great for folks who have debt problems. He is terrible for investing. Don’t listening to his investing advice.

  • ross says:

    You said in your article that Dave Ramsey doesn’t mention a 401k at all. I would suggest reading his book instead of flipping open the table of contents and taking notes. He says in his book to “first max out your employer 401k” then move on to other investments. Im not defending Dave Ramsey, but it makes you seem like a less credible writer when you dont have your facts straight. Now it seems like you’re just another joe with an opinion

    • David Wahl says:

      What Ramsey actually recommends is to first take full advantage of the employer match on whatever account(s) they will match, then invest in a Roth IRA and pre-tax retirement accounts (aka 401k/403b). My guess is that he doesn’t specifically mention 401k because many people have other types of pre-tax IRAs like a 403b.

  • Blake says:

    GE, I was about to chime-in on the 401k matching, but I see some fellow Dave listeners already beat that dead horse. For the rest of the baby steps, Dave has reasoning for each of your concerns. You’ve gotta bring your A-game when you are writing about the most popular financial advisor in the free world! So I recommend reading Total Money Makeover and Financial Peace University, if you can stomach the basic concepts long enough to finish them.
    As some others have mentioned, Dave is speaking to the masses, which are financially…challenged. He can not take the stance of recommending credit cards as long as you (audience) are responsible, because everyone thinks they are responsible when they couldn’t be further from it!
    Same goes for the Debt Snowball. Dave acknowledges that paying off the smallest debts first is not the mathematically correct strategy. But if people were considering the mathematics of their finances, they wouldn’t be in debt in the first place! His position focuses on the psychology of paying off the smallest amount first and gaining momentum to actually continue and finish.

    I love your website, and I visit at least once a day. Your topics are very interesting, and I’ve recommended this site to most of my 20-something friends! I mostly love your conservative views on finances and “stuff.” You are actually similar to Dave in a lot of areas…that’s a compliment.

  • Andew English says:

    Not knocking the plans, all sounds good. But what aboutfor the peope who really are making it by the skin of their teeth? I live in a 1br apt, with my “stay at home” wife and “2 year old” kid. All bills are just under 1200 a month, and I make 1350… and of corse that 150 goes to food… my job does not offer any types of benifits… where is the plan for folks like me? And no, the wife can’t work, cause then she would be working just to pay the day care bill. And then shouldn’t even have the bond she does with our daughter…
    Again, both plans you guys have work, for people who make a crap load of cash. and seems like all the people who call into the show, all make over 70k/yr… just a little discouraging for us who make under 30k…

  • Warren says:

    There’s a relatively new factor about him telling people to pay off the small loans first. Now that credit card statements have to show how much would be paid in total and for how long, those credit cards with large balances would be a monthly reminder to stop using credit. Being reminded that the cost of a buying a large television with credit could have paid for a car or that a couple meals out removed a vacation from someone’s future might be significant motivation.

  • Ashley T. says:

    I happened into this post when googling for Dave Ramsey, emergency funds and money market. I enjoyed your post and agree with most of your points. DR’s plan is so customizable because it is so vague – that’s a GOOD thing.

    Did want to point out, however, that Dave does discuss that 15% retirement contribution specifically in his book, Total Money Makeover. You actually agree with him completely on that note – invest in 401k as high as your employer matches. DR suggests investing in mutual funds after that with your remaining percent. I will say that he has high hopes for returns – he estimates the mutual fund returns WAY too high. He also states to stop all retirement contributions while repaying debt. I disagree completely. In terms of our debt situation, our 401k matches outweigh our interest on our debts.

    Again, agree with you on home ownership. We are happy renters and plan on being renters until at least our children go off to college (which we will help with but not cover entirely) or possibly even retirement. As long as you are living within your means, renting can be a great option long term to avoid home owner repairs while still paying less for rent in 30 years than you would pay for the interest on a conventional mortgage.

    Dave made his money in the real estate business both the first time around and the second time after his bankruptcy. Not to mention his millions of followers helped buy that garage that my entire family could live in comfortably. However, I’ve read his books and listened to his podcasts. He is definitely a great find for the average Joe American that is sky high in debt due to ignorance and stupidity. A lot of his ‘common sense, vague’ advice is geared toward that crowd I think.

