What Are Dave Ramsey's Baby Steps?

Dave Ramsey is a financial counselor who uses Biblical principles and traditional views on money to help individuals get out of debt. He currently hosts "The Dave Ramsey Show," a nationally syndicated radio show where he discusses financial goals with callers. The crux of Dave's financial advice comes from his 6 Baby Steps, which are designed to help individuals become debt free.

$1,000 Emergency Fund

Having an emergency fund of $1,000 cash in a savings account helps individuals learn to rely on cash rather than credit cards when financial difficulties arise. Anytime money is used from the emergency fund, it should be replenished so the $1,000 balance is always on hand.

Debt Snowball

Dave suggests writing down all outstanding debts (smallest to largest) and paying off the smallest debt first while making minimum payments on the other debts. Once the smallest debt is paid off, the next debt in line is paid off by using the money paid to the smallest debt and the next debt's minimum payment.

Three to Six Month Expenses

After completing the first two steps, the original $1,000 emergency fund should be built up to 3 to 6 months of household expenses. The monthly expenses include all normal outflows of cash during a monthly period.

Invest 15% for Retirement

Dave suggests investing 15 percent of household income into retirement accounts, such as Roth IRAs that are well diversified. This is the first step of wealth-building in Dave's program.

College Fund

Saving for college--whether yourself or a child--is done above the 15 percent saved for retirement; Dave suggests having a firm financial goal in mind before starting a college savings plan. He suggests Education Savings Accounts and 529 plans as the best savings options for college.

Pay Off House Early

Once the first five steps are completed, extra money can be applied to the home mortgage in order to pay down the principal early. Dave suggests attacking the mortgage with any extra household income, similar to the Debt Snowball approach.

References

• Dave Ramsey Website