Do Dave Ramsey’s Baby Steps Actually Work?

If you're trying to eliminate credit card debt, find out how a debt management program stacks up against Dave Ramsay's "Baby Steps" approach to solving your problem.

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Home > Debt Help Advice > Do Dave Ramsey’s Baby Steps Actually Work?

If you’re smothered under an avalanche of credit card debt, radio financial guru Dave Ramsey says don’t panic – just make snowballs.

Slowly, one snowball at a time, you’ll dig yourself out from under the cold, crushing weight of Visa and Amex and all credit card debt.

We asked Indiana University Professor Kristoph Kleiner, an assistant professor of finance at IU’s Kelley School of Business, to help us evaluate Ramsey’s baby steps.

Though he said Ramsey offers some positive ideas, he doesn’t agree with all of them.

Kleiner, a data-set-crunching wizard with a Ph.D. from Duke University, teaches corporate finance, and is eager to help the rest of us with his plain-spun, practical Midwestern advice on household financial problems.

Ramsey is a folksy character and media celebrity on 500 radio stations, a self-made millionaire who takes a strict Christian-themed, character-based approach to debt problems.

Let’s step back and listen to these two financial wizards debate Ramsey’s baby step proposals.

Baby Step 1: Save $1,000 in an Emergency Fund

Ramsey and Kleiner agree that setting $1,000 aside as soon as you can is a key first step toward walking away from debt.

Being prepared when bad things happen minimizes the damage and avoids borrowing. So make a budget, then set the emergency funds aside. Keep the money in a checking account separate from your regular account, Ramsey said in an article on his website.

Then, he said, keep your “grubby hands off it.”

Professor Kleiner supports the idea of the emergency fund.

“This should be a rule for everyone,” Kleiner said. “Half of Americans don’t have the resources to pay off a $400 unexpected expense. By saving and placing that money in a separate account, you can be ready for that expense when the time comes.”

Baby Step 2: Pay off Debt Using the Debt Snowball Method

The Snowball Method refers to paying the smallest debt first, then the next smallest – and on and on until you are living debt free. Ramsey suggests lining up debts “by balance, smallest to largest,” then paying as much of the smallest debt as possible while making minimum payments on the rest.

Some financial experts believe the Avalanche Method is better. This means escaping a debt avalanche by paying the highest debt first. Ramsey prefers the opposite.

His most controversial advice on snowballing debt is to pay no attention to interest rates unless two debts have similar payoffs – only then pay off the higher interest rate first. When you’ve knocked off a debt, he said, “Add what you were paying on that debt to the next debt, and start attacking it.”

“It’s about motivation,” Ramsey said. “Personal finance is 20% head knowledge and 80% behavior. When you start knocking off the easier debts, you will see results and you will stay motivated to dump your debt.”

The approach has strong supporters, including a Northwestern University study. Kleiner doesn’t entirely agree.

“Here’s where I agree,” he said. “Paying off a single debt is better than partially paying off several debts.”

But Kleiner said ignoring interest rates isn’t always wise.

“Sometimes interest rates matter,” he said. “Some borrowing is very costly, like payday loans. If you regularly depend on payday loans to cover your bills, be sure to pay this debt first.”

Baby Step 3: Save 3 to 6 Months of Expenses for Emergencies

Ramsey believes taking small steps to reducing debt builds positive momentum.

“But don’t start throwing all your ‘extra’ money into investments quite yet,” he adds.

Instead, build up your full emergency fund and ask yourself, “What would it take for me to live for 3-6 months if I lost my income?”

It’s a conservative approach that Professor Kleiner supports.

“We never know what the future will entail,” he said, “so it’s always a good idea to be prepared for bad luck.”

He points out that folks in the United States are not great at savings. The personal savings rate of disposable income (after taxes) in August 2023 was 3.9% in the U.S. The Chinese, by comparison, save 30-35% of their income.

This means that a U.S. family that makes $50,000 after taxes would be saving $1,950 while the family in China would be saving at least $15,000.

Some financial experts say Ramsey’s approach of saving more for a rainy day is silly when, for instance, you could be investing the money into a no-brainer employer match 401K.

Deciding the best approach is a personal decision. The most common criticism of Ramsey’s “Baby Steps” is they’re too rigid, like the Ten Commandments, too one-size-fits-all.

But if you do build a rainy day fund, Ramsey said it’s then time to invest and “to get serious about building wealth.”

Baby Step 4: Invest 15% of Your Household Income into Roth IRAs and Pre-Tax Retirement Funds

Saving for retirement as soon as you can is important. Yes, Social Security will help, but trusting politicians to ensure its future solvency might not be the smartest approach.

Taking steps on your own can lead to a comfortable retirement.

Ramsey suggests investing 15% toward retirement to ensure “your golden years will be secure and comfortable.”

“Start by investing enough in your company 401(k) plan to receive the full employer match,” he said. “Then invest the rest into Roth IRAs, one for you and one for your spouse if you’re married.”

He advises not investing more than 15% “because the extra money will help you complete the next two steps: college savings and paying off your home early.”

But he also said don’t invest less than 15% just so you can “get a child through school” because “the kids’ degrees won’t feed you at retirement.” That’s a harsh calculation when considering your children’s future.

Ramsey advises spreading the money across four types of mutual funds: growth, aggressive growth, growth and income, and international.

He projects making financial plans based on an expected 12% return. That sounds wildly optimistic, and critics have savaged him for saying that. But Ramsey has a basis for the figure.

