Dave Ramsey’s Baby Steps (and Why I Ignore Them)

Believe it or not, I have had multiple conversations about Dave Ramsey over the past couple weeks.

Dave Ramsey appears to be the introduction to personal finance for a lot of people out in the real world. While there are hundreds of great personal finance blogs, people are much more likely to stumble across the best selling personal finance book or the radio host that wrote it.

And that’s great. Any introduction to personal finance is better than no introduction to personal finance. If the options are Dave Ramsey or blind consumerism, then put me in the Dave Ramsey camp.

The problem is that people that find Dave Ramsey (at least in my experience) have had a tendency to preach Ramseyism as if it were The One True Word of personal finance.

So in response, here are the reasons that I am ignoring Dave Ramsey’s Seven Baby Steps (the central core of his personal finance prescription) and why you might want to as well.

1. $1,000 to Start an Emergency Fund

Dave Ramsey is virulently anti-debt. Like, sell all of your stuff to pay it off, anti-debt. Like, there’s no such thing as responsible credit card use, anti-debt.

Which makes it so surprising that he advocates building a $1,000 emergency fund before paying off your credit card debt. This doesn’t make sense from a numbers perspective. I have, in fact, previously advocated getting rid of your emergency fund if you have high interest credit card debt. As I said back then:

“Money is money is money. You have a positive balance in your savings account earning you 0.06%. You have a negative balance in your credit card account costing you 17.55%. Every month that you keep a spare $1,000 in your savings account rather than paying down your credit card, you are throwing away money.”

Ramsey’s argument is that, “When a car battery goes out or a baseball meets a window in your house, you won’t have to go into debt to fix it. You don’t want to dig a deeper hole while you’re trying to work your way out.”

But this doesn’t make sense. If you are already in debt, then the emergency fund doesn’t save you from going into debt like he claims.

Instead, you are saving $1,000 in case you have an emergency so that you can pay it in cash rather than putting it on your credit card. But you can put that $1,000 directly towards your credit card instead and end up better off.

If an emergency comes up, you can put it on your credit card. It will suck to see your balance bounce back up, but it will have already been lowered by the $1,000 from your emergency fund, so you will still be better off by the numbers.

Here, Ramsey is trying to protect you from the psychological hit of seeing the credit card balance go back up. However, the psychological protection will cost you in cold hard cash. If you feel that you need that psychological boost, then follow his advice. If you would rather keep your money for yourself rather than paying unnecessary interest, then feel free to ignore it.

2. Pay Off All Debt but the House

An important sub-part to this is his snowball method of debt repayment. “The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs.”

So if you have an $800 balance on a 0% interest car loan and a $2,000 balance on a 20% interest credit card, then Dave Ramsey wants you to pay off the car loan first.

This is a waste of money.

Paying off the highest interest debt first, regardless of the balance, means that you will pay less interest. This means that you will spend less money getting out of debt.

Dave Ramsey is advocating voluntarily paying extra money to credit card companies.

There is a rationale behind this position, of course. The idea is that it is easier to pay off lower balances and it will feel good to see that bill be completely paid off. This good feeling will motivate you to keep going.

If you are at risk for giving up on paying off your debt quickly because it feels insurmountable, then follow Ramsey’s advice. But like with Step 1, if you don’t need the psychological boost to keep you going and would rather keep as much of your money as possible, then ignore it.

There is also a third option when it comes to some debt: learn about forgiveness options. This is a tack that I am taking with my student loan debt. After taking on a significant six-figure student loan debt to pay for law school, I have dedicated myself to public service. Part of the deal with public service is that your loans can be forgiven after ten years. Because of that, it makes no sense for me to pay this off as quickly as possible.

3. 3 to 6 Months of Expenses in Savings

I actually don’t have a problem with this advice as a rule of thumb. I do have a problem with this being applied as a hard and fast rule for everybody. And I have a problem with it being placed above 401(k) contributions with an employer match.

An employer match is a 100% return on your investment. Or, depending on the terms, a 50% return if your employer matches 50% of your contribution. Either way, it is much more than you would be paying in credit card interest and much much more than you would be making in savings account interest.