    Regardless, glad I found your post – I’m off to read some of your other cheapskate posts ;)

  • Kevin R says:

    Hi G.E. Miller, I have a question about your comments regarding Baby Step #4 … First, you indicate that one should max out their employer 401K match (agreed … I get that (free money)). Next, you recommend maxing out a Roth IRA contribution, and then coming back to the employer’s Roth or traditional 401k.

    Hence, my question … Please help me understand the advantage of shifting to an “external” Roth IRA, before coming back to contribute in ones employer’s Roth/401K. Much appreciated!

    • Warren says:

      I’ll answer this one. Especially since I was in the situation where someone should NOT go to the IRA before filling up the 401K. With an employer 401K, you are limited to the broker that the employer chooses and the limited number of investment choices. On the other hand, when you get an IRA you can choose any broker and any funds. Most of the time you can find a broker where the funds can give you a better return and lower fees. Over the course of your working career the small differences add up.

      No my situation for a few years was the opposite. I was working for a large brokerage firm with so many choices I had what I wanted and there was NO brokerage fees and low fund fees. In addition we had access to very excellent advice. No IRA or other 401K ever did so well for me as that one 401K. But this was something like a 1 in 1,000 case.

  • Jennie says:

    I went through the Dave Ramsey program and I will tell you why it worked for us. First of all, the debt snowball, paying off the smallest amounts first regardless of interest rate gave us the incentive and success to keep going. This is reality in America. We paid off our bills a ton faster so we ended up saving alot on interest.
    We saved 1,000. Yes this is not much and we were lucky not to need to dig in it but we worked our tails off and sacrificed to pay our bills. In 7 years we paid of
    4,000 credit card
    6,000 credit card
    7,000 school loan
    18,000 credit card
    150,000 in student loans
    We are now working on paying down our house. We could not have done that if it wasn’t for his program. Unfortunately had kids in college already but they are now working and doing fine on their own. We have a ton of money that we put on the credit cards/loans below that we have now to invest… You need to start somewhere and when you are that much underwater it takes something simple like a snowball method to get it started…

  • Mark says:

    Very good different point of view here.

    There are different routes for everyone to get to a better place. Dave happened to be out there with sound principles, even though you can argue with them.

    I agree with you about having a larger emergency fund.

    Dave does on his radio show now, tells you to fund your 401k up to the employers matching fund and then put it in the Roth IRA. That is nice, but has anyone talked about the fees of the IRAs? On a recent PBS Frontline ( http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/ )they talked about this in depth. It seems like some of us could have much larger portfolios if we investigate further, but who knew this stuff????

    My employer says having a home paid for is like having a shoebox full of money under your bed. What is it doing for you? He suggested that if you did pay off your home, then reinvest part of that idle money into a property and build equity and hopefully the value grows, too. Even in a down market, acreage around my town is still selling for 15k per acre-ten years ago it was 3k per acre.

    Dave doesn’t like credit cards, however, if you become the well trained and budgeted, you can get a card that pays you back on all of your purchases. 4-5% ??? That could be a few “free” hundreds of dollars at the end of the year. Just religiously pay off your balance and stick to your budget and grocery list!

    I will leave you with this. If Nashville is my designation, there are several routes from my home that I can choose to travel. some may be faster, some may be safer or more scenic, it just depends how you want to travel. One thing is for sure, my money isn’t arriving at Dave’s house.

    Thank you……………..

  • Kody says:

    Don’t really understand how this is the “better version”. A lot of this is the exact same information that Ramsey preaches.

    For example, if you read into Ramsey’s step #3, and not just look at the description, you’ll learn that taking your employer’s full 401k match is the first thing Ramsey suggests you to do. Ramsey teaches to devy up your 15%, starting with matching 401ks, then to mutual funds, other counts, etc.

    Miller says “Ugh. This is the perfect example of over-simplifying with what sounds like a solid rule and making it a general rule for everyone, to their detriment.” Give me a break, bro! You didn’t even read into Ramsey’s principle here, and if you did, you misrepresented his material as your own! Not cool.

