What Is Dave Ramsey’s 7 Baby Steps?

Money can feel confusing and stressful. Many people don’t know where to start:
Should you save first?
Should you pay debt?
Should you invest for retirement or your child’s education?

What is Dave Ramsey’s 7 Baby Steps? Let’s check step-by-step plan to manage money and build wealth. You follow these steps one by one, in order. In this blog, we will explain each baby step in easy language, with examples and small calculations so that any reader can understand.

Overview: What Are the 7 Baby Steps?

Here are Dave Ramsey’s 7 Baby Steps:

Save $1,000 for a starter emergency fund
Pay off all debt (except your house) using the debt snowball method
Save 3–6 months of expenses in a fully funded emergency fund
Invest 15% of your household income for retirement
Save for your children’s college or education fund
Pay off your home early
Build wealth and give generously

Now let’s understand each step in detail.

What Is Dave Ramsey’s 7 Baby Steps?

Baby Step 1: Save $1,000 for a Starter Emergency Fund

The first step is to save $1,000 (or a similar small amount based on your country) as a starter emergency fund.

Why this step is important

Life is full of surprises:

Your car may break down
A medical bill may come
Your phone may stop working

If you don’t have any savings, you will:

Use credit cards, or
Take loans, or
Borrow from friends and family

This creates more debt and more stress.

A small emergency fund of $1,000 helps you handle small emergencies without using debt.

Example

Suppose you earn $2,000 per month. You decide to save $200 per month for your starter emergency fund.

Target: $1,000
Saving each month: $200

Months needed = Target ÷ Per month
= $1,000 ÷ $200
= 5 months

So in 5 months, you can complete Baby Step 1 if you are consistent.

Baby Step 2: Pay Off All Debt (Except the House) Using the Debt Snowball

After you have your $1,000 emergency fund, you move to debt payoff.

In Baby Step 2, you pay off all debt like:

Credit card debt
Personal loans
Car loans
Student loans

But you do NOT pay off your house loan yet. That comes later in Baby Step 6.

What is the debt snowball method?

In the debt snowball method, you:

List all your debts from smallest to largest (based on balance, not interest rate).
Pay minimum payments on all debts.
Put all extra money on the smallest debt first.
When the smallest debt is paid off, you take that payment and add it to the next smallest debt.
Repeat this until all debts are gone.

It is called “snowball” because your payments grow bigger as you clear each debt, just like a snowball rolling down a hill.

Example with calculation

Imagine you have these debts:

Credit card: $500 – minimum payment $25
Personal loan: $2,000 – minimum payment $50
Car loan: $5,000 – minimum payment $150

Your extra money for debt: $200 per month

Step 1: Order by smallest balance

Credit card – $500
Personal loan – $2,000
Car loan – $5,000

Month 1 onwards – Focus on smallest debt

Pay minimums on:
- Personal loan: $50
- Car loan: $150

Total minimums = $50 + $150 = $200

You also have extra $200 for debt.

You target Credit card debt:

Minimum payment: $25
Extra payment: $200

Total payment to credit card in month 1 = $25 + $200 = $225

In about 3 months (since $500 ÷ $225 ≈ 2.2), your credit card can be fully paid off.

After credit card is paid

Now you have freed $25 (minimum payment of the credit card). So your available money for the next debt becomes:

Extra $200
Old credit card minimum $25

Total extra = $225

Now focus on Personal loan:

Minimum: $50
Extra from snowball: $225

Total to personal loan = $50 + $225 = $275 per month

Your personal loan is $2,000.
Months needed ≈ $2,000 ÷ $275 ≈ 7.3 months

After that, you can attack the car loan with an even larger snowball.

This method helps you stay motivated, because you see quick wins when small debts disappear.

Baby Step 3: Save 3–6 Months of Expenses in a Full Emergency Fund

After all non-house debt is gone, you already have:

No credit card debt
No personal loans
No car loan
Only your house loan left
A starter emergency fund of $1,000

Now you make your emergency fund stronger.

In Baby Step 3, you save 3–6 months of your living expenses.

Why this step is important

This emergency fund protects you from:

Job loss
Medical emergencies
Big repairs (car, house)

With this fund, you don’t have to panic or go into debt during tough times.

How to calculate 3–6 months of expenses

First, find your monthly essential expenses, such as:

Rent or mortgage
Groceries
Utilities (electricity, water, gas, internet)
Transportation
Insurance
Basic medical costs

Example

Let’s say your monthly essential expenses are:

Rent: $800
Groceries: $300
Utilities: $150
Transportation: $150
Insurance: $100

Total monthly expenses = $800 + $300 + $150 + $150 + $100
= $1,500 per month

Now calculate:

3 months of expenses = 3 × $1,500 = $4,500
6 months of expenses = 6 × $1,500 = $9,000

So your emergency fund target is $4,500–$9,000.

