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What Dave Ramsey’s Baby Steps Are Missing

If you’ve ever done a Google search on personal finance, budgeting, or getting out of debt — there’s a good chance you’ve come across the name Dave Ramsey. 

For those unfamiliar, Dave is a well-respected personal finance guru who staunchly advocates for debt-free living through his radio show, books, and popular course: Financial Peace University.  

His simple, no-nonsense approach to money has inspired millions of Americans to pay off debt, save money, and attain financial freedom.

One of the pillars of Ramsey’s financial philosophy is a series of “baby steps” that help people modify their behavior related to money.

Here is a brief rundown of Dave Ramsey’s 7 baby steps:

  1. Step 1: Save $1,000 in cash for a starter emergency fund
  2. Step 2: Use the debt snowball method to pay off all your debt (excluding your home)
  3. Step 3: Set up a fund that can cover 3 to 6 months of expenses
  4. Step 4: Invest 15% of your household income into a retirement fund
  5. Step 5: Start saving for your children’s college
  6. Step 6: Pay off your home early
  7. Step 7: Build wealth and give generously


To be fair, on the surface these steps provide solid financial advice. However, when applied as a one-size-fits-all solution, Ramsey’s advice falls short of the mark.    

Today, we’re going to walk step-by-step through Ramsey’s baby steps — providing both the things we agree and disagree with, as well as alternatives to consider for your unique situation.


Step 1: Your starter emergency fund should depend on your income

Dave Ramsey draws a hard line in the sand with the $1,000 emergency fund. However, how much you need (or can feasibly set aside) will largely depend on your income. 

For example, a person making $40,000 per year may not have the ability to set aside $1,000 right away, while a person making $100,000 may wish to have a larger emergency fund at the ready. 

In short, putting a set dollar amount on emergency funds simply doesn’t make sense for a lot of people. A better method would be to calculate a set percentage for emergency funds based on your income and/or expenses.


Step 2: The debt snowball method doesn’t account for interest rates

The debt snowball method is a popular strategy where you pay off debt in order of smallest to largest, gaining momentum as you knock out each balance. 

To be clear, this is a great payoff method for anyone who may struggle with debt management and needs to experience a few ‘quick wins’ from the outset in order to feel like they’re making real progress. 

However, what the snowball method doesn’t account for is interest rates. 

For instance, what if your smaller debts have 0% interest? 

Rather than paying off your smallest debts, you would be better served to focus on your debts with the highest interest rates. You may feel like you’re making less progress, but you will ultimately save a lot more money.


Step 3: You should work simultaneously to set up an emergency fund and cover at least 6 months of expenses

In Dave Ramsey’s view, setting up an emergency fund and having a fund that could cover 3 to 6 months of expenses are treated as two distinct actions. Instead, it’s better to treat these as one action. You should try to build up an emergency fund that, with time, could cover at least 3 to 6 months of expenses. However, emergency funds don’t have to be separate from your other goals. 

For example, with a Roth IRA, you can take out the principal amount at any time without penalty. Thus, you could treat your retirement fund as a de facto emergency fund. 


Step 4: Investing 15% in your retirement may be too much or too little for some people

There’s no one-size-fits-all strategy when it comes to financial planning. Just like setting a dollar amount for your emergency fund, setting one percentage for everybody’s retirement investments simply doesn’t work. How much you should put toward retirement will ultimately depend on your income, your expenses, and your financial goals. Some people cannot afford to set aside 15% of their income for retirement. Alternatively, other people may wish to retire early by saving upwards of 25% of their income. So, choose a number that works for your circumstances.


Step 5: You can double-up your children’s college savings plan

Like emergency funds, Dave Ramsey treats saving for college as its own distinct action, separate from all other finance strategies. Instead, you should double-up your children’s college savings plan with something else. For example, let’s say you are 40 with a newborn baby. By the time your child is preparing for college, you’ll be nearing retirement. So, why not use a Roth IRA to kill two birds with one stone? Therefore, combining your retirement and college savings could help your student have more funds available to pay for college.

*Pro tip: FAFSA does not calculate retirement savings when determining whether or not your child qualifies for financial aid. However, they do count traditional college savings plans (like a 529 plan)


Step 6: Paying off your home early may cost you during tax season

There’s no doubt that paying off your home mortgage early is a huge accomplishment. However, there are a few benefits to investing those funds elsewhere and maintaining your mortgage for a little bit longer. One of the biggest benefits of maintaining your mortgage is the potential for a huge tax write-off. For example, let’s say you’re at your peak income. Your main goal will be to reduce your tax burden as much as possible. With a mortgage, you can write off the interest on your home when it’s time to do your taxes. 


Step 7: Build wealth and give generously

It’s hard to argue with Dave Ramsey’s 7th baby step. Building wealth should be one of the top goals of anyone’s long-term financial plan. Many people don’t associate building wealth and giving money away. On the surface, these two actions seem counterproductive in relation to one another. However, giving to charity is actually a great way to establish even more tax write-offs, reduce your tax burden, and put your money towards good causes — all at the same time.

If you’d like to get even more financial advice, consult the experts at Crossroads Planning today!

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