From Baby Steps to Financial Giant: Dave Ramsey’s Plan for Financial Freedom

Updated on August 15, 2023 Updated on August 15, 2023
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Are you ready to take control of your finances and start building wealth? Dave Ramsey’s Baby Steps is a proven plan for achieving financial freedom, but sometimes it can be hard to know where to begin.

We want to show you how to turn those Baby Steps into giant leaps toward your financial goals. From getting out of debt to building an emergency fund and investing for the future, we’ll break down each step of Dave Ramsey’s plan and give you practical tips for taking your finances to the next level. So let’s get started on the path to financial freedom and turn those Baby Steps into financial giants!

What Are Dave Ramsey’s Baby Steps?

Ramsey’s personal finance philosophy is based on seven steps. The steps are meant to help people get out of debt, stay out of debt, prepare for a financial emergency, and plan for their financial future.

The plan is broken down into seven steps so as not to overwhelm people. When we’re in a financial hole and look too far ahead, the situation can be so discouraging that people give up. If you take things one step at a time, any goal is easier to achieve.

How do you eat an elephant? One bite at a time.

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Let’s take Dave Ramsey’s baby steps and run them through the LMM filter, WWLMMD if you will!

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

An emergency fund is essential, even more, important than paying off debt. Why? If you don’t have the cash for an emergency, you’ll end up going into more debt to take care of it, either with credit cards, personal loans, borrowing from friends or family, or a payday loan.

If you don’t have an emergency fund, you’re not alone. 

Only 29% of Americans actually have the recommended six months of expenses stashed away. Just 18% have enough to cover three to five months of expenses. And nearly one-in-four Americans have no emergency savings at all.

“Your emergency savings is a buffer between you and high-interest-rate debt when unplanned expenses arise,” says Greg McBride, Bankrate’s chief financial analyst. “Nothing lets you sleep better at night than knowing you have money tucked away to cover unplanned expenses.”

You want to sleep at night, don’t you? Me too, let’s do it.

How To Do It

For some of us, $1,000 might as well be a million. But remember, we’re going to break each step down so we can achieve it and move on to the next one. If we do the math, we only need to save $20 a week to save $1,000 in a year. It’s great if we can do it faster, but saving $20 a week isn’t unreasonable, so that’s our goal for Step 1.

If you’re not budgeting, that’s a big reason you don’t have $1,000 for an emergency. Set up a Mint account. It’s free to use and will show you where your money is going. We all have spending leaks, and Mint will point them out so we can plug them.

Food is always a likely source of overspending. We waste a lot of the food we buy in the grocery, and we eat and order out too much. If you’re trying to save $1,000, you cook at home and bring your lunch to work until you do it.

You don’t want this step or any of the steps to be a miserable experience, so you’re allowed to have some fun. There are lots of ways to have fun without spending any or a lot of money. We have cheap date night ideas and cheap, fun summer ideas. 

Set up a Trim account. Trim goes through your debit and credit card transactions and looks for recurring charges like gym memberships, Audible or food delivery subscriptions, or wine of the month club.

When Trim finds these kinds of charges, they will send you a message asking if you want to cancel them. If you do, Trim takes it from there. I used Trim last year, and it saved me about $65 a month. Not only does Trim save you money, but it’s also free to use!

How much are you paying for things like cable, internet, and phone? Whatever your number, it could probably be smaller. The companies that provide these services are always offering specials because there is so much competition between them.


Use Trim to lower your bills. They'll analyze your accounts to determine where you can save money. They'll negotiate with your current providers or cancel unwanted subscriptions. Trim even fights on your behalf to reduce APRs and bank fees.

But you don’t want to research the best rates and then call your current provider to negotiate. You don’t have to. Billshark will do it for you. I used Billshark a few months ago, and they saved me about $62 a year on my cable and internet bill.

Billshark isn’t free to use. The fee is 40% of the amount they save you in one year, so for me, the fee was $24. True, I could have done what Billshark did myself for free, but I don’t have time to do the research and make the calls so paying for the service was worth it to me.

Got your $1,000? Good, on to the next step.

Want to get your money under control?

This is our guide to budgeting simply and effectively. We walk you through exactly how to use Mint, what your budget should be, and how to monitor your spending automatically.

