Thoughts on Dave Ramsey, the Baby Steps, & Financial Peace

dave ramsey baby steps
Sometimes knowing where to begin is the hardest part. When we were first starting our money journey, I felt like I understood the basics, but it was overwhelming to figure out how we should prioritize all our money goals. We had gone from a budget of “spend as little as possible” to finally bringing in an income that was covering our expenses with some money left over.

Financial Peace

This is where Dave Ramsey’s plan came in. Financial Peace University, (FPU), is Dave Ramsey’s well known class that teaches people how to get out of debt, learn how to manage money, and build wealth. We started off by borrowing the audio CD’s from a friend, and then we eventually took the class in person at our church.

Dave Ramsey can be a polarizing figure in the personal finance community. Some people agree with everything he says and have had their lives completely changed by following his methods. Others want nothing to do with any of his teaching. However, I think most people fall somewhere in the middle, recognizing that his teaching holds value, while picking and choosing what works best for their own lives.

Going through this material and learning these lessons was a huge step for us. Not only did we learn a lot, but it also helped us get the ball rolling on our various money goals. Before taking the class we were inching along, but FPU was instrumental in getting us on the same page and lighting a fire under us. It made us realize the importance of working towards debt freedom.

The Baby Steps

Dave Ramsey’s Baby Steps are well chronicled, but in case you haven’t heard of them before, here they are:

  • Baby Step #1 – $1,000 to start an emergency fund
  • Baby Step #2 – Pay off all debt using the Debt Snowball
  • Baby Step #3 – Build up your emergency fund savings to 3-6 months of expenses
  • Baby Step #4 – Invest 15% of household income for retirement
  • Baby Step #5 – College funding for children
  • Baby Step #6 – Pay off home early
  • Baby Step #7 – Build wealth and give

Are the Baby Steps and Financial Peace Worth Following?

Like many areas in personal finance, there’s no clear cut “right” or “wrong” answer. With any financial advice, it’s important to take it with a grain of salt. Do your own research and educate yourself. This enables you to take outside advice and tailor it to your specific circumstances. This is what we did with Dave Ramsey’s methods. For the most part, we agree with his philosophy and his teaching. However, there were some areas we adjusted based on where we were at in our journey and our life circumstances.

The reality is that the average American is saddled with tons of debt and living paycheck-to-paycheck, with little hope of a positive financial future. The average American doesn’t have a firm grasp of proper money management. They don’t receive personal finance education in school, and they don’t read blogs or books to learn on their own.

Many of these “famous financial figures” such as Dave Ramsey, Suze Orman, etc. go with a “one size fits all message.” That’s not how personal finance works, everyone’s situation is different. However, the “one size fits all” message allows for a larger reach, with more people resonating with different aspects of his plan.

The Baby Steps Are Just the Beginning

The Baby Steps give clear guidelines for the average person. They are simple, straight forward, and achievable. If they were overly complicated, too many people would be discouraged to even begin their journey. By following these steps, people have the ability to transforms their lives. The Baby Steps help people get out of debt, make a budget, save for retirement, build wealth, and make a positive impact in their communities.

Ramsey’s overall goal is to get people managing their money more wisely. The Baby Steps are meant to cover the basics, to provide a firm foundation. You could simply follow the Baby Steps and be fine. For those who want to go above and beyond and become even more financially savvy, you’ll be even better off. You can tweak the steps to better fit your personal needs.

It’s better to focus on one step at a time, because most people get discouraged and give up if the process seems too complicated. These simple steps are accessible to anyone. They help show that you’re making progress and have clear goals to be working towards.

Common Areas of Criticism

Some of the most common areas of criticism I’ve heard regarding Dave Ramsey’s methods are:

1. Calling all debt “bad,” no matter the circumstances

This one I have a hard time agreeing with. While I like his overall distaste for debt and how seriously he takes it, sometimes debt is necessary and can be useful. For example, student loans to be able to attend college, or mortgage debt. The psychology we have towards our debt is extremely important though, and this is where Ramsey’s teachings are valuable. While some forms of debt may not be as bad as others, taking debt seriously helps you avoid paying additional interest and frees up cash flow each month to use for savings.

