A Dentist’s Take on Dave Ramsey’s Baby Steps

Dave Ramsey’s Baby Steps has really made a name for itself as a go-to personal finance framework in America. They lay out a structured, step-by-step guide about:

• getting your finances under control
• getting out of debt
• building up your wealth

From the get-go, I saw the Baby Steps as a great starting point, especially for people like many of us who didn’t get any formal financial training growing up. The steps are clear and straightforward, making them easy to pick up and follow, regardless of your financial journey.

That said, while I value the solid foundation they provide, my own path as a dentist (periodontist) has led me to tweak and somewhat depart from these steps. My approach to things like debt, investing, and giving back has shifted as I’ve grown in my career. 

In this article, I’m going to take you through each of the Baby Steps. I’ll share how I started with them, what I’ve stuck with, and what I’ve changed.

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What Are the Dave Ramsey Baby Steps?

Before we get into the specifics, let’s lay out what Dave Ramsey’s Baby Steps actually involve. These seven steps are designed to help people not just manage their money better but to achieve financial stability and build wealth over time.

Here’s a quick breakdown of each step:

1. Save $1,000 for a starter emergency fund. This initial amount is meant to cover unexpected costs without throwing your finances off track.
2. Pay off all debt (except for the mortgage) using the debt snowball method. This focuses on clearing the smallest debts first, building momentum as each balance is wiped clean.
3. Save 3-6 months of expenses in a fully funded emergency fund. This gives you a substantial financial cushion and peace of mind.
4. Invest 15% of household income into retirement. This step is crucial for long-term financial security.
5. Save for your children’s college fund. Education costs are significant, and planning early can ease the burden.
6. Pay off your home early. Reducing this major expense can free up substantial funds for other uses.
7. Build wealth and give generously. The final step focuses on creating more wealth and sharing it, enhancing your life and those of others.

Each step builds upon the previous one, forming a clear pathway toward financial freedom and security.

Now, let’s go through each step and compare Ramsey’s approach with how I have adapted these principles based on my own financial philosophy and life experiences.

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

The first step in Dave Ramsey’s plan, which I wholeheartedly endorse, is to save $1,000 as a starter emergency fund. This amount serves as a buffer against those unforeseen expenses, like sudden car repairs or unexpected medical bills, that can really throw a wrench in your financial plans.

For me as a dentist, this step is about more than just money—it’s about developing the habit of saving and creating a psychological safety net. While $1,000 might not cover all emergencies, it’s a realistic and achievable target that offers a sense of security and a glimpse into financial stability. This step motivates you to keep advancing towards your financial goals.

Remember, this $1,000 is just the beginning. Keep it in a separate account (I keep mine in a Vanguard Money Market) to avoid the temptation to dip into it for non-emergencies. Once you’ve secured this fund, you’re better prepared to take on bigger financial challenges.

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

Dave Ramsey recommends the debt snowball method for paying off all debts except your mortgage. This involves tackling the smallest debts first and working your way up to the larger ones.

The logic behind this is simple: by clearing smaller debts quickly, you build momentum and confidence, which keeps you motivated to handle bigger debts.

From a financial standpoint, it might make more sense to pay off high-interest debts first to minimize interest costs. However, the debt snowball method offers ease and psychological benefits that are especially helpful for those who struggle with financial discipline.

Remember, Dave’s audience is the majority of Americans, which is broke people with little to zero financial education. 

The process works like this:

1. List all debts from smallest to largest.
2. Make minimum payments on all debts.
3. Apply any extra money to the smallest debt.
4. Once a debt is paid off, move to the next smallest.

Step 3: Save 3-6 Months of Expenses in a Fully Funded Emergency Fund

Step 3 is all about building up your initial emergency fund to cover 3-6 months of living expenses. This financial buffer is essential for managing life’s uncertainties, such as:

• unexpected job loss
• significant health emergencies

I’m a firm believer in the importance of an emergency fund. However, the ideal size can vary depending on your circumstances, such as how stable your job is or your ability to generate or access money quickly.

If you’re a medical professional like me, you understand that your job is stable, and you can work extra or longer shifts to make money as needed. In this case, you might be comfortable with a smaller emergency fund than someone whose job is less secure or harder to replace.

For me, I’ve been more comfortable with an emergency fund that covers 1.5 years’ worth of living expenses. You know what’s best for YOU, so I suggest building your emergency fund in a way that makes you comfortable.

Here’s how you can calculate what you might need:

• Track your expenses: Record your spending for a few months to get an average.
• Assess your needs: Consider factors like job stability, the ease of finding new work, and family size.
• Calculate your fund: Multiply your average monthly expenses by 3-6 to determine your target amount.

For example, if your monthly expenses look something like this:

• Housing: $2,500
• Food: $800
• Transportation: $600
• Utilities: $300
• Insurance: $400

This totals $4,600 per month. Based on these figures, a 3-month emergency fund should amount to around $13,800, while a 6-month fund would be approximately $27,600.

Start with what you can afford, and build up. Each month, add more to your emergency fund until you reach your goal.

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Step 7: Grow Your Nest Egg and Share the Wealth

The final stage of financial success extends beyond merely saving money—it’s about making your money work for you and having a positive impact on the world. This step involves two main objectives: building wealth and giving back.

