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An Overview of Dave Ramsey’s 7 Baby Steps

Dave Ramsey’s 7 Baby Steps is a management process that could potentially help you improve your personal finances and build wealth.

Chris Scott

Contributing Writer at Tally

July 19, 2022

When it comes to improving your finances, you’ll find that there are many different types of methods available. One option that has gained popularity in recent years is a strategy known as the “7 Baby Steps.” This plan was created by personal finance expert Dave Ramsey.

In this article, we’ll cover everything you need to know about Dave Ramsey’s Baby Steps method. We’ll start by outlining the steps themselves. Then, we’ll dive into a bit of the methodology and thinking behind the steps so that you can determine whether the strategy is right for you.

What are Dave Ramsey’s 7 Baby Steps?

The 7 Baby Steps were compiled by Dave Ramsey, a popular financial expert. He designed the steps to help people pay off debt, build wealth and start on the path to financial freedom. Here are the 7 Baby Steps:

  • Baby Step 1: Save $1,000 and put it aside as an emergency fund.

  • Baby Step 2: Pay off any debts you have besides your mortgage. This can include revolving credit accounts, like credit cards, auto loans, student loans, and personal loans.

  • Baby Step 3: Further build your emergency fund. Aim to have enough money in the account to fully fund six months’ worth of expenses.

  • Baby Step 4: Start investing for retirement. Ramsey suggests that you aim to invest at least 15% of your household income.

  • Baby Step 5: Start putting money into your children’s college funds.

  • Baby Step 6: Pay off your mortgage.

  • Baby Step 7: Continue to invest and build wealth.

How does the 7 Baby Steps program work?

There is a lot to like about the 7 Baby Steps program. If you are committing to the program, you are likely going to want to create a budget. Budgeting your monthly expenses can help you determine what you have leftover at the end of the month. This, in turn, will allow you to better project how much money you’ll be putting into savings accounts or toward debt.

If you don’t have enough money to save or pay off debt, you’ll likely need to either cut spending in some areas or boost your income.

Having said that, let’s take a closer look at the methodology behind the 7 Baby Steps and what you need to get started.

Baby Step 1: Establish an emergency fund

First and foremost, the program calls for you to create a starter emergency fund. Having an emergency fund in place is an excellent way to protect yourself when an unexpected expense arises. It can also prevent you from having to put the expense on a credit card, which could lead to more debt.

If you’re looking to establish an emergency fund, you may want to consider opening a high-yield savings account. A high-yield savings account will maximize your interest earnings while also keeping your money safe.

Baby Step 2: Pay off all non-mortgage debt

The next step calls for you to pay off debt (other than your mortgage). This includes things such as:

  • Credit card debts.

  • Student loan debt.

  • Personal loan debt.

  • Auto loan debt.

  • Any other open lines of credit.

The 7 Baby Steps prescribes paying off debt using the debt snowball method. With the debt snowball method, you pay off your debts in order from smallest to largest. You pay off your smallest debt first while continuing to make minimum monthly payments on the others. Then, once the smallest is paid off, you move to the second-smallest and so on. 

The upside of this method is that the “small win” of paying off one of your debts can provide motivation to keep going.

Having said that, debt payoff isn’t one-size-fits-all, and there are other strategies to consider. For instance, the debt avalanche method calls for you to pay off the debts with the highest interest rates first, regardless of the size of the total balance. 

You may not see the quick wins you would with the debt snowball method, but you’ll end up saving money in the long run. This is because you won’t accrue as much interest as a result of paying off the debts with the highest interest rates first.

Another potential payoff option is known as “Credit Score Factors.” With this strategy, you’ll pay off the debts with the highest credit utilization rates. By doing so, you’ll have a greater chance of improving your credit score factors.  

At the end of the day, the best credit card payoff strategy is the one that works well for you. If you find that one method works for you more than the others, then consider sticking with it. As long as you’re paying off debt and not collecting any new debts, you’ll be strengthening your financial health. 

Baby Step 3: Finish building your emergency fund

Once you’ve paid off your debt, Ramsey calls for you to pivot back to your emergency fund. He recommends having enough money in the account to cover three to six months of expenses. 

In terms of financial planning, this is a generally accepted best practice. Having a fully funded emergency savings account can give you peace of mind and help protect you from having to take on debt should an extreme life event occur, such as being laid off from your job.


Baby Step 4: Start investing for retirement

Once you’ve paid off your debt and fully funded your emergency fund, Ramsey calls for you to begin saving for retirement. If you’re looking to put money away in a retirement fund, consider some of the following options:

  • 401(k).

  • 403(b).

  • Traditional and Roth IRAs.

  • HSAs.

Ramsey calls for you to put 15% of your income into a retirement fund. This is a bit lower than the recommendations set forth under the 50/30/20 budgeting method. If you are putting 15% of your income into retirement, you may want to also ensure that you’re allocating another 5% of your income toward other areas of your savings plan.

Baby Step 5: Start saving for college

Once you’re putting at least 15% of your income into a retirement fund, it’s time to focus on college savings for your children. The types of accounts you can focus on include:

  • 529 plans.

  • Education savings accounts (ESAs).

  • Traditional and Roth IRAs.

At this point, you may be wondering how you are going to fit this into your budget. Remember that this financial journey takes time and that you’re not going to reach your goals overnight. 

Also, remember that once you pay off your debts, you won’t be charged interest by lenders, nor will you have to worry about making minimum payments. This can free up flexibility in your budget so that you can allocate money elsewhere.

Baby Step 6: Pay off your mortgage

If you’re able to fund college accounts for your children, the next step is to focus on paying off your home early. Up until this point, you should have been making the minimum house payment required on your mortgage. If you have followed Ramsey’s plan, you will know that by now, your mortgage is the last outstanding debt to your name.

Baby Step 7: Continue to build wealth

Once you have paid off your house, you will not have any more debt to your name. You have a fully funded emergency fund. You have a nest egg for retirement, and you have saved for your children to go to college. 

At this point, you can focus on continuing to build wealth. Perhaps you put more money into your retirement accounts. Or, maybe you focus on alternative investments, like mutual funds or real estate.

Is the 7 Baby Steps program right for you?

There is a lot to like about Dave Ramsey’s 7 Baby Steps program. It essentially calls for you to focus on three things — establishing savings accounts, paying off debt, and saving for retirement. If you’re strategic about how you manage your extra money, you’ll likely find yourself in a better overall financial position than before.

Whether the 7 Baby Steps program is the right choice for you depends on your personal situation. If you’re looking for financial advice, we recommend reaching out to a certified advisor or financial planner. These individuals can take an in-depth look at your personal finances and help you make financial decisions based on your unique situation.

If you’re looking for more ways to reach financial freedom, consider the credit card payoff app from Tally†. The app is designed to help you manage your due dates and pay down debts quickly and efficiently by offering a lower-interest line of credit.

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.