    • Kody says:

      Miller also says, “Dave does not mention 401K’s at all in any of his 7 baby steps.” That’s certainly not true. Ramsey is very clear that Roth 401ks are the way to go as you take the pre-tax benefit. This would fall under “Pre-Tax Retirement” in step #4. RAMSEY MENTIONS IT. A LOT.

  • Mark says:

    If you want you finances to be average, do what the average person does. If you want your finances to be extraordinary, you must take extraordinary measures. You COULD rely on luck to do it for you, but if you want guaranteed success, you have to use a guaranteed plan.

    If you spend all your money, it’s a REALLY safe bet you’ll be broke. If you save your money, and spend wisely, it’s a REALLY safe bet that you’ll have money.

  • tebici says:

    Another slight correction. If you dig a little deeper Dave essentially says that steps 4, 5, and 6 are happening simultaneously. Although now he does list them in order of priority. He says you shouldn’t save money for kid’s college until you’re funding your retirement because college is a luxury (something with which you seem to agree). Also the priority of college is going vary on circumstances like do you have kids and how old are they. If they’re 17 and they’re going to college then saving for college is more urgent than paying off the house unless you’re going to let them pay for it on their own (and of course Dave would say not to co-sign on student loans).

    You’re kind of reading more into a lot of the steps than is really there. He does kind of encourage people to buy houses sometimes but baby step six doesn’t say “go buy a house”. It’s says pay off your house [if you have one]. He’s got very specific guidelines when it comes to house-buying that set a fairly high bar (20% down and 15 year mortgage that is less than a third of take-home pay).

    Another note, part of the point of the 1,000 emergency fund is to make you feel uncomfortable so you work your bum off to finish baby step 2. Whenever you hear him talk through specific situations on the radio, none of the rules are completely hard and fast. If you think you’re going to lose your job or move or have a baby (or maybe if you have a family of six) he totally supports saving up extra for a short time and then paying off.

    People who really need strict guidance will follow his rules to a T. People who feel a little more confident (hopefully justifiably) in their financial management skills will fudge it. I already had more than 1,000 saved so I kept that, though I eventually used it to pay off my loans completely before saving up again. And I do have family and friends such that if I get fired I won’t be living on the street. I also use credit cards and pay them off every month. I’ve been using them since college and never carried a balance. Dave sets out the goal posts and people can decide for themselves where they want to deviate.

    Finally, dead horse, but you don’t even have to dig on the 401k thing. A 401k is “pre-tax retirement.”

    Anything that fits into six sentences is going to be dumbed down. There’s plenty more depth for anyone willing to read more.

  • Stephen Embree says:

    Paying off your home mortgage is not a good investment decision. If you do the math, the leverage you get from a having a home mortgage turns a home into a great investment.

    Ex. I bought my home for $100,000 using $25,000 downpayment and a 5% APR mortgage. My home value rose 2% in the first year to $102,000. I took the $75000 I could have spent paying off my mortgage and invested it in the stock market. My return there was 8%. My investment return can be calculated as follows:

    Increase in home value: $102,000-$100,000 = $2000
    Interest paid in first year (approximate): .05*$75,000
    Increase in value of stock holdings: .08*75,000
    Total money invested (including home equity and stocks): $25,000 + $75,000

    Total return on my $100,000 investment:

    100%*(2000-.05*75,000+.08*75,000)/100,000 = 4.25% return on investment

    This is return is twice the return I would have received if I had paid for my house in full. My return would have been 2% (the increase in value of the home).

    I don’t understand why you and Dave Ramsey are advising people to pay off their mortgages. It’s not a good investment decision. I suppose it might make some people happy to pay off their mortgage since it one less thing for them to worry about. It is not a good investment decision though.

    • scott says:

      @Stephen

      Comments in a couple areas:

      ANALYTICAL:

      - You left out the savings from interest deduction!

      - will quibble with some details / assumptions:

      ^ the increase/decrease in house value will happen independent of whether there is a mortgage or not.
      ^ the minimum equity in the house should not be factored in the comparison, since you are keeping that in the house in both scenarios.
      ^ 8% / 5% is quite high today – should probably be a couple pts lower for each.

      - largest factor, you ignored risk: unless you have quite the inside track, your 8% will take more risk than your 5%

      I would calculate/reason this way:

      $75k * 5% * [1-x] = $3750 * [1-x] ^^x=marginal tax rate

      @ 15% tax bracket: $3750 * 85% = $3187 guaranteed annual return over the remaining life of the mortgage.

