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Dave Ramsey’s Baby Steps

I’ve done a good job of sharing my disdain for Dave Ramsey’s popularization of a method of getting out of debt that caters to unmotivated individuals, the “Debt Snowball” method. That doesn’t mean I don’t agree with his principles or his intentions. I just think he, as one of the most popular “gurus” in personal finance, has to cater to the masses. It makes sense for him to profess a methodology that is simple reaches people on an emotional level. Real financial planners who work one-on-one with individuals to get out of debt and formulate a lifetime financial plan would be able to supply better options.

Dave Ramsey does offer something I like, his “Baby Steps.” These are seven suggestions that, when followed sequentially, will do wonders for helping people struggling with their finances to take ownership of the money in their life and start moving towards a more prosperous future.

Here are Dave’s suggestions, verbatim:

  • $1,000 to start an emergency fund
  • Pay off all debt using the Debt Snowball
  • 3 to 6 months of expenses in savings
  • Invest 15% of household income in Roth IRAs and pre-tax retirement
  • College funding for children
  • Pay off home early
  • Build wealth and give!

In general, I like this plan of action. These “baby steps” help someone ease into a pattern of new, financially responsible behavior, with small mini-goals which when taken in full view go a long way to help ensure financial stability.

These “baby steps” are designed to appeal to a large mass of people. This is not advice based on any one individual’s real situation, so it’s fair to apply some customization and perhaps even improvements. Here are a few small criticisms.

Is $1,000 enough or too much for an emergency fund base? Dave Ramsey suggests shoring up a $1,000 cash cushion before beginning to pay off debt. Although $1,000 is a finite number of dollars, its value has a different meaning to different people or to different families. A family with an income of $250,000 a year and $1,000,000 in debt may not consider $1,000 to be much of anything, while a family earning $20,000 per year and $100,000 in debt might find the saving of $1,000 to be a struggle. So what’s a better option? I would suggest that this base savings, what is needed to lay the groundwork before embarking on the great debt reduction journey, should be one months’ expenses, whatever they happen to be. That sets a high enough starting goal.

The “Debt Snowball” method is not so great. Despite its popularity and proven track record with a million dollar business marketing this method, I’d like to see more people give a real try to the Debt Avalanche. They’ll save money and time in the long run if they are intrinsically motivated. I’ve discussed this at length before.

Is it too soon to worry about college funding for children? I’ve heard experts suggest that parents should make sure their retirement is fully funded before worrying about funding education for their children. I don’t think saving 15% of household income, unless begun at a young age, will get most parents to a secure retirement, but that depends on the family’s needs at that later date. There are too many variables to predict that with any accuracy. The reason most experts suggest this is because you can borrow money for college, but you can’t borrow money (as easily or inexpensively) for retirement.

I strongly believe that parents have a responsibility to ensure that the best educational opportunities are available to their children, but with the prices of tuition increasingly well beyond the rate of inflation, I’m not sure how well that philosophy will work in the future.

Why pay off the mortgage early? Dave Ramsey is strongly against holding all forms of debt. Mostly, I agree. If the mortgage rate is low enough, and you have the fortitude, risk tolerance, and availability to invest the funds you would otherwise use to accelerate your mortgage payment in an asset allocation designed with a long-term time horizon, it may make more sense to pay just your minimum to the mortgage. But I won’t stop anyone who wants to pay off their mortgage early, even if they might end up with a lower net worth than if they had invested. The market is unreliable, but when paying off a mortgage early, you’re guaranteed to “earn” the rate of interest you’re being charged. It’s not a precise way of figuring the math, but knowing that you don’t have to pay interest that was originally included in your amortization is good.

Thanks go to Dave Ramsey for popularizing good general advice.

Updated September 17, 2011 and originally published August 25, 2008.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 19 comments… read them below or add one }

avatar 1 Anonymous

I agree your “debt avalanche” method will save you money over his “debt snowball” if you do the math; however, one could argue that “not doing the math” got you into credit card debt to begin with. I knew I could save a little bit more doing the avalanche method, but the snowball method worked for me and my wife. Now, we only owe on our house.

In general, I think you should take things from Dave Ramsey and other gurus and apply it to your own. For example, I agree with Dave on most things except for the mortgage. I don’t really think it is possible where I live to have a 15 year mortgage that is no more than 25% of your take home pay.

In conclusion…take the best things that apply to YOU from each guru and make them your own…you are still far better off than before!