#1. Building Wealth:

• Maximize retirement accounts: Take full advantage of these tax-deferred or tax-free growth opportunities.
• Invest in diverse assets: This includes stocks, bonds, real estate, and potentially starting your own business.
• Create multiple income streams: A diversified portfolio can increase your net worth and provide financial stability.

#2. Giving Back:

• Financial contributions: Whether it’s donating to charities, supporting causes you believe in, or assisting friends and family in need, financial giving is a powerful way to make a difference.
• Donate your time and expertise: Volunteering your skills and knowledge can be incredibly valuable and fulfilling.

By expanding your financial resources and using them to help others, you can achieve genuine financial freedom and leave a lasting, positive legacy. This approach not only secures your own future but also contributes to making the world a better place.

Understanding Cash Use in Ramsey’s Financial Strategy

Dave’s Cash-First Approach

Dave Ramsey promotes using cash for daily expenditures as part of his overall financial strategy, especially through his envelope system. He suggests that using cash helps control spending and avoids debt because it makes the act of parting with money more tangible.

According to Ramsey, this physical interaction with cash enhances spending awareness and encourages financial discipline.

Critique of the Cash-Only Method

While I recognize the benefits Ramsey attributes to cash, I believe credit cards can be equally beneficial if used wisely. Credit cards offer precise tracking capabilities, which are essential for effective budgeting and financial planning. They also provide convenience, rewards, and detailed financial records, which are impossible with cash alone.

I’ve actually been able to go on most trips for FREE now that I use this credit points travel strategy:

The effectiveness of credit cards hinges on disciplined usage. When managed correctly, they can enhance your financial management without leading to overspending or debt accumulation.

The Benefits of Credit Cards

In contrast to Ramsey’s view, I argue that the benefits of disciplined credit card use outweigh the simplicity of using cash.

Credit cards, when the balances are paid off monthly, can be powerful tools for financial management.

Flexible Financial Tools

Credit cards should not be dismissed; instead, they should be embraced as part of a broader financial toolkit, provided they are used responsibly. This means maintaining self-control and ensuring the full balance is paid each month to avoid interest charges.

Adapting Ramsey’s Model

Ramsey’s budgeting app, EveryDollar, supports his cash-based system by helping users meticulously track their spending, but it’s also adaptable for those who prefer credit cards. This flexibility shows that effective financial management can include both cash and credit, depending on individual financial habits and goals.

The choice between cash and credit ultimately depends on personal preference. Each person should use the method that best supports their financial objectives and lifestyle.

The Need for Financial Literacy in Schools

Financial literacy is critically underrepresented in today’s school curriculums, yet it’s essential for preparing students to manage their finances effectively. Integrating Dave Ramsey’s Baby Steps into the educational system could offer a structured, progressive approach to financial education.

Implementing Baby Steps at Different Educational Levels

The Baby Steps provide a clear framework that can be adapted to various age groups within the school system:

• Elementary School: Introduce basic financial concepts such as saving, spending, and the concept of an emergency fund. Young students could start practicing these ideas by managing small amounts of allowance money.

• Middle School: Expand to more complex topics, such as debt avoidance and the wise use of credit cards. This stage is crucial for building a healthy perspective on money management.

• High School: Dive deeper into investing, long-term financial planning, and preparing for future expenses like college. High school students can learn how to create budgets, build savings, avoid debt, and understand the basics of investing.

Long-Term Benefits

By the time students graduate, they would possess a robust set of financial skills, enabling them to make informed decisions and handle their personal finances confidently as adults.

This could fundamentally change their financial futures, equipping them with the knowledge to build wealth responsibly and avoid common financial pitfalls.

Summary: A Dentist’s Perspective on Dave Ramsey’s Baby Steps

Dave Ramsey’s Baby Steps offers a structured guide to gaining control over finances, eliminating debt, and building wealth, which I’ve found to be an excellent starting point.

However, as a dentist who has navigated both personal and financial growth, my approach has evolved to include more nuanced strategies in debt repayment, investing, and wealth-building.

The Foundation and Adaptations

While the Baby Steps lay down a solid foundation, particularly beneficial for those without formal financial education, I have adapted these steps to suit my professional and personal circumstances better.

For example, while Ramsey emphasizes the importance of eliminating debt quickly, I’ve found that integrating more aggressive investment strategies, such as real estate syndication, can also be highly effective. This not only helps in wealth accumulation but also in achieving financial independence sooner.

Giving Back and Financial Education

I agree with Ramsey’s notion of giving back, though I believe it can extend beyond monetary contributions. Volunteering time and sharing knowledge can sometimes be more impactful.

Additionally, integrating these financial principles into the public school curriculum could significantly boost financial literacy, providing future generations with the necessary tools for financial success.

Personal Experience with the Baby Steps

• Emergency Fund: I started by saving $1,000, which provided a buffer against unexpected expenses and helped inculcate a savings habit.
• Debt Repayment: I used the debt snowball method effectively but also prioritized high-interest debts to optimize my financial strategy.
• Investing: I advocate for investing 15% or more of household income, particularly in tax-advantaged accounts and real estate, to build a robust financial portfolio.
• Education Funding: While I utilized 529 plans for my children’s education, I realized the flexibility of real estate investments could have offered better returns and educational opportunities for financial management.
• Home Mortgage: Paying off my home early provided financial freedom, but I also recognized the potential benefits of using that capital for other investments.
• Wealth Building and Philanthropy: Building wealth has been about more than just accumulating assets; it’s about using those resources responsibly and giving back to the community in various ways.

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