The Truth About Dave Ramsey's Baby Steps

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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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 the under the cold, crushing weight of Visa and Amex and all the rest.

The Debt Snowball Method of debt reduction is just one of Ramsey’s famous “7 Baby Steps” to living debt-free, and living the life you want.

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

He doesn’t agree with all of them.

But five of the seven “Baby Steps,” the professor says, are solid answers to the question: How do I get out of debt?

  1. Save $1,000 as soon as possible to start an emergency fund.
  2. Pay off your credit cards—though Ramsey’s “Snowball Method” is controversial.
  3. Invest 15% of your Household Income in mutual funds and tax-free retirement funds.
  4. Pad that emergency fund with 3 to 6 months of living expenses.
  5. Save for yourself and your family, but share your blessings with others.

Professor Kleiner is data-set-crunching wiz 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 have a seat to watch these two financial wizards debate the baby steps like tennis pros volleying back and forth:

Baby Step 1: Save $1,000 to Start an Emergency Fund

Once you’ve taken Ramsey’s crawl-before-you-walk pledge – “No more borrowing! It’s time to break the cycle of debt!” – make a budget.

Then put away $1,000 for a rainy day “as fast as you can.” Bad things happen to good and bad people and you have to be prepared or they’ll sink you.

Keep the emergency fund in a checking account separate from your regular account, Ramsey says in an article on his website, “for those unexpected events in life that you can’t plan for.”

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

Professor Kleiner says this is a very good idea.

“This should be a rule for everyone,” he 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 All Debt Using the Debt Snowball Method

There’s more than one way to melt an avalanche of debt.

The more common “Avalanche Method” of paying off debt is to tackle the biggest credit card debt first, with the highest interest. Make sense. But not to Ramsey, who has popularized the “Snowball Method,” which has some prominent supporters, including a Northwestern University study.

Ramsey says to line up your consumer debts “by balance, smallest to largest,” and attack the smallest debt first by paying off as much of it as possible, while making minimum payments on the rest.

His most controversial advice is to pay no attention to the 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 says, “Add what you were paying on that debt to the next debt, and start attacking it.”

“It’s about motivation,” he says. “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.”

Professor 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 “Here’s where I disagree,” he adds. “Sometimes interest rates matter. Some borrowing is very costly, like pay-day loans. If you regularly depend on pay-day loans to cover your bills, be sure to pay this debt first.”

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

With your consumer debts now being slowly paid off, Ramsey says, “You will have built serious momentum. But don’t start throwing all your ‘extra’ money into investments quite yet.”

Instead, it’s time to build up your full emergency fund.

Ask yourself, he says, “What would it take for me to live for three to six months if I lost my income?”

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

“And we Americans are not great at saving,” Kleiner adds. He says that U.S households save only 2.4% of disposable income (income after taxes), whereas the average family in China saves 37% of disposable income.

“So, if your family makes $50,000 each year after taxes, they save only $1,200,” Kleiner says. “The family in China saves $18,500 in comparison.”

The updated statistics on personal savings as a percentage of disposable personal income have changed dramatically. The COVID-19 pandemic not only had consumers sitting at home, they were sitting on their money as well. The personal savings rate soared to 33.1% in April 2020 and has bounced around considerably since then, dropping to 13.6% in the spring of 2021.

Other 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.

You’ll have to decide what feels right to you. The most common criticism of Ramsey’s “Baby Steps” is they’re too rigid, like the Ten Commandments, too one-size-fits-all.

But Ramsey says once your rainy-day fund is nice and fat, now it’s 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

Start with retirement investing to ensure “your golden years will be secure and comfortable,” he says.

“Start by investing enough in your company 401(k) plan to receive the full employer match. 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 says 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.”

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

Critics have savaged him for saying you can make your financial plans based on an expected 12% annual return.

It must be nice to hand out such unrealistic happy talk when you’re sitting on half a billion dollars.

If only life was that easy, and wealth was automatic. It sounds like a politician who promises a chicken in every pot.

