Evaluating Dave Ramsey’s Total Money Makeover — Which Baby Step is Right for You?

Dave Ramsey is a hot and controversial subject online. To some he’s the guru who saved their lives, to others he’s annoying, simplistic and illogical. I tend to fall on the side of liking him, but I can see why some people don’t.

I discovered Dave Ramsey on the blogosphere and quickly read his Total Money Makeover and skimmed Financial Peace. We put some of his principles to work, though because of the length of our debt-repayment, we’re not quite gazelles.

When the M-Network did their series on his famous baby steps, I started thinking of Dave in a different way—not just as someone for those in debt but as someone who offers solutions for various steps along your path. He’s not just for those in debt, but also for those looking to escape the cycle of living paycheck-to-paycheck.

So what I’m doing here is dividing up Dave Ramsey’s baby steps with starting points for people at different stages of their financial journey. And so I don’t have to cover as much in this piece, I’ll be linking to the M-Network articles which more fully explain and evaluate each step.

Starting Point for Those in Debt

You’re in debt and you don’t see a clear or simple way to get out. Or maybe you’d just like to find a program to follow, one that’s worked for other people. Then this is the best place to start. (People with only mortgages start down with those living paycheck-to-paycheck.)

Baby Step 0 — No more debt

Before beginning the program, you have to swear off debt. You will not incur new debts and you’ll dedicate yourself to getting rid of it. Mortgages are a gray area.

Ana at DebtFREE-Revolution and Single Guy Money both covered this step.

Baby Step 1 — Emergency Fund

Begin with a $1000 emergency fund. This is to defend yourself against what Dave Ramsey calls “Murphy.” Because Murphy’s law says that if something can go wrong, it will. So you protect yourself against emergencies. Guard this fund jealously, don’t spend it on non-emergencies like dinner out.

Gather Little by Little (Gibble) shares his emergency fund strategies. He’s had to learn important things, like how much his family really needs in their fund and where to put it.

If you have a hard time coming up with this money, try PaidTwice’s snowflaking method. Instead of using your snowflakes to pay down debt, put them in a special account to build up your emergency fund.

Baby Step 2 — Use a Debt Snowball to Pay Off Your Debt

The debt snowball is a way of organizing your debts so that they get paid off faster than if you did the minimums only. It helps you knock out one debt at a time, which feels so good! While not everyone agrees with Dave Ramsey’s method of organizing the debt snowball, the snowball itself is a much better way to pay off debt than haphazardly throwing extra money at randomly chosen debts.

PaidTwice covers Dave Ramsey’s version of the snowball and explains why she does hers differently and how.

For Those Living Paycheck-to-Paycheck

If you want to build wealth but are living paycheck-to-paycheck, this is where you should start in the baby step game. Or if you have debt but it’s only your mortgage. You’ve already committed to baby step 0 of not acquiring new debt and staying current on all your bills. Keep that up!

Baby Step 3 — Fully Fund Your Emergency Fund

Whether you were in debt and had that thousand dollars or you’re just starting, this is the time to build 3-6 months worth of living expenses in an emergency fund. It doesn’t have to be the same as your take-home pay, but rather what your family needs to live.

If you just finished debt repayment, simply turn your debt snowball this way. If you’re starting out, begin your savings snowball or snowflake it if you have to. This is still the point in the game where you’re living without a lot of nice things to get yourself set.

Lynnae of Being Frugal explains some of the reasons behind using a real emergency fund (vs. your 401(k) or HELOC) and her thoughts on what to do with it.

Baby Step 4 — Invest 15% of your income into Retirement

Ok, you’ve finished protecting your present, now start protecting your future. You can use your former savings snowball money to make this happen.

The Dough Roller has some advice on retirement accounts and shows you pretty pictures of how your money will grow. Yay!

Baby Step 5 — Start Saving for Your Children’s College

If applicable, help your kids avoid one of the biggest debt pitfalls out there—student loans. I’m immensely grateful that my parents and grandfather helped me (plus lots of scholarships). This comes after retirement savings because you can’t borrow money for your retirement and it’s much tougher to work your way through it or go without.

David of My Two Dollars covers this step and points out that there’s nothing that says a parent has to pay for their child’s education, but it’s great if you can help.

Baby Step 6 — Pay of Your Mortgage Early

Probably the most controversial step. I’m going to let Pinyo handle this one at Moolanomy. He shows both sides of the issue and why each one might be appealing. There are a number of other bloggers who’ve covered this, so when you’re at this step you can look around and see what’s right for you.

For Those Who’ve Built Wealth

Whether you did the other baby steps or just started here (and if you’ve build wealth without saving for retirement/children’s college, consider going back to those steps), Dave Ramsey has advice for you. He believes that eliminating debt and building wealth aren’t the end-all be-all.

Once you’ve built wealth, you should live and give. If you keep living in a way that makes you miserable, then there’s really not much point in being out of debt, you’re still unhappy. Rather, live responsibly so as not to waste your money but as to maximize it.

Keep investing, not just for your retirement but as a way to build wealth.

And give something back. Ramsey believes strongly in giving. For him, that’s motivated by his faith, but you can have all kinds of reasons to give. Before, you might have felt the pull between giving generously and paying the bills. Now that you’ve built wealth, you don’t have to worry about that.

Plonkee deals with this step and offers some sage advice:

You will always need to live within your means and save for a rainy day. Even if you feel that you have enough money so that you never have to work another day in your life, you won’t have it for long if you spend more than you earn, or you don’t replace the emergency money you use when your boiler breaks down or the cat gets sick.

and

Now, more than ever, you need to evaluate what you really want out of the rest of your life.

So there you have it. I don’t think Dave Ramsey has all the answers for everyone. But I think that his plan is quite right for a number of people. If you like the plan but don’t feel you can muster the intensity, that doesn’t mean you can’t follow it…just do the plan instead of reading all his books, listening to his show, hanging out in his forums.

On the other hand, I think the passion he generates in others is valuable for a lot of people who need the motivation and support to get out of deep debt. In that case, go all in!

And remember, just because you’re not in debt doesn’t mean Dave Ramsey isn’t for you.