How to do Dave Ramsey's Baby Steps

Dave Ramsey is one of America's most prominent personal financial advisers. He has a number of books, a financial course, a radio show and a TV show. He is also one of the strongest advocates for getting out and staying out of debt. In his books, course, radio and TV shows he guides people with his so called "Baby Steps". These are a series of steps that one takes to get on the path to wealth, and it works under the premise that if one does a few things with high intensity, they will actually get done. Here are how to do the steps.

Get on a written monthly budget. This means you spend every dollar on paper before you receive it, so that when you do, the money won't run away. Do the budget on paper before the beginning of each month.
Stop all unnecessary financial activity. This means you stop all contributions to retirement accounts and any other long term financial programs such as college saving. Do one thing at a time. Right now you are getting out of debt. If you have non-retirement savings and investments (such as CD's or stocks), these can be liquidated to get you moving on your financial plan.
Get current with all creditors. If you are behind, make arrangements to catch up or even pay them off.
Once current with all creditors, put $1000 in a separate account from your checking account. This is a starter emergency fund. If there is an emergency, instead of paying for it with debt, instead you pay for it with money. If at any point you actually need money from the emergency fund, the next order of business is always to restore your emergency fund.
List all your non-mortgage debts from smallest balance to largest balance. This includes credit cards, cars, student loans, HELOC's, personal loans, store credit, and whatever other loans you may have. Shred all your credit cards and never use them ever again. Pay minimum payments on all debts except for the one with the smallest balance, and instead pay as much as you possibly can on the debt with the smallest debt under the debt is gone. Enjoy the feeling of having one less debt, and then continue by attacking the next smallest debt. Each time you eliminate a debt, you will have more money to pay off the following debt. Dave Ramsey refers to this as the "Debt Snowball".
Once all your non-mortgage debt is paid off, start putting more money into your emergency fund until you have 3 to 6 months of expenses in your account. This should be enough to cover any emergency that will come your way.
Once your emergency fund is fully funded, start putting 15% of your income into retirement accounts (401(k)'s, IRA's, etc)
Once you are able to comfortably able to put 15% of your income into retirement, start funding your children's college education, if you have children who will be going to college. Fully funding a Coverdell ESA (currently $2000/year/child) will be sufficient in many cases.
Once you are out of debt, have a complete emergency fund, are paying for retirement and the kids' college, then you can start paying off your house early with whatever you have left.
Once the house is paid off, you can become very wealthy and give generously.

  • Sell the car! Your car may be dragging you down. If the total value of your cars is more than half your annual income, Dave says you need to sell them regardless of debt. However, you can sell your financed cars to get out of debt sooner.
  • Sell your stuff. You probably have a ton of stuff that you don't use. Have garage sales and put stuff on eBay or CraigsLists.
  • Budget stuff with cash. For certain categories in your budget (such as food and entertainment), withdraw the money in cash and put it in an envelope. Once the money is gone, it's gone and you can't spend anymore. This is an automatic version of discipline. Also, studies show that you are more frugal when you pay with cash as opposed to plastic.

  • If doing this with your spouse, make sure both of you are in agreement!

Copyright 2009 by Michael Nehring