      Then I would ask myself – Is my guaranteed return of ~$3k/yr and less availability of funds, worth the risk of my other investment option(s)?

      EMOTIONAL

      The reason why Dave and others advise mortgage is because they factor human behavior. Generalizing, most people don’t separate the emotions from investing / purchasing. ex: The average person would be much less likely to spend $2k on an upgraded vacation/car or other discretionary expense if they only had $5k in their bank account vs $80k.

      Same idea as when people are happy they get a tax refund in the Spring. I (and I suspect you, Stephen) wouldn’t like it, because Uncle Sam had the interest-free use for that money. Some people use it as a forced method to save, because they know they will spend it if they have it.

      The strategy of paying down the mortgage is for the people who need that forced discipline, which is likely going to be a majority of people seeking Mr. Ramsey’s help.

  • Bruce says:

    Remember the name of the system, Financial Peace. Peace being the operative word. Debt=risk/worry. No debt, no worry. It’s the human factor for “most” Americans.

  • Ryan says:

    “Dave and I have a bit of a history (I’ve written about him once and he has no idea who I am).”

    Hilarious. I laughed out loud. Keep up the good work. I am learning a ton.

    Ryan

  • Rick says:

    It’s pretty obvious you haven’t REALLY studied what Ramsey says. You over-simplify his steps (ironically). In at least one case you actually “corrected” him by saying exactly what he says in his course. [Step 4] Why don’t you take his FPU course, THEN critique it?

      • Rick says:

        A. If you can’t afford it, they offer “scholarships” which allow you to take it for free.

        B. Either way, you’re critiquing something that even a casual Ramsey follower can tell you really don’t know what you’re talking about.

        I do appreciate you are trying to do a good thing and maximize people’s financial status. You’re trying to improve upon his plan, nothing wrong with that. But, unless you really study his plan then this blog post is not a helpful critique. It’s not even accurate. It comes across as you’re looking for a (verbal) fight rather than genuinely understand his plan.

        If you take his course and revise this with an accurate portrayal of his method, and your response to that, please email me or reply here. I’d love to read that as I’d like to tweek my financial plan as appropriate.

      • Rick says:

        BTW, although your 1-3 steps miss the spirit of what he teaches, I’ll give you your points that you make. But, 4, 5 and 6 you really need to go back and see what he says about those because you got it wrong. Again, he goes into detail in the FPU course.

  • Bruce says:

    In your alteration of baby step 3 you mentioned a 12-month emergency fund in a ETF. But even something ultra conservative has risk. Couldn’t a bond fund drop low enough to lose money lower than the 12 month period at the same time you lose a job or have an emergency? Aren’t you inviting risk into an area where safety is required? I would love my money in a bond fund so can you help explain your rationalization here please? – Bruce

    • G.E. Miller says:

      If your position drops below a level where you are comfortable with, you can add to the position and benefit on a recovery. 12-months is almost twice the normal recommendation, so even if your fund lost half its value, you’d still be in the same place as if you had saved a 6-month emergency fund.

  • Bruce says:

    Thanks for your reply

  • Bruce says:

    Would you please explain a bit more about your bond fund? If the principal drops from 12 to 6 months then that goes against your point of a 12 month fund. Would you please share some more reasons to have this money in a slightly risky investment and chance the loss of principal when this money needs to be protected for an emergency?
    I really love this article and agree with every other point you make. I hope to learn more about your reasoning for this point. Thanks

    • G.E. Miller says:

      Risk is a matter of perspective. Just as your fund could go down 50%, it could go up 75%. The only thing that is guaranteed is that if it is not invested, it will lose about 3% of its value every year due to inflation. In my opinion, that is risky. Why not put your money to use and if the fund drops, backfill it so you can gain on a recovery?
      It’s one point of view. If you’re not comfortable with the risk, then don’t do it. Maybe one of these days, interest rates on CD’s/money market will return to levels where it makes sense to put it in them, if you’re not comfortable with more risk.

  • Dima says:

    I don’t think you have read Dave’s information lately, he DOES recommend to take the companies match.

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