An Introduction To Dave Ramsey’s Total Money Makeover Baby Steps

by Hank Coleman

Dave Ramsey's Total Money Makeover Baby Steps

Dave Ramsey Baby Steps in The Total Money MakeoverI’m always asked about how to start or where to start if you are struggling with your finances. If you have a mountain of credit card or student loan debt or a slew of other financial problems, it can be very intimidating where to start. That is why I always recommend that people start with Dave Ramsey.

I’m a huge Dave Ramsey fan and his book, The Total Money Makeover. It is one of my top ten personal finance books that everyone should read. It should be on everyone’s nightstand. So, it is a great place to start.

While there are many great ways or ideas out there, Dave Ramsey’s Total Money Makeover is one of the best ways to save your money, build an emergency fund, get rid of debt, and start to take control of your finances. Dave Ramsey is a nationally known thanks to his books, nationally syndicated radio show, and many appearances on national television.

The Total Money Makeover consists of Dave Ramsey’s seven step plan to build an emergency fund, get out of debt, invest, and start to gain financial independence. Dave Ramsey said in his book that that got the idea of naming his program with baby steps from the movie, “What About Bob?”.

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“What About Bob?” is a comedy with Bill Murray where Bob torments his psychiatrist who tries to help him with his OCD. Like an alcoholic, his doctor tells him to take baby steps and get through his problems in small bites, one day at a time. So, throughout the entire movie, Bob walks around talking about baby steps. And, Dave Ramsey’s popular system was born as well out of that movie.

Dave Ramsey baby steps can help you take control of your finances. Dave Ramsey has seven baby steps. Below is a little brief synopsis of Dave Ramsey’s seven baby steps to financial freedom from his book, The Total Money Makeover. Over the next few days, I’ll break each one down and talk about each of the Dave Ramsey Baby Steps in more depth.

Dave Ramsey Baby Steps

Baby Step 1 – $1,000 Emergency Fund
Baby Step 2 – Pay Off All Of Your Debt With A Debt Snowball
Baby Step 3 – Fully Fund Your Emergency Fund
Baby Step 4 Save 15% Of Your Income For Retirement
Baby Step 5 – Save For Your Children’s College Education
Baby Step 6 Pay Off Your Mortgage Early
Baby Step 7 Build Wealth And Give

Baby Step 1 – Start An $1,000 Emergency Fund

Introduction To Dave Ramsey Baby Steps The very first of the Dave Ramsey Baby Steps is to get a $1,000 emergency fund in the bank. This step is critical to help you to stop adding to your debt. If you do not start this way, you may still fall back on using credit cards. So, in baby step one, sell things or save up as fast as possible to get that first $1,000 in the bank. An emergency fund makes sure you have money to cover these circumstances and stops you from getting into debt.

In order to keep you from going further into debt, you need to set up your starter emergency fund of $1,000 in the bank as fast as you can. So, how do you find that $1,000 when your budget is already probably super tight or even resulting in a negative cash flow every month?

One of the easiest ways is to sell something. This may not be a very popular piece of advice, but selling something is one of the easiest ways to get out of financial trouble. You will see it also in the next baby step when many times you can get out from under your debts, such as a car payment, by selling the asset. Do you have a car you can sell to raise the cash? Do you have some shares of stock that you can sell?

What books, DVDs, CDs, textbooks, and other things that you can sell on a website such as or eBay? You may want to consider having a yard sale. This is a quick way to build up your cash reserves to get that quick $1,000 Dave Ramsey emergency fund in your bank. 

Will $1,000 solve all of your financial problems? Of course, it won’t, but it will start you off on the right track. It will keep you from digging a bigger hole for your finances. You do not want to continue to add to your debt by continuing to rely on your credit cards. This $1,000 is your starter emergency fund to keep you from added to however much debt you have. Do not save more than that $1,000.