2. No credit cards

The psychology behind credit cards is important. Some people can’t avoid overspending, and they need to feel the cash leave their hands. Studies show that people who use credit cards tend to spend more. The average person has thousands of dollars worth of credit card debt. These people would be much better off doing what Ramsey suggests, cutting up their credit cards and never using them again. However, for the people who have build a solid financial foundation, credit cards can be a useful tool. We use credit cards for the ease of tracking spending and travel rewards, and we’ve never paid a cent in interest charges.

3. The math not adding up for the Debt Snowball method

This is another area where the psychology of debt is important. The Debt Snowball method says that you should list out your debts from smallest to largest, regardless of interest rate, and pay them off in that order. You pay the minimum payment on all your debts and then use every extra dollar you have to throw at your smallest debt in the snowball. Once you pay off the first debt, you move on to the second debt, and so on. This creates a snowball effect.

Mathematically, you’d save some money on interest charges by attacking your debt with the highest interest rate first. This is what we did in our debt repayment process. However, some people need the psychological benefit of experiencing those small wins, by paying off those smaller debts. This helps motivate them to continue on with their debt repayment. It’s better to pay a few more dollars in interest on the eventual road to debt freedom than it is to abandon the journey altogether. So while we preferred to take the route of attacking the highest interest rate first, this is another principle that I’d say is up to each individual to make the choice that’s best for them.

4. Assuming unrealistic investment returns (12% per year, rather than a more realistic 7%)

While these returns are ridiculous, the point remains the same. He uses these numbers to show the importance of investing early and consistently throughout your life. This helps inspire more people to save for retirement. One of my favorite quotes that he says is, “the only people who get hurt on a roller coaster are the ones who jump off.” Having a long-term mindset for investing is a winning formula. While the returns will likely not reach this level, the important principle is to show the power of compound interest and inspire more people to begin investing.

5. Being vague with his investing advice

I have less of a problem with his unrealistic investment return numbers, and a bigger problem with how vague he is with his investing advice. His advice in this area is along the lines of “find and invest in some good growth stock mutual funds.” Very broad and vague, and not helpful for the average person. Again, this teaching can be used as a starting point to propel someone to further learning.

6. Talking about home ownership as a goal everyone should have

Some people are better off owning, and some people are better off renting. Make the decision that’s best for your own situation and stage of life.

7. Too religious

His religious background is his “why” for the reason he decided to get a handle on his money and be wiser with it. While I identify with that as well, I don’t feel like it should make or break being able to use his financial advice in your own life.

Areas We Modified from Dave Ramsey’s Teaching

We differed in a few areas from Ramsey’s teachings, including:

  • Building up a larger emergency fund – we live in a high cost of living area, $1,000 wasn’t going to cut it for us as an emergency fund. We built this up before attacking our debt.
  • Using credit cards – we pay off the balance in full every month
  • Ignoring the “Envelopes Method – Ramsey recommends withdrawing cash for your variable expenses at the beginning of each month and putting the cash into various envelopes, for example “Gas” and “Groceries.” For some people this method may be worth trying out. However, I wasn’t comfortable carrying so much cash and prefer using credit cards for expenses tracking purposes.
  • Started saving for retirement while still in debt – We each began saving 10% into our retirement accounts before our student loans were paid off. There were a few reasons for this, namely to get started with investing early and to take advantage of the 401k match that our employers offered. Our student loans were low enough interest rates that it was worth it to us to invest and pay off debt at the same time.
  • Saving for retirement more aggressively than saving for our future kids’ college – This is something that we’ll need to continue to discuss going forward, but right now I anticipate us focusing on retirement savings rather than saving for our future kids’ college.
  • Being content with renting – Right now we’re a long way off for being able to buy a house, but I’m perfectly content with that. I see us renting for a good while longer, and then maybe eventually owning a home in the future.

Final Thoughts

In general, we follow Ramsey’s plan and agree with his overall philosophy. While there are some areas I disagree with, and some areas we’ve modified, I still credit Financial Peace as being a huge springboard for my personal finance education. I’ve learned a lot from his methods, especially about how seriously to take debt and strive to pay it off as quickly as possible.