You can pick 3 months if your job is stable, or 6 months if your income is unstable or you are self-employed.

Baby Step 4: Invest 15% of Household Income for Retirement

Once your emergency fund is ready, you start serious wealth building.

In Baby Step 4, you invest 15% of your household income for retirement.

This money should go into:

Retirement accounts like 401(k), 403(b), IRA (in the US), or
Other retirement or pension plans available in your country
Long-term mutual funds / index funds (depending on your plan and advice)

Why 15%?

15% is enough to build a strong retirement amount for most people if they start on time and invest consistently for many years.

Example with calculation

Suppose:

Your household monthly income = $4,000
Yearly income = $4,000 × 12 = $48,000 per year

Now calculate 15% of your yearly income:

15% of $48,000 = 0.15 × $48,000 = $7,200 per year

Per month investment:
$7,200 ÷ 12 = $600 per month

So you should invest $600 every month into your retirement accounts.

Power of compounding (simple picture)

If you invest $600 per month for 25 years, and your investments grow at an average return of 8% per year (just an example, real returns vary), your money can grow to several hundred thousand dollars over time due to compound interest.

The key is:

Start early
Be consistent
Think long-term

Baby Step 5: Save for Your Children’s College or Education

After you start investing 15% for retirement, you can begin saving for your children’s education.

This step is about planning ahead so your children don’t have to take heavy student loans.

Where to save?

Depending on your country, you can use:

Special education savings plans
529 plans (in the US)
Education savings accounts (ESAs)
Or simple long-term mutual funds in your name for their education

Example with calculation

Let’s say your child is 8 years old and you want to save for college when they turn 18. So you have 10 years.

You estimate you will need $20,000 for their education.

Target: $20,000
Time: 10 years

Ignoring investment returns for simplicity, you can calculate:

Money to save per year = $20,000 ÷ 10 = $2,000 per year
Money to save per month = $2,000 ÷ 12 ≈ $167 per month

If you invest this money and earn some returns, you may need a bit less per month, but this simple math gives you a clear starting point.

Baby Step 6: Pay Off Your Home Early

By this step, you have:

No non-house debt
A big emergency fund (3–6 months)
15% of your income going to retirement
Some money going to your children’s education

Now you can focus your extra money on paying off your home loan early.

Why pay off the home early?

You become completely debt-free
No monthly mortgage payment
More peace of mind
More money available to invest and give

Example with calculation

Suppose your home loan details:

Remaining loan: $150,000
Interest rate: 5%
Normal monthly EMI: $800
You decide to pay an extra $300 per month towards the principal.

Your new payment = $800 + $300 = $1,100 per month

This extra $300 can save you:

Several years of payment
Many thousands of dollars in interest

Exact savings depend on your loan terms, but the simple idea is:
The more you pay early, the less interest you pay overall.

Baby Step 7: Build Wealth and Give Generously

This is the final step. By now, you:

Have no debt at all
Have a strong emergency fund
Are investing 15% for retirement
Are saving for your children’s future
Own your home (or almost own it)

Now you are in a position to build wealth and help others.

How to build more wealth

You can:

Continue investing more beyond 15%
Buy assets that grow over time (businesses, property, etc.)
Diversify your investments wisely

Giving generously

One big idea in Baby Step 7 is to give:

Help family in need
Support charities
Give to your community or religious institutions

When your own finances are strong, giving becomes easy and joyful.

Do You Have to Follow the Steps in Order?

Yes, Dave Ramsey strongly suggests following the steps in order:

1 → 2 → 3 → 4 → 5 → 6 → 7

Why? Because each step sets a strong base for the next one.

For example:

You don’t invest heavily (Step 4) before you clear your consumer debt (Step 2), because high-interest debt can eat your money.
You don’t worry about your home loan (Step 6) before you build a full emergency fund (Step 3), because emergencies can force you back into debt.

This order brings focus. Instead of trying to do everything at once, you do the right thing at the right time.

Simple Summary Table of the 7 Baby Steps

Baby Step	Action	Main Goal
1	Save $1,000 emergency fund	Handle small emergencies without debt
2	Pay off all non-house debt (debt snowball)	Become free from consumer debt
3	Save 3–6 months of expenses	Protect against big emergencies
4	Invest 15% of income for retirement	Build future wealth
5	Save for children’s education	Reduce or avoid student loans
6	Pay off home early	Become completely debt-free
7	Build wealth and give generously	Enjoy financial freedom and impact