He said he’s using “a real number that’s based on the historical average annual return of the S&P 500,” the 500 largest, most stable companies in the New York Stock Exchange. The average annual return of the S&P 500 since 1957 has been 10.7%, and from 2013 through 2022 the return was 12.39%, right at Ramsey’s target

But … in 2022 the S&P lost 18.11%.

Professor Kleiner said that Ramsey’s investment advice is sound, if simplistic.

He advises investing the maximum your company allows in your 401(k) plan, but points out that’s easy advice.

The hard part is deciding the particular type of investment.

“There are two things to remember here,” Kleiner said. “First, invest in stocks when you are young and slowly move that money to safer assets (like bonds) over time. Stocks offer high returns on average, but also more risk. As you get older you should take less risk so that you don’t lose your money right before retirement.

“Second, when choosing a fund, focus on passive funds that track the S&P 500. Active funds require higher fees, yet rarely outperform a simple market portfolio (that invests a little in all companies).”

Baby Step 5: Save for Your Children’s College Fund

Ramsey is realistic about college. He even advises to think hard about whether your child should even attend college. In the 2020s private equity investors have found the trades to be a recession- and pandemic-proof profession, and have started investing money there. Workers in the trades do very well without a college degree; college is not for everyone.

“Think about whether or not a degree in your chosen field will actually open up career opportunities,” Ramsey said. “The truth is that, in many fields, a degree won’t open doors for you. Consider whether the cost of the diploma will bring you a financial return in the long run. Is that General Studies degree worth the amount of money you are paying for it?”

Kleiner agrees. The pay gap between college and non-college educated workers has been rising since 1980, he said, but at the same time college costs have soared.

“As a result, a college degree can be a path to high income, but also a path to high debt,” the professor said. “Students should be realistic about both their future income prospects and their ability to pay off student loans based on that future income.”

If you’re saving for college, Ramsey advises, “as much as possible,” use Educational Savings Accounts (ESAs) and 529 tax-advantaged savings plans known as qualified tuition plans.

“Never use insurance, savings bonds, or pre-paid tuition,” he said.

And he said: Pay cash.

The freedom of your son or daughter graduating without student loan debt loan would be a major first step toward financial solvency.

Baby Step 6: Pay off Your Home Early

Once steps 1 through 5 are complete, Ramsey said “it’s time to dump the mortgage.”

If you have an adjustable rate, interest-only, or even 30-year mortgage, consider refinancing to a 15-year, fixed-rate mortgage, he said.

Here’s where many financial experts disagree with Ramsey, Professor Kleiner among them.

Sure, it’s nice if we all could live without mortgages. But Kleiner said that approach isn’t for everyone or every situation.

While nobody should carry problematic credit card debt, Ramsey often is criticized for demonizing debt too much.

“In my opinion, this is a major misunderstanding in finance,” Professor Kleiner explained.

“Debt is not necessarily good or bad, it is just a method to pay for expenses,” he said. “To decide on whether debt makes sense, we often need to look at why a person is taking on debt in the first place.”

While it’s great to pay off a 30-year mortgage in 15 years, many might not be able to afford extra payments on the mortgage. They and others may be putting all they can into retirement and/or college savings. If the mortgage is affordable, dumping it is not always a great idea – especially because mortgage interest paid is a healthy tax deduction.

“We all need a place to live and a house is usually the largest asset we buy in our lifetime,” Professor Kleiner said. “As long as our income can easily cover our individual mortgage payment and we live within our means, why not pay it off in monthly mortgage payments (rather than all at once in cash)? This is especially true given the tax benefits given to mortgage holders.”

Baby Step 7: Build Wealth and Give

In the idealized version of baby steps one through six you now you have no debt, not even a mortgage. You’ve kept to Dave Ramsey’s zero-based budget and maxed out your 401(k) and Roth IRAs.

This means with what’s left you can “truly live and give like no one else by building wealth, becoming insanely generous, and leaving an inheritance for future generations,” Ramsey said. “And it’s all because you had discipline for a few years.”

Professor Kleiner agrees – as long as life turns up all roses and sunshine for you and your investments,

“Giving is always a valuable endeavor,” Kleiner said. “All of us should give more often.”

Do Dave Ramsey’s Baby Steps Work?

They can, but they might not be for everyone.

Ramsey’s steps are sound and logical, but they rely on some best-case scenarios. Not everyone makes enough money to save 15% for retirement while also saving for college and paying the mortgage early. For some, that’s a fantasy world.

Common sense applies too. We should do all we can to wipe out our credit card debt, but a mortgage may simply be something we pay over time. The baby steps are laudable goals, but it’s also important to have a balance and keep in mind Kleiner’s advice: Not all debt is bad.

Help Getting Your Finances In Order

If debt is an issue in your life to the point it’s having a negative and wearing impact on your financial and mental well-being, it may be time to have someone help you assess the best steps to eliminate it.

A nonprofit credit counselor could offer advice in a free session. The counselor, who is bound by law to offer the best financial advice he or she can, would help assess your financial position and evaluate best options based on income and debt.

If credit card debt is an issue, one of the options available is a debt management plan, which reduces the interest on credit card to a more manageable number (7-8% down from 16-18%) and allows you to make one payment per month.

Whatever program is recommended, the counselor will make a decision with careful study and consideration of the individual situation. Talking things through with the counselor could be an important first step in getting back on financial solid ground.

About The Author

Mike Capuzzo

Mike Capuzzo is the New York Times-bestselling author of Close to Shore and The Murder Room. A former staff writer for The Miami Herald and The Philadelphia Inquirer, he has won more than a hundred journalism awards. Publishers have nominated his books and articles for the Pulitzer Prize six times. Mike can be reached at [email protected].


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