See more details about Baby Step 1 – Get $1,000 In The Bank

Baby Step 2 – Pay Off All Debt With The Debt Snowball

The second baby step is to list your debts in order, make the smallest debt your first priority, and pay off all of your debt besides your mortgage using the debt snowball method. This is a psychological method in the sense that by paying off the first debts with the smallest balance, you will be motivated to pay off the rest. This is typically contrary to many popular opinions on paying off of debt which recommends paying off the debt with the highest interest rate first instead.

What Is A Debt Snowball?

A debt snowball is a well-known method that is used to eliminate all of your debt. This method was made popular by Dave Ramsey in his personal finance book, The Total Money Makeover.

The method requires you to deal with the smallest amount of debt first and then move on to the next smallest and so on and so forth until all of your debts are completely paid off. Dave Ramsey instructs his followers to get rid of all of your debt except your mortgage which you will tackle in Baby Step Six.

How Does A Debt Snowball Work?

Now, grab a piece of paper and list all of your debts owed. Make sure you list them by the balance that you owe from smallest to largest. Now, you throw all of your disposable income into paying off the debt at the top of your list, the smallest debt, first.

Determine how much money you can put towards this smallest debt and keep putting money towards this debt until you have paid it off, no matter how long this takes. For all of your other debts, you continue to pay the minimum payments that are due on them. Do not become late on any of your debts if you can help it.

Once you have paid off your first debt, then you add the amount of money that you were paying on that debt and tackle the next one on your list. When you take that amount and the minimum you were already paying on that debt, you will see more money become available to put towards paying off your debt.

That is why it is called a debt snowball. It keeps rolling downhill and keeps getting bigger as you pay off more debt. You add your extra payments to the next debt where you are already paying the minimum balance. It has a compounding effect that is very powerful. Now, you just repeat this process until you have paid off all of your debts on the list.

 See more details about Baby Step 2 – Pay Off Your Debt With The Debt Snowball

Baby Step 3 – Complete Your Emergency Fund

Once you have completed the first two baby steps, consider what would happen if you were out of work for three to six months? Once you have found the answer this is how much you should then save, and add it to your $1,000 starter emergency fund and complete your fully funded emergency fund.

Three Months Or Six Months In An Emergency Fund?

Why do financial planners give people a range of three to six months worth of savings in an emergency fund? One thought is that you can potentially save less for your emergency fund if your job security is very certain.

For example, many government workers have excellent job security. They could arguably survive on a smaller emergency fund that other people with less job security. If you are self-employed, you may need to save more than six months in an emergency fund in order to feel secure.

These are just rules of thumb, and you should save as much money as you need in order to provide you and your family with security and peace of mind. If that means that your emergency fund is over six months worth of your take home pay or closer to one year’s worth of living expenses, then that is okay to hold an amount that will help you sleep at night.

See more details about  Baby Step 3 – Fully Fund Your Emergency Fund

Baby Step 4 – Invest 15% Of Household Income

Once you reach the Dave Ramsey Baby Steps four, you will have a substantial emergency fund and no payments on your debts except your house. Now Dave Ramsey’s Total Money Makeover says that you should invest 15% into Roth IRAs and pre-tax retirement investments. Remember no more or no less than 15%! Dave Ramsey has other plans for your money as well as he leads you to financial peace.

What Should You Invest Your Money In?

So, now that you know how much money you should be saving every month from your paycheck, then the ultimate question becomes where to put it? This is a problem that many people dwell on. Should you invest in individual stocks, bonds, mutual funds, or your company’s 401k? What about Roth IRAs?

If you stick strictly to the Dave Ramsey baby step method that he outlines in The Total Money Makeover, he recommends buying good growth stock mutual funds to help you build your nest egg for retirement. You should have a well-diversified portfolio of stock mutual funds that include international stocks, mid-cap, small-cap, and large-cap or capitalization companies. For most people, using a Roth IRA is one of the best tax advantages that you can find.

By using after-tax dollars in a Roth IRA, you can withdraw your investment and its earnings tax-free in retirement. Another investment that you should use first is a 401k if your company matches your contributions. Many employers match the first 3% of the investment that you make in a 401k. Not taking them up on that offer is essentially throwing away a 100% rate of return.