It is also a limited time offer. If you do not get your employer match for 2017, you can’t go back and get it in 2018. If you choose not to get your employer match, then you are throwing away a guaranteed 100% return on your money.

As for the use of the 3 to 6 months of expenses as a benchmark, just think through how it applies to you and your income.

Are you a freelancer? Are you at a start-up or in a particularly volatile field? Then maybe keep a larger emergency fund to offset the variability or volatility of your income.

Are you in a government job? A union job? Are you from a two-income household where the incomes are from different employers and fields? Then you could probably keep a smaller emergency fund because the risk of job loss is lower.

4. Invest 15% of Household Income Into Retirement

The average American savings rate is 5.7%. That means that following Ramsey’s advice here would put most people in a much better position.

But is it enough?

Looking at the chart from The Shockingly Simple Math Behind Early Retirement, we can see that a 15% savings rate leads to a working career of 43 years. This means that if you want to live a comfortable retirement, you can save 15% of your income from your college graduation at around age 22 until your retirement at age 65.

Assuming you actually start saving at 22. And assuming you have a steady income. And you don’t lose your job at any point. And you don’t want the option to retire early. And health issues don’t force you to retire early.

15% is a great starter goal for your retirement savings. Hit it and then set a new, higher goal.

5. College Funding for Children

My wife and I don’t have kids at this point and so college funding for those non-existent children is not a part of our current financial plan. Because of that, I can’t really weigh in on where this should fall in the list of priorities.

What I can do is give you some common-sense wisdom that has been floating around the personal finance blogosphere: Your kids can borrow money for college. You cannot borrow money for retirement.

Just running the numbers, it looks like you should be saving more than 15% towards your retirement before you move on to college funding.

Beyond that, this comes down to a matter of your personal priorities. Do you want to give your kids some support? Pay for their full way? Pay for grad school?

Where do those different levels of support fall in your list of other priorities?

I have no problem with people placing college funding for their children next in their financial to do list. But do it because you made a conscious decision that it was your priority, not because you were told that it is the correct answer by someone that has never met you.

6. Pay Off Home Early

Sure. Why not? If this is what you want to do.

From a pure numbers perspective, when you accelerate payments on your home should be based on the interest rate on your mortgage. Is it higher or lower than the expected return on an index fund?

But whether or not to pay off your home early often comes down to more than numbers. There is a level of comfort in not having to worry about your ability to make mortgage payments if you lose your income. There is a level of comfort in having more flexibility with your future income.

I don’t have a problem with making a mathematically inefficient decision here. Especially because you will then have lower expenses in retirement and the option to downsize to a smaller house and cash out the difference.

As with college savings, however, where this falls in your priority list is a very personal decision and there is no one-size-fits-all approach.

7. Build Wealth and Give

Under the final step, Ramsey says to “Build wealth, become insanely generous, and leave an inheritance for future generations.” As far as tactics, he states that “Now you can max out your 401k and IRA so you can continue to live and give like no one else in retirement.”

Why is this last? Why wait to build wealth until your house is fully paid off and college is fully funded?

And you can probably guess that I am against waiting to max out your retirement accounts until this step. Even ignoring the idea of financial independence or early retirement, think of the tax savings you’re giving up by ignoring this in steps 1 through 6! That’s big money and big growth that you are choosing to miss out on.

More importantly, though, why wait until this step to give money away?

First, giving money away makes you happier. It is, in fact, one of the most cost-effective ways to improve your own happiness. Even from a selfish perspective, why would you horde all of your money until this last step if you can use it to buy happiness? We want to be financially successful, but we cannot give up our happiness on the way there. The journey is at least as important as the destination.

Second, even a small amount of money can make a big difference. As of 2013, there were 767 million people in the world living on under $2 per day. You could change a family’s life trajectory for less than you spend on coffee or fast food. There are also many easily curable diseases that we just don’t have the funding to eradicate. You could save lives for cheap.

Even if you can’t donate much, you can still make a massive difference in the world.