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avatar 2 Anonymous

Paying off the mortgage early is so difficult to determine. I’m like you, I wouldn’t want to pay off that low interest loan in order to sacrifice other things – like retirement, long term saving, even having fun. However I know instances where it can work. I have a 51 year old friend who probably makes around $38k/year. Her husband is a seasonal worker. He has steady work from Sept to March, but picks up work here and there the other months. He also has a high liklihood of being injured on the job and possibly losing income if he can’t work (they are well insured though). But when they bought their home they took out a 15 year mortgage. They paid for it in 14 years. So now, in their early 50s their home is paid for. For them this is a real boon. As soon as the house was paid for they funneled the money into the cars and paid them off. These people will never be rich, they may never be able to completely stop working. But they will always have a roof over their head, food in the cupboard, clothes on their back, and a lot fewer worries than many people in their situation.

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avatar 3 Anonymous

I disagree that the “Debt Avalanche” is inherently better than the “Debt Snowball”. It’s mathematically better, but as Chris noted above, it’s the very lack of mathematics and emotional responses to money that get people into debt in the first place. People that rely solely on mathematics when dealing with finances would not get themselves into debt (aside from a usually necessary mortgage and possible car loan) and therefore would never need the “Debt Avalanche”. Thus, I believe that dealing with such individuals, you should work towards the lowest balance first rather than the highest interest rate. This relates to the very emotional motivation that got them into debt but it works towards getting them out of debt instead.

So while I do agree that mathematically, your plan is better than David Ramsey’s, I don’t believe that it will necessarily work better for most people.

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avatar 4 Luke Landes

Hm, no matter what, the “Debt Avalanche” idea always attracts attention, even when it’s a small part of a larger post.

Chris and CJ: Though not everyone finds themselves in unmanageable debt the same way, the people you are referring to found themselves in debt because they took an emotional approach to their finances. If they take an emotional approach to getting *out* of debt, they are not really changing their mindset and are likely to fall into debt again, using their emotional approach to money. Humans are not so one-dimensional that they can only exist in “an emotional approach” and “a mathematical approach.” Both are important and needed, especially for getting out of debt, but a shift to a mathematical approach to frame the particular ordering of debts would be more beneficial. You can even apply the “quick wins” scenario to the Debt Avalance. I recognize that not everyone is motivated the same way, but that’s not immutable.

There is a strong emotion attached not only to the “quick wins” approach (the Debt Avalanche also produces quick wins), but to the particular method espoused by Dave Ramsey, particularly for those who have had success with the approach. I agree that it’s a highly successful approach, but I disagree that a cheaper, faster solution has a smaller chance of success for *everyone.* This is not about “bad method vs. good method,” it’s about a method whose best scenario produces a good result vs. a method whose best scenario produces the best possible result. At least give people the *option* for the best possible result.

Overall, think about how much money is wasted in interest payments by people getting out of debt who haven’t even *tried* the Debt Avalanche because either they are unaware that this process could save money and time when compared to Dave Ramsey’s technique or they are told that they would not succeed with this “more complicated” process (it’s not at all) and the Debt Snowball is better.

I’ve written about this extensively here and here, particularly in the comments in response to others.

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avatar 5 Anonymous

Can you provide an example of someone who took a “logical” approach to finance and ended up in debt?

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avatar 6 Luke Landes

Chris: There may be some confusion here, maybe I miswrote something — it’s the emotional approach to spending that is more likely to get some people into debt. But that doesn’t mean those who fall into that category are better serviced by an emotional approach to getting out of debt, even if you believe that the “Debt Snowball” is purely “emotional” and the “Debt Avalanche” is purely “not emotional,” neither of which are true.

There are many reasons people find themselves in debt because of something other than emotional spending. Unexpected medical expenses, loss of job, lack of insurance, natural disasters, etc.

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avatar 7 Anonymous

If somebody thinks logically and mathematically, then paying off debt early such as a mortgage or even a low interest car loan may not always make sense. I had a car loan that was 3.75%, (back in 2004). I could have paid more as downpayment, but I took a long 72 month loan because I knew that I was earning 5.5% in a money market account, (through GM which was in much better shape back then). So even if I paid 28% tax on the interest and I netted only 3.96% from the account, I still made 0.24% per year by not paying the loan off early. It’s not a lot, but it is positive and it gave me access to more cash in my bank accounts for a long time. This reduces stress and pads your emergency fund.