There is actually a rhyme to the reasoning as to where the 15% comes in. Be sure to check out my full details of where the 15% actually comes from in my review of Baby Step 4 and investing 15%.

 See more details about Baby Step 4 – Invest 15%

Baby Step 5 – Establishing A College Fund

This baby step helps you learn to save for your children’s college education with a 529 College Saving Plan. Like a Roth IRA, a 529 College Savings Plan allows you to make after-tax contributions and withdraw the contributions and earnings tax-free for educational expenses, tuition, room and board, fees, and other education needs.

529 College Savings Plans

A 529 college savings plan account is one of the most recommended ways for people to start savings for their children’s college education. A529 College Savings Plan is an investment with tax advantages that is designed to encourage savings for future education expenses like tuition, books, uniform, and other educational expenses. Profits earned in these programs can be withdrawn tax-free assuming that they are used for qualified higher education expenses.

Setting up a 529 college savings plan is very easy to do. Most states have their own plans, which help parents save on state taxes too. 

You don’t have to sign up for the 529 college savings plan in the state where you live. There are others that are better and have cheaper fees. But, it may be worth looking at the state where you live first if you pay state income taxes.

Not only that these 529 college savings plan set up specifically for college education expenses, you can transfer the benefits amongst your children or even use the investment yourself. Just make sure that you’re making qualified purchases for educational expenses to avoid paying penalties.

Want to find out alternatives to a 529 college savings plan? Be sure to check out the full story on 529s and other plans in my full review of Baby Step 5.

 See more details about Baby Step 5 – Save For College

Baby Step 6 – Pay Off Your House Early

Now you are getting to the final stages of The Total Money Makeover, and it is time to pay off your house early. All your extra money after investing and saving for college should go towards paying your mortgage off. Once you start to pay off parts of your mortgage, you will gain momentum and be well on your way to financial peace and independence.

If you have gotten this far in Dave Ramsey’s get out of debt lifestyle change, then you are ready to for the biggest baby step of them all — paying off the mortgage!

The interest on a mortgage is staggering. If you look at it this way, that $250,000 house can turn into a $500,000 albatross payment over time depending on your mortgage payment, interest rate, length of the loan, and other factors. It honestly can sink you if you return to any of your old financial debt habits, such as increasingly relying upon credit cards.

But, it doesn’t have to be that way. Dave Ramsey’s Baby Step 6 is to pay off your mortgage early so you can live debt free.

See more details about Baby Step 6 – Pay Off Your House Early

Baby Step 7 – Build Wealth And Give

Now you are in the final steps of the Dave Ramsey Baby Steps, it is time to build wealth and give, leave an inheritance for your children or the ones you love, and help others with the money you have built up. This step is the final one and always ongoing.

There’s nothing wrong with wanting a better life for yourself and your family. Pursuing higher pay and better investments can bring you many benefits. But, once you attain a higher standard of living, it’s important to give back to those who truly need.

Building wealth and giving back to your community is a popular money habit among the wealthy and middle class alike. You’ll not only secure a financially stable future for your family, but you’ll also develop a long-lasting, honorable legacy among your favorite charitable causes. By donating what you can to ensure other people, animals, and other parts of the world can thrive, you’ll be remembered in a much more favorable light than the other guy who hoarded all his funds until the day he died.

What about you? Are you a Dave Ramsey fan? Which baby step are you on?

Do you have a money question that you would like to ask? Email me your money, investing, retirement, savings, or other question to Questions [at] If I pick your question for the next article in the series, I’ll send you a free copy of Dave Ramsey’s book, The Total Money Makeover.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]

Hank Coleman has written 581 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.

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{ 1 comment… read it below or add one }


I love this book too! It got me highly interested in my own finances. I really like how he “ignores the numbers” and says to tackle the smallest debt first to build up motivation and momentum so that you can stay consistent. I might have to re-read this one now.



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