Third, if you don’t build a habit and mindset of giving and generosity before you become wealthy, how giving and generous do you think you will be when you become wealthy? Maybe you can hit a certain net worth number and flip a switch, but that doesn’t feel very realistic to me.

If your mindset is “I’ll give when I have more,” it will be very hard to switch your mindset once you have “enough.” It will be difficult ever to feel like you have “enough.”

I am very much against tacking giving on to the very end of a financial plan. It’s always a good time to help others.

The Takeaway

I don’t want this to come off as an anti-Dave Ramsey screed. He can be a great introduction to personal finance. If you are an average American with no idea where to start, go ahead and start with Ramsey’s Baby Steps. But once you get started, do a little more research. Create a plan that fits your life and your needs.

Personal finance is personal. Don’t let a guru (or his rabid followers) convince you that there is only one answer.

21 thoughts on “Dave Ramsey’s Baby Steps (and Why I Ignore Them)”

  1. Great post, Matt. I’ve actually never been a disciple of Mr. Ramsey or new much of what he preaches. I had heard of his recommendation to save 3-6 months for an emergency fund which I thought was bad general advice for the masses. I dispelled this in a post a while back. But otherwise, your overview was the first I’ve read much about him.

    My conclusion: he doesn’t think anyone can walk and chew gum at the same time. Why do I need to build an emergency fund before I pay off the credit card or invest in a 401k that gives me free money with the company match? Why fund the kids college before paying off the home? Why focus on paying off the home before building wealth?

    I just don’t get it. We can all do multiple steps at one time. As a matter of fact, I have a credit card I pay off every month in full and always have. I’ve been investing as much as I could in my retirement accounts since day 1 and having now bought a house I haven’t changed that. Now that I have kids and my retirement plans are decently secure, I’ve been investing heavily in 529s simultaneous to retirement investing and paying off my mortgage via the normal installment schedule.

    Not a big deal or overly difficult to do multiple things at once. And taking an equal and balanced approach to paying down the mortgage and investing has led to continuous growth in my net worth and financial flexibility…one step at a time, while chewing gum.
    The Green Swan recently posted…Blogging Update: The 1 Year EditionMy Profile

    1. Solid analysis, JW. It definitely seems to show a lack of faith in people’s ability to make their own informed decisions about their priorities and how they should be balanced. I’m with you. I think balancing your different goals is important and don’t see a problem with doing more than one thing at a time.

      Then again, Ramsey made millions of dollars selling his inflexible plan to people and I don’t even make enough to cover my hosting fees, so…
      Matt recently posted…Dave Ramsey’s Baby Steps (and Why I Ignore Them)My Profile

  2. This is a great breakdown. I haven’t read anything of his but I have seen it across the internet – and you’re right, people certainly talk about it like it’s the only way that finances can be managed. I included a quote of his that I saw on a recent budgeting post, and so many people said (on the post and social media) that it was nice to see a Brit talking about Dave Ramsey. Not sure why?
    I’ve seen people ask ‘is it ok if I don’t do this step exactly like Dave says?’. Whilst I agree with many of your points, I think that maybe he was going for a general approach, as you obviously can’t make something specific for everyone in one book.
    I’m unsure if he says this in his work though. I think all personal finance advice should be a guide, as you said – it’s personal and different for each person.
    Francesca – From Pennies to Pounds recently posted…How To Pay Off Debt With The Debt Snowball MethodMy Profile

  3. Your takeaway is exactly what I was going to say. The best thing that Mr. Ramsey does is to get people started – that’s by far the most important thing a person can do.

    Once you’ve strated down your path, you can adjust as needed to create a plan that makes sense for you.

    Good stuff, Matt.

  4. I largely agree with Erik. The reality is most people that have no financial background at all have no idea where to start. They are looking for someone to tell them a step by step inflexible guide that will work for someone that has no financial acumen. That’s what his plans are written too. If they get you to begin the path, then they’ve done their job.