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Baby Step 2: Pay Off All Debt Using the Debt Snowball

Debt is the reason most people find Dave Ramsey. Millions of us are in debt, and it’s a significant drag on our journey toward financial freedom. Having debt is also mentally and physically stressful so let’s kill this debt.

Pick a Method

You can’t just throw money at various debts; you have to have a plan to attack them. There are two, snowball and stacking.

Snowball means listing debts by dollar amount, lowest to highest and paying them off in that order.

Stacking means listing them in order of interest rates, highest to lowest and paying them off in that order. Ramsey advocates snowball but stacking will save you the most money.

snowball vs stacking

I’m with Ramsey on this. Stacking saves you more money because you pay less in interest, but the snowball is more satisfying. When you see a debt at $0, it really gives you a boost and feels like you’re making progress. And that feeling gives you momentum to keep working hard at killing your debt.

Credit Card Debt

Credit card debt is among the worst kinds of debt to have because the high-interest rates make it hard to make progress. If your credit score is good enough, apply for a balance transfer card.

Credit Karma can show you a selection of them and let you know which ones you’re more likely to be approved for based on your score.

You transfer the balance of a high-interest card to the new card. During the introductory period, which ranges from six to 24 months, you aren’t accruing interest, all of your payments go towards paying the principal. This lets you make faster progress.

You do need to pay off the balance before the 0% APR period ends though or what remains will be subject to the new interest rate which may be higher than what you were paying on the original card.

Another option, again if you qualify, is to take a debt consolidation loan from a company like Upgrade. You use the loan to pay off your cards. You still have debt, but just one payment and with a lower interest rate than you had on the cards.

Student Loan Debt

If you have student loan debt, the first thing to do is to find out if you’re eligible for any of the forgiveness programs available. If not, consider refinancing with companies like Earnest or Commonbond. You can lower your interest rate which can save you thousands of dollars over time.

Baby Step 3: 3-6 Months of Expenses in Savings

Saving $1,000 for your emergency fund was a great accomplishment, but it’s not enough. Not to worry! You killed your debt, so you have freed up some money that you can use to grow your emergency fund.

But no matter how frugally you live, three to six months’ worth of expenses is a hefty chunk of money so we’re going to buckle down so we can do it fast.

How Much Is That?

Living expenses mean bare-bones expenses like rent or mortgage, utilities, car payments, etc. You don’t need to factor in things you pay for every month but could live without like cable, dining out, and entertainment expenses.

Add up those numbers and multiply it by three, that number is your first goal. Double it to have six months of expenses, and that’s the ultimate goal. No one expects you to do this overnight. Accumulating this much in savings is going to take a while for most of us.

That doesn’t mean you should leave things open-ended, having a date looming can motivate us. Do the math like we did to get to $1,000. Let’s use a round number for ease of example.

To have a six-month emergency fund, we need to save $20,000. That means we need to save $384 a week for one year. Not realistic for most of us. If we make it our goal to save $20,000 in three years, we need $128 a week. I think we can do it!

Your Budget

In our first step, we just asked you to set up a Mint account, not to make a budget. We didn’t want to overwhelm you, just to show you where your money was going. Now we’re going to budget for real. Set up your budget categories. 

Use the 50/30/20 method to budget your money. 50% goes to essentials; no more than 35% should go to your rent or mortgage. 30% goes to non-essentials like clothes, vacations, and meals out. The remaining 20% is for investing or if you still have debt, paying that off.

50-30-20 rule

Mint is excellent but it won’t stop you from going over budget. There is a more extreme budgeting method if you have a hard time sticking to your budget. It’s the envelope method. Mark an envelope for each category that you can spend cash on, gas, food, entertainment, etc.

You can’t pay cash for your rent or mortgage, but those aren’t the categories we overspend on. You can budget weekly or monthly. At the beginning of the period, you take out the amount of cash you have budgeted for each category and put it in the designated envelope.

Once it’s gone, you’re done spending on that category, even if the budgeting period hasn’t ended. This is not the most convenient way to budget, but it can help those who have tried and failed to stick to a budget.

Make a budget and stick to it.

Make More

When the average American spends five hours a day watching TV, there is no excuse not to have a second stream of income. That’s what this blog started as. Do you know how much it makes? $400,000 a year. Do you know how long it took to reach that number? About five years.

If you want to achieve financial independence, things like shopping with Ebates and using Seated to make dinner reservations are great ways to save money, but saving is not enough at some point. You need to make more.

