Dave Ramsey was the gateway drug into this whole financial freedom lifestyle. He has brought to millions of folks the baby steps of living debt free. From the fully funded emergency fund to the debt free screams, Dave Ramsey has probably touched your financial life in one way or another. He has authored a number of books, created a course on financial freedom called “Financial Peace University”, packs the house when he hosts his Smart Money conferences and has a nationally broadcast radio show.
Dave Ramsey has some pretty simple steps to follow or “baby steps” to living life debt free. They are as follows:
- Start an Emergency Fund of $1000.00
- Pay off all debt using the “debt snowball”. The snowball is paying the minimum amount on all of your current debts and using all extra monies to attack the smallest debt first. Once that debt is paid, you can use the money saved from not having the first debt to pay toward the second smallest debt and so forth. Hence the snowball effect.
- 3 to 6 months of expenses in savings
- Invest 15% of household income into Roth IRAs and pretax accounts
- College funding for children
- Pay off your home early
- Build wealth and give!
Now, if you have not made a plan to become free of debt or have never heard of Dave Ramsey, I recommend you fire up the Google search right now. His teachings are a great start to get into the mindset needed to achieve financial independence. Obviously, being debt free or at least having an understanding and control of your finances is paramount to living a financially responsible life. But how can we tweak this strategy to maximize our money and our time? After all, Dave does say that if you follow his baby steps, you can look up at 65 and “retire inspired”… well what if we are not trying to retire at the traditional age? 30 more years sitting behind a desk waiting to get that plaque and gold watch are not going to cut it. Here are some strategies that deserve some thought about hacking the traditional “baby steps”.
Baby Step 1: Start an Emergency Fund of $1000.
This step has more to do with comfort, communication and preparation. Is an emergency fund of $1000.00 enough? Are you and your partner comfortable with that amount? Do you have any upcoming needs that would deplete that fund pretty quickly such as an older car or multiple children? I believe at minimum it should be this amount. With our first baby on the way, we definitely did not only keep $1000.00 cash in an emergency fund. I would say that one-month expenses would be enough to put your mind at ease. Again, I believe this baby step should be about having the conversation with your family, partner or even yourself on the amount you would be comfortable with and preparing to take on the challenge of making that amount your “bank account floor”. This type of communication from the beginning can ease the idea of aggressively paying off debt if your loved ones are not exactly hyped on the plan. Buy in from everyone involved is key from the beginning and for me; the idea of a little more funding for the emergency fund did the trick.
Baby Step 2: Pay off all debt using the “debt snowball”
This step is easier said than done that’s for sure. The debt snowball is designed to give someone some wins during the process. Get the smallest debts done first so you will have the confidence to tackle the bigger debts later on in the process. Admirable strategy. This will work, and has worked for millions of people. However, there is a couple different ways to optimize this baby step. After all we are all paying the same amount of debt off in the end, right? Right? WRONG!
The debt avalanche method will actually save you more time and money than the debt snowball method. Essentially, the debt avalanche is paying off your debt with the highest interest rate first. This will save you money over the long run because your accounts with the highest interest rates will not be sitting there accumulating more debt faster while you pay off your smaller balances. You will be knocking out these interest rate demons while your other debts gain less interest on the balance.
For Example, lets say you have two debts:
$5000.00 student loan at 3%, minimum payment $50.00
$10,000.00 credit card at 22%, minimum payment $200.00
You have $300.00 to pay the debts per month, so $50.00 a month over the minimums. Here are the payoff calculation comparisons for the snowball and the avalanche.
|Strategy||Payoff||First debt payoff||Payoff date||Interest paid||Total paid|
|Snowball||94 months||54 months||05/09/2026||$13,160||$28,160|
|Avalanche||80 months||73 months||03/09/2025||$8,858||$23,858|
As you can see the avalanche will be paid off 14 months earlier with the total amount paid being $4,301.49 less in interest than the snowball. However, your first debt will be paid off sooner with the snowball but that $4300.oo is a steep price to pay just to be able to get a win. Check out the comparison calculator and decide if this is the right strategy for you! https://tools.doughroller.net/debt-snowball-calculator/
I myself also took a unique approach to paying off debt. I knew going into repayment we would be having our son. This would put a pause to any debt payments for a couple of months while we figured out our budget. My wife was also taking 3 months off of work for maternity leave. This would make our monthly household income drop, as we would just be receiving my salary. What we agreed on was to pay off our debts with the highest monthly payments. This would free up more money for us as we hit those months where our budget was uncertain. By paying off the highest monthly bills we dropped our total monthly expenses. Even though we were not following the snowball or avalanche method, we were paying off our debts. It felt a bit more manageable living off one income now that we didn’t have to make a $220.00 student loan payment or a $180.00 car payment, even though these debts were in the middle of our snowball. $400.00 now freed up from our monthly bills! I am almost positive that the baby expenses will use up a good portion of that budget surplus but better to be paying for the care of my son as opposed to cutting checks to creditors.
This method may come in handy for someone who does some type of seasonal work, teachers or maybe someone who is having a child like us.
These are just a couple ideas that can be discussed as you take “Baby Step 2”. Choose the option that works best for you and your budget needs. Just keep paying off that debt no matter how it is done!
I hope this has been helpful to you. Come back next week as I put out the second “disc” discussing baby steps 3-7!
***For those of you who do not get the reference in the title of this article, I am referencing the Notorious B.I.G’s album Life After Death… please don’t take any offense, I wholeheartedly love Dave Ramsey.***