    Sure, personal finance is personal. Every persons plan is and should be different. Once you understand enough about it you shouldn’t follow some gurus advice like its the ten commandments. But, for most people just starting out they don’t have the knowledge to make the decisions. They are looking for someone to make them for them hopefully as they take the time to learn how to make their own. Sadly some will never leave that state, but even in a Ramsey world they are better off then where they started. There is a reason why no personal finance bloggers will state they follow Ramsey to a T. It’s because they’ve started to engage and understand personal finance, the step beyond Ramsey.

    It’s kind of like all the Fintech apps these days. They have extra fees and are generally not targeted at an educated engaged investor. They are for the person who hasn’t figured it out.

    *Full disclosure, I’m not even sure I have Ramsey’s book. If I did it was long after I developed my plan. My personal finance literacy started more in the Forbes and Wall Street Journal world. These days if I read Personal Finance How to Books its more out of curiosity, I prefer more economics or books that focus on a company/person.
    Full Time Finance recently posted…When you Fail to Reach your GoalsMy Profile

    1. I think we’re on the same page here. Ramsey is as good a place as any to start if you don’t know where to start, and following his plan will put you in a much better position than following no plan. My tone may have been a bit harsh on Ramsey here, as it was in response to Ramsey fans telling me that I needed to abandon my personalized and heavily researched approach to money to follow his plan.

      Thanks for the comment!

  5. I agree with everything you said…but I think Erik makes a great point. The average person is different. My friend taught a financial literacy class that I attended. He talked about the snowball method and afterwards I told him that the math doesn’t make sense. Of course you should pay the highest interest first! He told me that he’s worked with many people with debt and that while I might be right about the math…personal finance is much more about emotions rather than math. For most people paying off debt, they need the motivation of getting rid of a credit card payment. It’s a win, and they continue paying the next one and then the next one. Sure, paying the highest interest debt might in theory work out better but what good is it if that person just gives up because they don’t feel like they’re getting anywhere. I know you mentioned this aspect, but I think we sometimes don’t appreciate the psychological part of personal finance…even for those of us pursuing FI.

    1. I agree. Psychological benefits are better than mathematical benefits for a lot of people. Maybe most people. I write a lot about the psychology of money, and it can definitely be the defining factor for a lot of people. I think my problem is with the framing of it as THE way to do things rather than A way to do things. I noted above in a comment above that this semi-rant was in reaction to having a Ramsey fan tell me that I was objectively wrong in my approach to money and that I needed to change. The psychological benefit (at least with regard to debt repayment) is not necessary for me to stay motivated, so it doesn’t make sense for people to be pressuring me to adapt that approach. That said, my tone may have been too harsh against Ramsey when my real issue was with certain of his followers.
      Matt recently posted…Dave Ramsey’s Baby Steps (and Why I Ignore Them)My Profile

  6. I teach Dave Ramsey’s Financial Peace course through my church. I’m no fan boy but he has brand recognition which makes it possible to get people through the door and give them some financial advice which is better than what they’re usually getting. Some of the things I’ve seen people do is creative to the say the least 🙂

    I will say in the Financial Peace class that encourages everyone to include tithing into their budget but I’m not sure what he teaches in his other courses regarding the principle of giving.

    But anyway I hear ya when it comes to some of his advice.
    Mustard Seed Money recently posted…Saving for the Future While Enjoying Life TodayMy Profile

    1. Yeah, the consensus of the comment section seems to be that I am severely underrating Ramsey’s ability to get people started in the world of personal finance, which is a fair critique. People are definitely better off following Ramsey’s advice than nothing and it makes it easier to get started on improving your financial condition.

      That’s great that you are teaching that course! I’m sure you are able to deliver more nuance and personalized advice than anything that can be delivered in book form. It must feel great to be helping your community in such a hands-on manner.

      Thanks for the comment!
      Matt recently posted…Dave Ramsey’s Baby Steps (and Why I Ignore Them)My Profile

  7. Full disclosure, my wife and I are pro Dave Ramsey and using him alone as motivtion we paid off $107K in 33 months. That was 2.5 years ago and we have generally followed his baby steps since then and had even more success. We are at a bit of a crossroads at the moment in terms of deciding to paying off our house we recently purchased but if it hadn’t been for that initial inspiration provided by him I never would have thought it was possible to make such drastic changes in personal finance. We’ve loosened up in terms of our Ramsey fandom since then as his major strength is debt payoff as his savings approach leaves a bit to be desired.