Ask your boss for a raise. Drive for Uber on evenings and weekends. Sell stuff on eBay or Amazon. Teach English with VIP Kid, sell your lesson plans on Teachers Pay Teachers, sell a course on Udemy. Answer surveys on Survey Junkie, become a Task Rabbit.

Survey Junkie

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In the past, making money outside of your regular job often meant a traditional part-time job like retail or serving. The problem with those kinds of jobs was that they came with a schedule and maybe it didn’t fit with the time you had free.

But so many of the ways we listed to make extra money have flexible schedules! It’s easier to make money on the side than it ever was so there is simply no reason you shouldn’t be doing it. Remember, we’re only looking for an extra $128 a week, and part of that can be money you saved.

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

Woo! You did it! The first three steps were the hardest by far. Everything from here on out is going to be a piece of cake!

We Say 20%

Dave says you should invest 15% of your income, but we say 20%. People are living longer than ever, and medical costs are higher than ever so while 15% is good, 20% is better.

We also want to retire early, and you probably do too. Saving that extra 5% will allow you to retire earlier. Not sure how much you’ll need to retire? No fear, Personal Captial has an awesome retirement calculator that will tell you that.


The Gateways

If you’re brand new to investing, the easiest ways to get started are M1 Finance and your employer’s 401k if they offer one.

We like M1 because there is no minimum and the fees are low. It’s also easy. You just answer a few questions, set up an automatic deposit each month and you’re investing.

401ks are great for the same reason. You opt-in, the money comes out of your paycheck before you get a chance to spend it and it’s tax-advantaged. The money goes in tax-free and grows tax-deferred. Upon withdrawal after age 59 1/2, the money is taxed as income.

Real Estate

We love real estate as a means of investing because it’s passive. If you want to own rental property, you don’t have to be a hands-on landlord.

You can buy a turnkey property and they do all the work for you. Andrew and Laura have a few rental properties; they’ve never seen the houses in person!

They even created a course documenting their experience that focuses exclusively on using a turnkey rental property investing strategy: Rental Properties for Passive Investors.

You’ll learn their criteria for finding (and closing) the right property, the foundations of a successful rental business, the advantages of shielding your assets with an LLC, and more.

Rental Properties for Passive Investors

Our proven, data-driven approach to building a portfolio of income-producing rental properties that perform in the long-term.

If you don’t have the money (yet) for a rental property, you can still invest in real estate. Fundrise allows you to get started for just $500.


Because part of any retirement strategy should be to legally avoid taxes as much as possible, a 401k isn’t enough. You can only invest $18,500 in a 401k for 2018. Once you max that, you can open an IRA.

You can choose between a Traditional IRA and a Roth. A Traditional IRA is not taxed upfront but at the point of withdrawal. The money grows tax-deferred. Upon withdrawal after age 59 1/2, the money is taxed as income. A Roth IRA is taxed upfront and not upon withdrawal after age 59 1/2. For 2018, the contribution limits for both are $5,500.

To really bag some tax benefits, check out advanced IRA strategies. 

Baby Step 5: College Funding For Children

Having a kid costs nearly a quarter of a million dollars. Read it and weep, or read it and make an appointment for sterilization. And that doesn’t count the cost of college.

Why Should You Pay?

No law states parents have to pay for their child’s college education. We get it though, parents want the best for their children and want to help them. But remember, your kid has a lot longer to work to pay off their student loans than you have to save for retirement.


If you do want to help, the best thing to do is start saving early. You can do that with a 529 plan. A 529 Plan is like a retirement account for college.

Your contribution is made with after-tax dollars and is not taxed when the money is withdrawn as long as it is spent on educational expenses. You do have to name a beneficiary but can change it once a year.

529 Plans can be purchased direct or through an adviser. You can use 529 money to pay for lots of different types of education, community college, a four-year college, trade schools and some study abroad plans.


CollegeBacker helps you save for college through a 529 plan. They don't take commissions and let you choose your monthly fee. They're also a fiduciary, recommend low-fee investments, and put your interests first.

Why Should Anyone Pay?

There are lots of ways to go to college without going into debt for tens or hundreds of thousands of dollars. We know you’re proud when your kid gets into the best school they applied to, but it’s no longer realistic for most of us to attend the best (read: most expensive) college that will have us.