As for paying mortgages off early, I would say that is not smart because you lose the interest deduction which subsidizes you having more cash available for other uses. Also, you pay less and less interest as the loan gets older so then you’re paying back more money that’s costing you less to keep. Plus, if house prices go down, you have more equity locked up in the home, (as we’ve all seen today). Similar to what Flexo mentioned with student loans, if you need cash suddenly, it’s more expensive to take out a personal loan. As long as your house is worth more than your loan balance, you have little to worry about. If you’re upside down, you have to save cash, but then, you can use the cash you saved by not paying off your loan early. Plus, that money had the potential to earn you interest.


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avatar 8 Anonymous


I don’t necessarily think you are “wrong” with the debt avalanche, but I don’t necessarily think you are “right” either. I believe that there are a lot of variables to consider.

For instance, if you had one debt of $1000 and another of $20,000, then I would recommend paying the $1000 off first even if the interest was higher on the $20,000. $20,000 looks daunting and will often take a long time to pay off regardless of income. $1000 gives you progress.

However, if there was a $2,000 debt and a $2,300 debt, I would pay off the higher interest of the 2. Either debt is close enough that math should take over.

Also if the lower debt is only .5% higher than the higher debt, in the long run you may only be paying a difference of a $10-$20 between the two. In such a case, I might pay the lower balance first.

If you are paying $100 per month extra towards debts, I would be more likely to consider a low balance debt but if you are paying an extra $1000 per month, I’d be more inclined to pay off a higher interest debt.

I don’t think the Debt Snowball or the Debt Avalanche apply to everyone. For instance, I have a tiny credit card debt due to an insufficient emergency fund during an emergency, one car loan and a mortgage. My options are extremely obvious. I’m paying off my credit card, then car, then mortgage. For others, it may not be so obvious if they have 7 credit cards, 2 car loans, a mortgage and a HELOC. For instance, it may be mathematically sound to roll over all credit cards into a HELOC. The problem with this is if they don’t exercise self-control… the reason they got into debt in the first place… than they may just spend the reduced expenses on useless stuff rather than spending the money paying down debt.

I think it varies from person to person.

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avatar 9 Anonymous

Flexo, thanks for the article…I enjoyed reading it. I believe a person should pick which one works best for them. For me, the debt snowball worked b/c my wife (the emotional one) was one board with getting debt free when we quickly paid off a small bill. Also, as CJ mentioned above, I would pay off the $1,000 bill first and then hit the $20,000 bill…simply because I would only have one debt left.

Either way, like I stated above, I think you choose pick and choose advice from the financial gurus that work best for YOU.

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avatar 10 Anonymous

I am an accountant and have a finance degree and I am also a personal finance fanatic. I used to resist Dave Ramsey’s advice and think I had a better way of doing things because I had more knowledge and experience than the people he was talking to. At one point last year, I had enough money, plus some, to pay off our $200K mortgage. My mathmatically wired brain couldn’t in good consciense pay it off. Well, things happen. They wouldn’t have happened if I had payed off the mortgage. You open yourself up to things happening to you. I miss that euphoria I used to have because I knew I could have been debt free if I wanted too. I realize more that his mantra applies anyone’s situation and is the most simple, straight-forward method. I would say it is the most “full-proof” way of handling finances. Another comment concerning the tax write-off of mortgage interest. Does everyone really have enough knowledge to know if they are getting the full benefit of the write-off? I don’t think that most people donate and have enough mortgate interest to equal more than the standard deduction. I think for most people, this is bad advice. It would be insightful to see where everyone stood concerning if they receive the full benefit of the mortgage interest deduction instead of just filing the 1040EZ and taking the standard dedection.

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avatar 11 Luke Landes

Todd: That’s a good question about the deduction for mortgage interest. Usually that’s a benefit that people mention when comparing buying vs. renting, but it’s probably true that fewer people take advantage of it, whether or not they qualify.

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avatar 12 Anonymous


to me, paying off your mortgage early is the most important goal in personal finance. I don’t personally know any rich people with a mortgage, however I know plenty of well of people who have done nothing special other than make sure they paid their mortgage down in the qucikes possible time (many picked a really cheap house to make it easier).

I’m not so sure about saving for college. Here in the UK the value of a University education seems to be decreasing year by year, whilst the costs are rising and rising.

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avatar 13 Anonymous

My biggest problem with Dave Ramsey is his strict no-student-loan debt rule. In Dave Ramsey’s world, only kids of millionaires can be doctors.