    While he, along with Suze Orman and maybe Clark Howard, are the introduction to personal finance for so many one has to admit he has made a big impact on so many people’s lives who otherwise wouldn’t have benefited. We did a debt free scream in his studio and after we were done they said that 8 million people were going to hear that. That is an unbelievable reach and one we’ll most likely never ever have again.

    Despite that reach there are so many people that never pay attention to their finances until it is too late. Forget about optimizing their financial approach, they aren’t even is the same building as those who save or use debt responsibly. Those people are who we need to reach. If some people follow Ramsey or Orman and some follow your blog or other blogs then great and everyone benefits. It is easy to find fault with or debate the 7 baby steps but I have to think that at a certain point it is less about understanding the math and more about the overall behavior that lead people to make bad financial decisions. Who cares if someone pays their house off early and then someone else only focuses on retirement? Both are making sound, responsible decisions that will put themselves in a better spot in the future. We shouldn’t be worried about them since they will ultimately be fine even though one might mathematically come out ahead but personal finance is so much more than just the math. It is those around us without a clear sense of direction or urgency that we need to reach out to.

    I appreciate the analysis and recognize that it is for another level of financially minded person. Dave Ramsey has tapped into something and it is worth understanding that to better knowing why the babysteps are what they are. I think they are deceivingly simple in how he presents them but they are also carefully calculated to achieve maximum impact for broadening his audience and for them achieving success which in turn is critical to his success. I’m not suggesting malice on his part but he speaks to such a wide audience that he has to be stubborn about the babysteps, or other financial aspects, or else he risks many in his audience not understanding the message or going astray.

    I think there is more than enough room for all of the financial experts and bloggers to find their own lane though and make a difference. We all need to find ways to get out to the masses to make an impact.

    Thanks for the detailed post.
    Kevin recently posted…Our Story on Stacking BenjaminsMy Profile

    1. Congrats on the debt payoff! Very impressive!

      Dave is great for motivation and I have no doubt at all that he has done a ton of good in the world by getting people to pay attention to their finances. His methods are great for the psychological factors. While I am more of a math person, there are plenty of people that are better off taking the more psychologically advantageous route and those people should absolutely stick with Ramsey.

      I did not intend this to be an article arguing that nobody should follow Ramsey’s methods. Rather, it was an explanation of why I choose not to in response to getting push-back from people telling me that I was doing it wrong. While I disagree with his approach in a number of places, I respect the hell out of the way he has been able to connect with people and get people passionate about finances. Like I said, I have no doubt that that alone has done a ton of good in the world.

      Thanks for the thoughtful response, Kevin.
      Matt recently posted…Make Space to Be WrongMy Profile

  8. I know its not very popular to say, but I’ve never been a huge fan of Dave Ramsey. I think it mostly stems from this Money Magazine article where it talked about how he preaches about finding investments that return “12% per year” and planning to withdraw “8% per year” from your portfolio. Those figures are absolutely insane!
    MMD recently posted…Niche Website Update 38 – How I Sold My WebsitesMy Profile

  9. I fully agree with you and Erik’s point as well. Dave Ramsey’s plan can work for anyone if they work it. The average person drowning in consumer debt may not be able to rationally devise a plan from a pure numbers point of view. The average person drowning in debt probably shouldn’t be doing any giving. But a thoughtful person who’s taking steps and has a plan to get out of debt is certainly in a position to give.

    Personally I like Ramsey for the motivational reinforcement. We still listen even though we’re beyond all the baby steps. But, I’m not giving up my credit cards because Dave Ramsey says so. By the way, you know he hates the student loan forgiveness program too, right?
    Mrs. Groovy recently posted…That Time I Lied and Fake-Cried to Save My Family $1,000 in Airline FeesMy Profile

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