Dave Ramsey’s famous 7 Baby Steps are a set of financial guidelines to help individuals achieve financial stability and build wealth. The idea is that each step builds on the previous one, the ultimate goal being financial freedom and peace of mind. Here’s a summarised version – plus my thoughts on whether they make sense or not ‘over here’.
Baby Step 1: Save €1,000 as a starting Emergency Fund
Quickly save a small emergency fund to cover unexpected expenses.
I agree, although I would say €5,000 is a safer (short term) buffer.
Baby Step 2: Pay Off All Debt (except the mortgage)
Dave Ramsay advocates paying off all non-mortgage debts using the (psychologically easier) debt snowball method, starting with the smallest debt and working your way up.
I prefer the more economically sound debt avalanche method, paying off debts with the highest interest rates first.
Baby Step 3: Increase your Emergency Fund (to 3-6 months of expenses)
Build your emergency fund to cover 3 to 6 months of living expenses, to give you even greater security in case of a financial shock.
I agree – just make sure you don’t accumulate too much cash before taking the next steps.
Baby Step 4: Invest 15% of your Household Income in Retirement
Start contributing 15% of your income into a pension to build wealth for the future.
I think 15% may be too much of a stretch for young people, especially those who are (rightfully) prioritising saving for a first home deposit (which Dave Ramsay doesn’t mention).
Baby Step 5: Save for your Children’s College Fund
Having paid off all your debts (except the house) and started saving for retirement, it’s time to start an investment fund for college fees etc.
Dave Ramsay refers to tax advantaged US savings schemes which (like the UK ISA) we don’t have here – but I still agree with making non-pension investments.
Baby Step 6: Pay Off your Home Early
Work towards paying off your mortgage faster by making extra payments and becoming totally debt-free, including your home.
I disagree. I generally recommend my clients hold on to mortgages and instead maximise pension contributions (and after that, investment savings).
Baby Step 7: Build Wealth and Give
Maximize your wealth-building potential by saving, investing, and then giving generously to your family and others.
No argument here!
I hope this has given you food for thought. The 7 Baby Steps are very popular in the US as they are straightforward and easy to understand, but remember, a one-size-fits-all approach does not suit everyone’s unique financial situation.
And if you like this article, try this one: How to get the Best Returns on Savings