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avatar 14 Anonymous

The problem with any financial advice “off the shelf” is, well, that it is off the shelf. It does not take an individual ‘s personal situation and preferences into account. For many struggling people a $1000 emergency fund may be a good idea, but for many others it is not. How about using lines of credit – i.e. HELCOs or credit cards – as funds to draw on in case of an emergency? This is normally not a good thing to do, but if somebody is struggling to pay off some debt costing 10% or so how much rational sense does it make to get 3.5% on deposits? On the other hand, I can see how saving $1000 and putting it away for an emergency can have a tremendous psyhological boost sort of like “Hey, I can actually save money!” As many people have noted here, money is not just a matter or rational thinking but it has a very strong emotional component.

If emotional behavior got people into trouble, why would one want to continue on that path? Would it make sense to switch to a rational approach?

People who deal with personal finance or who are customers of financial planners tend to be in a better financial position than the average person in the US is. Therefore, the whole issue whether to pay for kids’ college or not comes up all the time. But for many people, especially the ones dealing with a heavy debt load, this is not an issue. Think about the 18% of Americans who are exposed to tremedously expensive health care since they do not have health insurance. Again, what to do about college expenses depends very much on an individual’s financial position and preferences – as all other issues in personal finance do.

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avatar 15 Anonymous

These are some really helpful posts.

I think a lot of people struggle with things like; which debt should I pay off first, should I pay my mortgage off or not, should I start now to save for my children’s college education, and, what about the grandkids?

Tough decisions.

It may be best to consult an advisor (accountant or financial planner or the whiz kid around the corner) who can run the numbers to see which options would work out best financially.

I attended a very interesting event that spoke about the debt the nation is in and how we can recover. Check it out: Be well.

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avatar 16 Anonymous

My 16 year old son got his first job this summer. Mathmatically I showed him if he put $167 each month (approx $2,000 annually) into a Roth IRA that averaged 12%. Showed him if he did that for only 10 years by the time he is 60 he will have $1.5 million. So his first month he had to buy an upgraded phone, clothes and movies.

The math is easy to figure. Being consistent to sticking with it is another issue.

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avatar 17 Anonymous

You’ve read the arguments about comparing the avalanche and the snowball many times before, but I want to touch on it anyway, because you showed some uncertainty in how you feel about paying off the mortgage. Isn’t it a debt? If you think you might not want to pay off that debt because of an opportunity to earn more elsewhere, than shouldn’t you mention that in all of your debt avalanche related posts? As I just mentioned in another comment, my mortgage is actually my highest interest debt (and was even when I had revolving credit card debt), so really, if even the mortgage shouldn’t be paid off via avalanche because you could be earning more elsewhere, then none of my other debts should be paid off either.

In other words, if I can earn 5% or more (after tax implications) with my money, it should put it there rather than pay off my debts that are all effectively 5% or less (after tax implications). Of course that’s speaking strictly mathematically. Psychologically, I would like to reduce my debts and increase my monthly cash flow, which I would then feel more comfortable investing for that 5% or better return.

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avatar 18 Anonymous

The Debt Snowball makes practical sense too. It helps free up debt obligations sooner, meaning that in the case of an emergency you have more monthly dollars available sooner (i.e. if I pay off that $1,000 debt with a minimum payment of $100, I free up $100 a month in case of emergencies).

I understand the math of the debt avalanche, but I like the Debt Snowball better for both the motivation (emotional) and practical (debt obligation reduction) reasons. However, I probably won’t follow either. I’ll be using a debt snowball with common sense. For instance, if I have a $5000 29% interest debt and a $4000 4% debt, I’ll pay off the $5000 first. But if I have a 5% $1000 debt and a 10% $20,000 debt, I’m gonna knock out the $1000 first.

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avatar 19 Anonymous

Good post. One of the best critiques of Dave’s plans I’ve read.

The author’s advice is sound for financially adept readers. However, Dave’s target demographic lies well outside these tight circles. The vast majority of Americans are in desperate need of rudimentary financial guidance.

Many of the replies mention logic, emotion, and math but Ramsey devotees are told that behavior modification is the key. Early victories are key to sustained financial progress. Thus, while the Debt Avalanche appears a better solution from a mathematical perspective, the Debt Snowball almost always assures more financial victories (as measured by debts retired) than other approaches.

I would caution against classifying Dave’s audience as “unmotivated” though. There are many reasons people fall or walk into financial difficulty. Laziness is one cause to be certain but as often life changes like medical emergencies and economic down turns are to blame among countless other excuses/reasons.

All-in-all well done.

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