I have a few issues with Dave Ramsey’s 7 Baby Steps.
There is denying that they have worked for thousands of people in the past, but it doesn’t mean they’re perfect financial steps to follow.
In fact, after 2020’s pandemic, Dave Ramsey is catching a lot of flak amongst the personal finance community for being outdated.
He prioritizes paying off debt above all else. He insists on having you pay off your loans before building a significant emergency fund, and before investing.
Time is our biggest asset with investing and you need to start TODAY.
Another thing that I find surprising is he already assumes you have a house. In Baby Step 2 he talks about how you don’t need to pay off your mortgage. What if you’re renting? At what point do you buy your first house?
My version of Dave Ramsey’s Seven Baby Steps accounts for those who are renting and have not bought their first home. They are also updated to reflect people’s lifestyle changes since he first came up with his steps in the 1990s.
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The Modern version of dave ramsey’s 7 baby steps
Dave ramsey’s baby Step 1: Save $1,000 For Your Emergency Fund
Modern Baby Step 1: Save 3-6 months of expenses for your emergency fund and place it in a high yield savings account
$1,000 is not enough for most emergencies. Last month I paid for my dog’s surgery and it cost me $850. If I was following Dave Ramsey’s method then I would have almost depleted my whole emergency fund!
If 2020 taught us anything, it’s that no job is safe from a worldwide pandemic. Professors, engineers, and accountants that I personally know were forced to take furlough. The COVID-19 pandemic didn’t stop at the service industry- everyone was affected in some shape or form.
You need an emergency fund of more than $1,000! Plain and simple.
If you’re self-employed I recommend saving at least 6 months of expenses in your emergency fund. For those with more stable jobs, 3 months should be enough.
Quick Emergency Fund Calculation:
EF= Bare Essential Bills * 3 months
Once you’ve saved your emergency fund, place it in a high yield savings account that is FDIC insured and will earn you more interest than a traditional savings account!
Dave Ramsey’s Baby step 2: Pay off all debt (except house) using debt snowball method
Modern Baby Step 2: Use the debt avalanche method to pay off all high-interest debt (i.e credit cards). Do this WHILE investing up to your company match. Once you’ve paid off your credit cards move on to Step 3
Baby Step 2 is not quite as straightforward as Step 1. This one is a two-parter.
Part A.
Use the debt avalanche method and organize all of your debts from highest to lowest interest rate. Focus on paying the higher interest rate debt first (interest rate above 8%)! This will typically include your credit cards.
Why 8%?
The average return on the stock market from 1957 to 2018 is 8% per year. Thus, if any of your debts have interest rates below 8%, your money is better served being invested.
*Don’t forget to pay the minimums on all of your debt though!*
Part B.
Find out if your company matches any of your contributions towards your 401k, 403b, etc.
If your company does match your contributions, then do your best to contribute up to that matching limit! That is literally free money they are offering you in order to incentivize you to contribute to your retirement.
If your company does not match your contributions, then I recommend investing at least 15% of your income for this particular step.
Read: Snowball vs. Avalanche Method
Dave Ramsey’s baby Step 3: Save 3-6 months of expenses in a fully funded emergency fund
(If you’re following my method, you would have already done this!)
Modern Baby Step 3: Invest up to your company match for 401k, continue using debt avalanche method to pay off your high-interest debt. Start saving for a house
This is a continuation of Baby Step 2. Continue paying off your debts and investing into your retirement. This is also the time to start considering buying a house if you live in a lower cost of living city, or perhaps even beginning your real estate investing journey.
I personally recommend using a lower down payment program of 3-3.5% for a primary residence. I’ll dive deeper into this in a future article but with mortgage rates being below 4% right now (January, 2021), your money is better served being invested into paying off your debt and going towards your retirement rather than a heftier down payment.
Dave Ramsey’s Baby Step 4: Invest 15% of your household income in retirement
Modern Baby Step 4: Buy a house! But, continue to invest up to your company match for 401k, and use the debt avalanche method to pay off your debts
Invest at least up to your company match, buy a house using the down payment strategy we discussed in step 3. Use the remaining money to pay off your debts.
Dave Ramsey’s baby Step 5: Save For your children’s college fund
Modern Baby Step 5: Pay off all of your debt using the avalanche method. Make a plan to max out your 401k and Roth IRA. (These maximum contributions change every year so be sure to Google it for an updated number! Also Roth IRA has an income limit so be sure to check if you’re within that)
Congrats! You are finally debt free!
Now that you’ve paid off all your debts, you can use the money you were allotting for the avalanche method to contribute more towards your 401k and Roth IRA. Aim to invest around 20% of your income and gradually progress towards maxing these accounts out so you get tax benefits as well as retirement growth.
Dave Ramsey’s baby Step 6: Pay Off Your Home Early
Modern Baby Step 6: Start investing in real estate, max out 401k and Roth IRA and contribute to an investment brokerage account.
I disagree with Dave Ramsey here as well. If your mortgage rate is lower than 8%, then it is worth it to focus on maxing out your 401k and Roth IRA instead. Once you’ve maxed out those retirement accounts, then you should start focusing on real estate investing or investing through a brokerage account (Fidelity, Charles Schwab and Vanguard are popular options).
Dave Ramsey’s baby Step 7: Build Wealth And Give
Modern Baby Step 7: If you choose to have children then start saving for their college funds. Read The Budget Mom’s article on the 529 college savings plan. Otherwise, continue building wealth and giving back.
This was Dave Ramsey’s baby step 5, but I pushed it back to the end. I currently don’t have children so this is my last priority as of now. But, as I grow older then things will shift.
Remember, these steps are used as a rough timeline but you can adjust them to your own priorities and lifestyle as you see fit.
At first glance, the modern 7 Baby Steps might seem like they take longer to accomplish, but remember it is a marathon not a sprint. Investing is so important to take advantage of when you’re younger and that is the main focus of these Seven Baby Steps.
Final Take Away on dave Ramsey’s 7 baby steps
Invest early and often!! Use the debt avalanche method and focus on the math of your debt free journey.
But, if you find yourself struggling with the debt avalanche method and prefer Dave Ramsey’s 7 Baby Steps, then by all means stick to what brings you the most success.
Like I always say, personal finance is personal and you need to take advantage of the methods that work for you.
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