Breaking Down Dave Ramsey’s Baby Steps 1-4

updated October 23, 2022
Click here to visit Dave Ramsey’s 7 Baby Steps Website

If you never heard of Dave Ramsey, I would HIGHLY recommend you click here to learn more about his Baby Steps to help you start saving for emergencies, paying off debt for good, and building wealth.

My purpose of this next set of blog posts is to break down the first half of Dave Ramsey’s Baby Step program for you, in my own words.

Screenshot from Dave Ramsey’s Baby Steps Program

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

This first step is CRUCIAL. Seriously, I can’t stress this enough. You never know what life will throw at you. You want to make sure you have at least some cash stored away for these situations. Some situations may not accept a credit card and will only accept cash. And if you don’t have at least $1,000 stored away for this, you may be out of luck.

If $1,000 seems like a lot to you, don’t feel like you need to do this overnight. Depending on your situation, you can slowly build up to $1,000. I would recommend keeping a separate high yield savings account for this money. This will give you a higher annual percentage yield compared to the traditional savings accounts, which will help your money grow. Plus, it will also not tempt you to transfer it back to your checking account to use for purchasing goods.

Once we were able to save at least $1,000, we made a decision to save more. We found that for our peace of mind, we liked having at least 6 months of living expenses in our emergency fund. Most people recommend closer to 3 months, but your situation is different from everyone else. Find what works for you. But you should have at least $1,000 in your starter emergency fund.

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

So, debt SUCKS. Hard. If you want to truly live financially free, you need to pay off your debt. This means cars, credit cards, student loans, and whatever other personal loans you may have.

There are a few methods of paying off debt that read in my post, 3 Methods to Pay Off Your Debt. Dave Ramsey advocates the Debt Snowball method – starting from the one with the lowest balance, to the highest balance. This strategy seems to be best psychologically speaking. This is because you’ll be paying off debts faster at the beginning, which may help you stay on track to the finish line.

You put all your extra money into the lowest balance, while you pay the minimum balance on your other debt. Once you’ve paid off that lowest balance debt – which will be insanely fast – you continue on to the next lowest, and continue until it’s all paid off.

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

Congrats on paying off your debt! Now use the money that you were paying off your debt with, and put it back in your high yield savings account where you keep the $1,000 you stored from Baby Step 1.

Once we saved $1,000, and paid off our debt, we liked having at least 6 months of living expenses in our emergency fund. Most people recommend closer to 3 months, but your situation is different from everyone else. Find what works for you.

Baby Step 4: Invest 15% of Your Household Income in Retirement

You have a solid emergency fund saved up. You are free of debt. Now we can start looking towards the future, and we’re going to start building your wealth!

Dave Ramsey recommends putting 15% of your gross income towards your retirement. If you can’t put that much, that’s okay! Put as much as you can towards your retirement. Because if you are still working your full time 9-5 job when you’re in your mid-60’s, it should be because you love you job and you are choosing to do it – and not because you feel like you have to in order to keep yourself financially afloat.

There are many options to putting money towards your retirement. Your employer may have a 401(k) plan that you can contribute your pre-tax dollars from each paycheck towards retirement. If you’re an independent contractor or run your own business, you can open up an individual retirement account, such as a Roth IRA, and contribute to that as well. You can also invest in low cost index funds for the long term wealth growth as well. There are many options – do your research and find what works best for you.


These first 4 steps are what got us into a much better financial situation than we were at just two years ago. In 2019, we overspent, carried debt, and knew very little about investing. In just two years, our emergency fund is fully funded in our high yield savings account, we have paid off our debt, we have a savings rate of anywhere between 40-50% each month, and we put that money towards our retirement funds and our low cost index funds.

If this makes you feel overwhelmed about your financial situation, read my blog post on 3 Ways to Recover from Financial Mistakes. We’re all human, we all make mistakes. But it’s about how we learn and recover from this mistakes, that will make our future bright!

In my next blog post, I will go over the second half of Dave Ramsey’s 7 Baby Steps – saving for your children’s college fund, paying off your mortgage early, and building your wealth and giving.

Note: I am not a certified financial advisor/planner or a certified financial analyst or a CPA or an accountant or a lawyer. Remember, I am an allied health professional, just like you! This website/blog is for entertainment and educational purposes only. Please consult with your financial advisor(s) regarding your personal finance, investment, and tax matters. 

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  1. Pingback: Breaking Down Dave Ramsey's Baby Steps 5-7 - FIREd Up For Allied Health

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