Some financial advisors criticize Dave Ramsey’s Baby Steps. On the surface, it’s easy to write them off as envious. After all, the Baby Steps are very scalable – they can apply to a large number of people and can therefore reach a larger number of people because of this. Reach = more money for Dave & his team.
Some of the criticisms is that they’re too basic and don’t take each person’s personal situation into consideration. On the subject of them being too basic, the best solution is often the simplest one. And on the personal situation side, all people have the same basic needs: food, clothing, and shelter. If one of the Baby Steps isn’t a perfect fit, adjust it. It’s your life and money, and ultimately, we can do whatever we want with our money.
A plan doesn’t have to be complicated to work for you. But let’s break the steps down and delve into them a bit more.
Baby Step One: Save $1000 ($500 if you make less than $20,000 a year)
The argument against this is that it doesn’t cover ALL emergencies. And it won’t cover, say, your HVAC unit blowing out or the engine falling out of your car. But will it buy you a space heater or a fan or a beater to get you around? You betcha. The point of this baby emergency fund is to keep you from running up more debt while you tackle Baby Step 2.
Will it work for everyone? I don’t know. This is where thinking for yourself comes into play. It was perfect for me, I could have gotten by on half of it, but if your job is volatile, if you have a sick kid, if you know you’re moving soon – all these are examples of situations in which you might want to have more of a buffer between you and life while you’re paying off debt.
Baby Step Two: Pay Off All Debts (except for the house) Using the Debt Snowball Method
The main argument against this is one is that naysayers claim it makes more financial sense to pay off the highest interest rate first. I’ve already talked about this, but the fact of the matter is, it’s more important to focus on paying off debt in the quickest possible way in general – not arguing over methods. It goes without saying that if you had financial sense, you wouldn’t have a mountain of debt in the first place. So what’s important to discuss here is will this work for everyone?
If you only have one or two debts, or if your debt amounts are all very similar, than it really doesn’t matter. Just pay them off as fast as you can. From a psychological standpoint, anyone with multiple debts of varying amounts will benefit tremendously from the more frequents wins that the Debt Snowball will give them. I personally believe the snowball method to also be faster because of the intensity it inspires, but again, it depends on your personal debt load.
Baby Step Three: Fully Fund Your Emergency Fund with 3 to 6 Months of Expenses
One argument against this is that six months may not be enough. Suze Orman’s big thing was always 8 months of expenses, and some advisors have said as much as one year. Some broke people go as far as to say that an Emergency Fund is not necessary at all because you can just get a HELOC. But we’re not going to talk about stupidity here. 🙂 It goes without saying that the last thing you need when your life is falling apart is more debt.
So will this work for everyone? I think it’s safe to say that it’s sufficient for the vast majority of people. However, that’s not the only argument here. The other is that some people think it’s a waste to have thousands of dollars just sitting in the bank and not keeping up with inflation. The point is not to keep up with inflation. If you’re that worried, then add to it every year. The point is to have access to money in case you need it so you don’t go into debt every time you blow a tire.
Dave says your Emergency Fund is insurance NOT an investment. The problem with investing your emergency fund is that it will cost you money to get to it if you need it. You’ll have taxes to pay, penalties to pay, whatever. Not to mention the fact that it will also take a few days to get your money out in the first place. And let’s not look over the risk you’re taking. Do you really want to risk the market turning down at the same time you’re having an emergency? Hello, Murphy.
Baby Step Four: Invest 15% for Retirement
There isn’t usually much argument against this. Most of the arguments come from people who think it’s either too much or too little, or from people arguing about the placement of this step in the first place. Personally, I think this will more or less work for everyone. If you shoot for 15%, or as close to it as you can comfortably get, than you should at least be able to keep your basic needs met during retirement.
More personally, this is the Baby Step I’m stuck on. Not because I don’t want to save for retirement at all, but because it’s hard for me to get to even 15% of my take home pay without squeezing my budget to death. Dave’s answer to my problem is for me to go out and make more money. For the people who aren’t comfortable investing at all, he basically tells them to just get over it, and maybe get an advisor to hold their hold. I don’t think he’s wrong, but I honestly don’t care enough about retirement to stress myself out all the time or work two jobs when I don’t have to. This said, according to my R:IQ, I appear to be on track to keep up my current lifestyle in retirement at least – so that will have to be good enough for me right now.
Baby Step Five: Save for Kid’s College
I haven’t run into a lot of fire against this baby step. Most people see it as optional. If you want to help pay for your kid’s college, this is where you would start in the baby steps, after taking care of yourself, so you don’t have to live in their attic later. If you don’t have kids, or if they’re grown, you of course skip this step entirely. If you have kids, younger kids living at home, you then get to decide if you’re going to help them, and then if you are, to what degree. Are you going to pay for all of it? Part of it? Only In-State Tuition? Whether this applies to people or not depends on how they answer those questions.
Baby Step Six: Pay Off Your Home Early
The biggest argument here is that you’re giving up your tax break. The fact of the matter is: you’re paying far more money to the bank in interest than you’re getting a tax break for. Use yer brain, peeps. $10k to the bank to write off an extra $6k on your taxes? Not smart. You either want to pay your house off or your don’t. Some people argue that it’s not worth lowering your “quality” of life to pay your house off early when it’s probably going to be paid off by the time you retire anyway. Arguments aside, this applies to anyone with a mortgage. Dave is right: you can save so much more money and have so much more fun with money if you don’t have a mortgage. It’s just a matter of if you want to do it or not. Some people would obviously have to sacrifice more and longer than others to get this done. That said, paying off your house while you’re still young is not a pipe dream. People do it all the time. Granted they make a lot more money than I do, but they do it.
Baby Step Seven: Build Wealth and Give
This is another one that doesn’t get too much criticism. Dave isn’t suggesting people get rich for the sake of getting rich. He’s suggesting you get rich so you can help a lot more people than you can help when you’re not rich. I also can’t argue that I would love to be able to donate thousands of dollars a year (or maybe even monthly!) to the causes I care about one day. This is where true financial freedom is at, and that works for everyone.
Dave’s philosophy has always been about financial freedom. These steps have helped millions of people get out of debt, and more importantly, it has helped them gain control of their finances. It’s hard to argue with results, though of course, people always do, but it’s definitely worth a try. 🙂