When Dave Ramsey baby steps might not work

Dave Ramsey baby steps have helped millions get out of debt and increase their net worth. These decade old steps may not be valid today. They are good steps and they worked great for millions of people in the past but I don’t think they will work well for everyone. Especially during these times, where student and personal loans are high.

What are the 7 baby steps ?

1. Save $1000 for your starter emergency fund
2. Pay off all debt except your house using the debt snowball method
3. Save 3-6 month of emergency fund
4. Invest 15% of your household income in retirement
5. Save for your children’s college fund
6. Pay off your home early
7. Build wealth and give

All these baby steps sound great but here is why they may not work efficiently for everyone. Lets go over a scenario. If we consider a person in their mid to late 30 who has over $100,000 in student loan debt and $20,000 in credit card debt. If this person makes about $75,000 a year and goes through the Dave Ramsey baby steps he will have to budget carefully. Delay saving for retirement for years and delay home purchases.

If he follows the baby steps it could take 6-7 years to pay it off-depending on their cost of living. It might take an additional 6 months to a year to save for the emergency fund. This person would delay their retirement saving-since the baby steps advocate for no retirement saving until step 4. Dave Ramsey also advocates saving 20% for a down payment and getting a 15 year mortgage-which would be great if you can afford to maximize your retirement account and pay a 15 year mortgage.

Like this post ? Also read: How much money is enough ? or 5 Easy Ways to $1 Million Net Worth

How to replace the baby steps ?

By the time he is done this person would be in his early to mid 40’s and miss out on a lot of compounding advantage. Here is how this person can proceed.

1. Save a month worth of expenses- a $1000 is too small, these days it will not cover multiple emergencies or not even one. It also reduces your anxiety. You can compare it to sleeping on a one inch or 6 inch mattress.
2. Pay off consumer debt with high interest rates- high interest loans like credit cards will eat away your income. They are terrible for growing wealth.
3. Save up to the match in retirement – a match is the amount your company will match for every dollar you contribute. Which means if your company matches 5% and you make a $100,000 a year, your company will match $5000 of your contributions. By the end of the year your $5000 will grow to $10,000+.
4. Save for an emergency fund of 3-6 months. This will depend on your comfort level. If you no one depending on you and your job is stable you can save 3 months. If not 6 months.
5. Max out your retirement accounts. You can max out a 401k up to $22500 in 2023 and IRA limit is $6500.
6. You can pay off your low interest loans and/or save for a house purchase.

Read other Money Diary series:

1. How to turn your finances around

2. How to pay off $60K debt

3. A single mom exceling in her personal Finance

This plan gets the person out of debt quicker and allows them to save for retirement. With Dave Ramsey steps, the person could lose millions by not starting young. They also miss out on the match from work.