Hasn’t Ramsey heard about the millions of Americans who lose their shirt in the stock market?

Though there is no conclusive study on the matter, but there are numerous articles that claim as many as 80%-90% of investors fail. Even if that number is way off, there is no evidence that the average investor can make anywhere near a 12% annual return.

But Ramsey says 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 current average annual return from 1923 (the year of the S&P’s inception) through 2019 is 7.75%.

The S&P 500 gauges the performance of the stocks of the 500 largest, most stable companies in the New York Stock Exchange. It is often considered the most accurate measure of the stock market as a whole.

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

You should invest the maximum your company allows in your 401 (k) plan, Kleiner says.

But that’s easy advice, he says.

The hard part is “deciding on the particular type of investment. There are two things to remember here. 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

Some critics say you should be saving for your retirement instead at this point, not for your kids’ college. Let the little brats handle that themselves and learn responsibility and empathy, is the idea.

Then they’ll be more caring care-takers of you in old age, not self-entitled narcissists skiing in the Italian Alps while you press the call button to get the nurse to turn on Bonanza in the old folks’ home.

Ramsey is realistic about college. You don’t want your child to be the one who graduates with a Ph.D. in Victorian Poetry, $100,000 in student loan debt and a job working at McDonalds. It happens.

In fact, he says think hard about whether your child should even attend college.

“Think about whether or not a degree in your chosen field will actually open up career opportunities,” he says. “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?”

Even Kleiner, the college professor, agrees. The pay gap between college and non-college educated workers has been rising since 1980, he says, 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 says. “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.”

And he says: Pay cash. No college loans. You’ll be a frugal freak, the star of your Econ 101 class.

Baby Step 6: Pay off Your Home Early

Now you’re feeling pretty good about things.

“After you’ve paid off all consumer debt, have a fully funded emergency fund, are contributing at least 15% of your income toward retirement, and have a plan for contributing to your kids’ college educations,” Ramsey say, “it’s time to dump the mortgage.”

“Put all extra funds (based on having created a solid budget) toward that mortgage and get it paid off in full as soon as possible,” he says.

“The less interest you pay to the bank, the more money you have to give to worthy causes and to fulfill your dreams, whatever those dreams may be.”

You can save “tens of thousands of dollars in monthly (or even yearly) interest.”

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

Here’s where many financial experts disagree with Ramsey. Professor Kleiner is one of them.

Sure, it’s nice if you can live without a mortgage. But Kleiner says that absolutist approach, Thee Must Now Pay Off Thou Mortgage, isn’t for everyone, or every situation.

In fact, his criticism of Baby Step 6 calls all the other Baby Steps into question.

No one (except maybe Visa and Mastercard) thinks it’s a good thing that you have that credit-card boot on your throat. And maybe these little baby feet help can kick it off.

But a frequent criticism of Ramsey is that he demonizes 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.”

In other words, if you have low-interest, useful debt, a good deal when you need it, it can be an opportunity, not a problem.

Dumping the mortgage may not be a good idea at this point.

“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

The heck with baby steps. You’re rich now, baby.

Now you have no debt, not even a mortgage. You keep to Dave Ramsey’s zero-based budget and “max out your 401(k) and Roth IRAs,” Ramsey says.

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

It’s time to give money away.

“Hoarding money is not the way to wealth,” he says. “Save for yourself, save for your family’s future, and be gracious enough to bless others. You can do all three at the same time.”

If life turns up sunny side for you and your investments, Professor Kleiner agrees.

“Giving us always a valuable endeavor and all of us should give more often.”

Check out our review of Dave Ramsey.

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].


  1. N.A. (2021, March 26) Personal Saving Rate. Retrieved from
  2. Khondkar, K. (2020, March 10) Stock Market Yearly Historical Returns from 1921 to Present: Dow Jones Index. Retrieved from
  3. Ramsey, D. (ND) Who Do You Trust? Retrieved from