Choose the Right Major

Ultimately the final decision on what to major in is your kids’ to make, but you can certainly let them know they need to get a good ROI if they are going to take out loans. Getting a $100,000 degree in a major that is never going to pay more than $50,000 a year can have lifelong financial consequences.

It’s Not For Everyone

You know your kid better than anyone. You may want them to go to college, but it isn’t for everyone. It doesn’t make them less smart than other kids, and it doesn’t mean that they’ll be doomed to a life of low wage work.

There are lots of alternatives to college and plenty of interesting, well paying, prestigious careers that don’t require a college degree. 

Pushing a kid who isn’t college material into going is going to end up with one or both of you in debt and the kid probably dropping out with no degree to boot.

I hate the system we have in the U.S. that pushes every kid into college and immediately after high school. Aussies have the right idea. A lot of their kids take a gap year. They spend a year traveling or working and figuring out what they might like to do with their lives.

If you don’t feel like your kid is ready for college at 18, don’t force them to go.

Baby Step 6: Pay Off Home Early

There can be good debt and bad debt. Good debt is debt that has a low-interest rate and that you borrowed to make more money, like when you buy an affordable house.

Bad debt is high-interestest debt that you took out but has nothing to show for it. Like credit card debt that you racked up buying clothes, you don’t wear.

Dave disagrees, he thinks there is no good debt and all debt should be paid off ASAP.

Okay, First Of All

Why are Americans so obsessed with buying a house? I’ve heard all kinds of crazy reasons people did it and in lots of dumb circumstances. Our upstairs neighbor was loud, so my girlfriend, whom I’ve known for two weeks and I bought a house! 

I never really thought about buying a house, but my parents said I should so I did! I have $50,000 in student loans and $30,000 in credit card debt, but I’m a homeowner! American dream achieved! 


I’m not saying there aren’t good reasons to buy a house but make sure you have a few before you do it because it’s not a great investment. There are lots of hidden expenses and a ton of responsibility.

But If You Did It…

Is Dave right, should you focus on paying it off as fast as you can? It depends on your own feelings about debt. You can, over time, expect to make about 7% a year from your investments. The average mortgage rate is 4.38%.

That means you can make more in an investment than you are paying in interest. And time is everything when it comes to investing. The longer your money is invested, the more it grows.

But if you are debt adverse, like it makes you sweat spinal fluid when you think about it, we can understand why you would want to pay your mortgage off. If you choose this route, pay it off fast. 

Baby Step 7: Build Wealth and Give!

You’re at the last step, and things can pretty much go on autopilot. You did the hard work, and now you can relax and reap the rewards.

Continue to Build Wealth

You just need to keep doing what you’ve done to build wealth. Continue to stay out of debt. Replenish your emergency fund if you’ve had to dip into it.

Max out your 401k and Roth accounts. Contribute regularly to your Betterment account, if your real estate investments have been going well, consider buying more rental property or increasing your Fundrise investment.

Start planning what your post-work life will look like. Retirement no longer means playing golf and sitting in the rocking chair on the porch. You want more than that for the next phase of your life.

Give It Away

Give it away if you want to use your money to buy happiness. Being generous has been shown to make us happy. That might mean gifting your children the downpayment for a home, giving money to a charitable or political cause you care about, or just buying the guy next to you at the bar a drink for no reason in particular.

You Are Allowed Do-Overs

When I write things like this, I’m always afraid I make it seem too easy. Doing this stuff is like losing weight. It isn’t easy, but it is simple. If you follow these steps, they will work. But I know it’s not easy, especially the getting out of debt part.

I’ve had to do it twice because I don’t learn the first time. The first time I got into credit card debt, I chalked it up to being young and dumb. I knew exactly what I was doing the second time, and I just didn’t care. Spending that money made me feel better and I did it.

So I know from experience it isn’t easy and you’re allowed to mess up. You’re allowed to be on Step 3 and have to go back to Step 2. You’re always allowed a do-over, but you are never allowed to quit. Achieving financial freedom isn’t easy, but it is simple. See you at the finish line.

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Candice Elliott - Senior Editor Candice Elliott is a substantial contributor to Listen Money Matters. She has been a personal finance writer since 2013 and has written extensively on student loan debt, investing, and credit. She has successfully navigated these areas in her own life and knows how to help others do the same. Candice has answered thousands of questions from the LMM community and spent countless hours doing research for hundreds of personal finance articles. She happily calls New Orleans, Louisiana home-the most fun city in the world.
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