I think there is something for everyone within Dave Ramsey’s teaching, and the large majority of people would be much better off with managing their money if they applied his methods. Again, everyone is different and people need to decide what works best for them, but having a proven framework to go off of is extremely valuable.

Ultimately my biggest financial goal is to build wealth, to provide stability for my family and to be able to help other people. Dave Ramsey, the Baby Steps, and Financial Peace have been big catalysts to making these goals become inevitable. As he always says, “Live like no one else, so you can live and give like no one else.

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16 Responses

  1. I love the quote, live like no one else, so you can live like nobody else. It’s so true – in work, life, or finances.

    Thanks for sharing Matt 🙂

  2. Tawcan says:

    Love to quote as well. It’s all about taking small steps to improve your finances. Great stuff.

  3. Steveark says:

    So many people are polarized in their views on DR. But it is hard to argue with his results in the lives of so many, especially in this community. I am FI and slightly early retired but my path was more like yours. That doesn’t make Dave wrong, it just means we took a slightly different path to the same goal. Great post Matt.

  4. JoeHx says:

    Dave is vague with what to invest in because he wants you to pay his advisors to sell you his pick of mutual funds. He’s against low-cost index fund investing, not to the point he is against debt, but he actually has said that mutual funds always beat the market. (see where he says “I recommend mutual funds because they always beat the S&P.”)

    • Matt Spillar says:

      Yeah exactly, he says “invest in mutual funds with a good track record” but doesn’t go any further than recommending his advisors. Not ideal for the average person. My investing post that I linked to discusses my views on how most people would be best advised to invest in low cost index funds. Thanks for the comment!

  5. Andy Hill says:

    You’re spot on in my opinion. He’s a major help in the beginning for sure. He gets you in gear!

    I’m a Financial Peace University coordinator right now and I’m constantly conflicted with the parts of the class I don’t agree with. Most the meat of his program is dealing with debt and the marriage/Money dynamic. That’s the real value in my opinion.

    • Matt Spillar says:

      Thanks Andy! I think it’s great that you’re an FPU coordinator and it would be valuable to the students in the class for you to share those viewpoints of where you conflict with his teaching. I’ve thought about becoming a coordinator as well, and I think that’s what my approach would be.

  6. Carmen says:

    Love this! Honestly, like you mentioned, there is no right or wrong approach when it comes to your personal finances. Unfortunately, there isn’t a one size fits all because everyone’s circumstances are different. All of the criticisms you pointed out are very valid! I personally am not a fan of credit cards because I know my strengths and weaknesses and some people just don’t. We can all gain knowledge from everyone in the personal finance space, we don’t necessarily need to follow every piece of advice to a T because as I said, everyone’s circumstances are different. Grea Post!

    • Matt Spillar says:

      Thank you Carmen! Really appreciate the comment and glad you enjoyed the post. I love that you have such good self awareness to know that credit cards aren’t for you, that’s awesome! The most important thing is to make mindful choices for our own circumstances.

  7. Kris says:

    When you first realize you need some advice on how to deal with your debt(car, credit cards, student loans, etc…) Dave Ramsey is a good starting point. Once you get out of that situation and have a good grip on your finances, you can still heed his advice but also know you can modifying some of it. Like his no credit card method, you could go away from that if you pay off your credit cards every month. I like Dave’s approach to money but it doesn’t mean you have follow everything he says. Like you said, everyone has their own ways with their money as long as your always aware of it.

  8. Mr. Groovy says:

    Hey, Matt. I love this post. It’s one of the best assessments of Dave’s 7 Baby Steps I’ve ever read. We turned our financial lives around primarily because of him and his program. But like you, we’re not Financial Peace absolutists. We have credit cards. eschew the envelope system, and are firm believers in index fund investing. I don’t see how Dave’s ELPs are going to get you a 12% return over the next couple of decades. The Boglehead 6-7% return is more realistic. Anyway, that being said, always direct a personal finance newbie to Dave’s “Total Money Makeover.” It’s the perfect place to start for someone whose financial situation is in tatters. Cheers.

    • Matt Spillar says:

      That’s high praise, thank you so much Mr. Groovy! Love that you guys have had a similar experience to us with Ramsey’s program. It’s definitely my go-to recommendation for someone needing to improve their situation and build a financial foundation.

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