Did you know that millions of people have followed and completed Dave Ramsey’s popular childhood steps towards financial freedom? It’s a clear path that’s easy to follow, and statistics show that they work. Or are they?
A quick Google search for Dave Ramsey’s Baby Steps will show you conflicting opinions on both sides of the argument, so who do you believe?
For example, we wrote a viral article about Dave Ramsey being out of date and outlined our own 12 Toddler Steps to Financial Freedom. We have a reboot article titled 15 Tips by Dave Ramsey that will change your life forever.
Well, we’ve made the analysis easier for you by describing several advantages and disadvantages of Dave Ramsey’s 7 Steps to Baby.
Baby steps
If you’re reading this, you’re probably at least a little familiar with the Seven Little Steps and how they work. If not, don’t worry! Here’s a quick plan to refresh your memory:
- Step one: Save at least $ 1,000 (or $ 500 for lower-income people) to keep in reserve for financial contingencies.
- Step two: With the help of “Debt Snowball”, pay off all your debts, except for the mortgage. This includes car loans, credit cards, lines of credit, personal loans and even student loans.
- Step three: Strengthen your emergency fund and save at least 3-6 months on living expenses for unforeseen events like job loss, health expenses, etc. This is an important part of the financial planning pyramid.
- Step four: Save at least 15% of your family’s total income and set aside for retirement.
- Step five: If you plan to have children and plan to pay for their education, save enough to pay for their college expenses.
- Step six: Pay off your mortgage and any home loans ahead of schedule. This also includes a second mortgage such as a home equity line of credit or a home equity loan.
- Step seven: Continue to accumulate and increase your wealth while giving back to others.
Small steps are designed to tackle your most pressing financial challenges ahead of time, and you plan to save a significant portion of your retirement income and accumulate wealth afterwards. Visit Dave Ramsey’s website to learn more about the seven little steps.
Dave Ramsey’s budget percentage is also a great place to start taking control of your finances.
Advantages
As you can see, this is a pretty simple plan. Seven steps to follow, they are easy to understand and have already worked for millions of people! Some general benefits of using Dave Ramsey’s baby steps:
This is already a proven process
There are likely hours after hours of studying, organizing, and analyzing your top personal financial priorities behind the baby steps. Don’t reinvent the wheel! What’s the point in recreating what is already working?
Many people don’t want to have to deal with the hassle of meeting with a financial planner, calculating projected savings growth, how quickly they will pay off their debt, etc., just to improve their financial situation. They want something that’s proven and easy to use. This is where baby steps can be very helpful because it is proven to be easy and simple to work with.
Financial education is practically not required
Anyone with a high school diploma (or less) can follow in a child’s footsteps. It doesn’t require complicated math; for this you do not need to have experience in the field of personal finance and you do not even need to calculate where you pay the highest interest on your loans!
Still not sure if you know enough about personal finance? I will teach you in one sentence that will prepare you for the essential knowledge you need to follow in the footsteps of Dave Ramsey in Child. Here it is: save in case of an emergency, pay off debt, save more and create wealth, then give to others. That’s all!
You have many resources available
Dave Ramsey founded Ramsey Solutions in 1992 to help as many people as possible financially. This is almost 30 years of financial experience from one resource, and it was all built on the concept of seven small steps that he teaches. To say that you have many resources available when you follow his plan is to say nothing.
In addition to free website content, education, radio shows, podcast episodes, and a free budget app, Dave Ramsey provides his audience with even more resources, such as:
- SmartVestor: A list of trusted financial experts that Dave has reviewed and made sure they follow his monetary beliefs.
- Approved Local Provider (ELP): List of trusted agents verified by Dave and his team. This ranges from insurance experts, real estate agents and even tax advisors.
- SmartDollar: A financial well-being solution for businesses that teaches employees to change financial behavior.
- Ramsey Personalities: Many Ramsey Solutions experts work with Dave, and Dave’s audience can write books, build courses, and even host their own radio shows. Some experts include Chris Hogan, Rachel Cruz, Christy Wright, Anthony O’Neill, Ken Coleman, and John Delaunay. Visit Dave Ramsey’s website for information on each of Ramsey’s personalities here.
disadvantages
Those who read include dreamers, entrepreneurs, small business owners and successful people seeking to change the world. Those of us who fall into these personalities or similar mindsets face some setbacks in following Dave Ramsey’s little steps. Some of them:
It takes time
Of course, most things related to money take time before they bloom. However, some ways to accumulate wealth can be faster than following the seven small steps. For example, the average person who makes $ 50,000 a year and wants to start from the first step, saving $ 1,000, it can take 3-6 months if you only have $ 200-300 a month. The same can be said for paying off debt and creating a reserve fund to cover living expenses for 3-6 months.
Someone might argue that consolidating your debt into one low-interest loan saves time and money in debt repayment. Others may say that you have one $ 1,000 credit card to use as a back-up fund so you can focus on putting that money where it has a greater impact. To each his own!
Baby Steps Doesn’t Distinguish Between Good and Bad Debt
It is recommended to have zero debt in the first steps of the child – NEVER. This means no mortgages, small business loans and car loans. If you follow Dave Ramsey, the whole debt is hopeless. Of course, we can all agree with this to some extent. But someone might argue that they would instead invest their $ 15,000 in an investment that yields 7-10% per annum, instead of buying a car for $ 15,000 in cash.
Where is the financial harm when your bottom line is still 7% if you make a 10% return in the stock market with your $ 15,000 by paying 2.99% on a car loan? Where is the awful math when you pay 4.99% on a $ 50,000 business loan, resulting in 30% more revenue for your business? Would you pay 4.99% to get 30%? Absolutely!
Home ownership is hard to combine with small steps
If you already own a home when you are just starting to walk up the stairs, it is recommended that you either sell it, pay it off as soon as possible, or refinance it before the 15-year mortgage term. If you are not home when you first start taking baby steps, you are advised to buy cash or get a home on a 15-year mortgage that is not worth more than 25% of your total household income. home earnings (that is, your income after taxes).
In other words, if you make $ 50,000 a year, your wages for a home will be about $ 3,200 a month. By following Dave Ramsey’s 25% Rule, with a $ 3,200 monthly home payment, you can afford a mortgage payment of about $ 800 a month. Depending on the mortgage interest rate, this means that you can only afford a home in the price range of $ 160,000 to $ 180,000 maximum. If you cannot fit into these parameters, Dave Ramsey advises you to rent an apartment.
Which path to take
Who are the baby steps for? You must understand that Dave Ramsey serves a specific niche audience. Its listeners are mostly made up of people living paycheck to paycheck, with below average incomes and poor credit ratings. Don’t get me wrong, not EVERYONE who listens to Dave Ramsey fits this profile, only most. In fact, if someone who fits this niche profile wants to take out a $ 100,000 business loan, do you think this is a wise move? Perhaps this person should first put things in order in their finances.
To determine the best approach for you, take an honest look at your financial scenario. What is your current income? How much debt do you have? How much savings do you have? What does your loan look like? Be honest with yourself!
Then look at your financial goals and financial beliefs. Where do you want to be in five years or even ten years from now? Are you the type of person who thinks that owning a home and a small car pays with your money for higher returns? Answering these questions will point you in the right direction.
Bottom line: Dave Ramsey’s baby steps work. There is no doubt about that. It is a proven system that has improved the financial well-being of millions of people. It’s up to you how ambitious you want to be with your finances and wealth accumulation!
This article originally appeared on The Money Mix and has been republished with permission.