4 Ways Dave Ramsey’s Baby Steps Miss the Mark

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Since you’re reading a blog about personal finance, there’s a good chance you have heard of Dave Ramsey and maybe even follow some of his financial advice. Much of it is very helpful, simple advice that working adults managing their own finances should know.

If you are not familiar with Dave Ramsey, he hosts a syndicated radio show on personal finance and is the author of several books, including The Total Money Makeover.  The show instills his Christian beliefs and a very very anti-debt message.  In fact, he is so anti-debt that some of his advice misses several basic financial perks that leave individuals better off financially in the long run.

Nevertheless, his show is interesting, especially when he talks to callers and dissects their financial situations. His no-nonsense style works for a lot of people, especially those in dire financial situations. But after listening for awhile, it became very clear that this is financial advice for people who do not have a clue about money and have no desire to actually learn it.  It’s more “tell me what to do since you’re the expert” type of advice.

The Baby Steps

Dave Ramsey’s advice is centered around seven steps to take — in order — to reach financial peace.  He calls them the 7 baby steps, and they are his roadmap to financial freedom.

Dave Ramsey's 7 Baby Steps

Source: daveramsey.com

The first step is basic — keep a little cash aside for small emergencies.  $1,000 is not enough to sustain long-term job loss or major emergencies but can help with small unexpected expenses while you are busy working on paying down debt in step two.

Step two is undoubtedly the most arduous for the majority of Dave Ramsey followers.  Paying off all non-mortgage debt is a significant task for anyone strapped with student loan or credit card debt, and causes many to seek the council of financial experts like Dave Ramsey.

Money management gets a lot more exciting after baby step two.  No longer buried in debt, it’s time to grow wealth and start putting your money to work in the form of interest, retirement earnings and home equity.  Dave Ramsey lays out a strict plan for where to route the extra money after debt is paid off.

Does his plan make sense for a lot of people?

Yes.  For those without a plan, perhaps feeling hopeless and ready to give up, the baby steps offer motivation and an easy way to track progress.

Does his plan make the most sense for everyone?


Our family did not follow his steps exactly and we are better off for it.  The baby steps are purposely simplistic, designed to work for just about anybody and to be understood by all.

But everyone’s situation is unique.  Rather than blindly following seven steps in order, we decided to understand our own situation better and customize our own steps to financial freedom.  We work hard to earn a living wage, and we chose to become financially educated and decide for ourselves where to put our money to work best for us.


Where Dave Ramsey’s Baby Steps Miss The Mark

As my wife and I worked through our own financial situation, it became clear that Dave Ramsey’s baby steps were missing key pieces of financial advice.  Advice that would have benefitted me and other financially challenged individuals, especially Millennials.  There are four areas specifically where Dave Ramsey’s advice is lacking or downright poor in my mind.

#1: Maximizing Employer Matches for Retirement Accounts

Many employers offer retirement account matches up to a certain dollar amount or percentage of income.  TAKE ADVANTAGE!  Even before we took real ownership of our financial plan, this was a no-brainer for me and my wife.  Company matches are free money.

In addition to the extra money from an employer, you’re maximizing the time your money has in the market by investing early.  And when your debt is gone, you will appreciate that your investments are not starting at $0.  You can’t go back and recuperate lost employer matches that you missed in past years.

What is the downside and why doesn’t Dave Ramsey advocate this in his baby steps?  The amount that you invest in your 401K or 403B won’t go to paying off your debts right now and will cause debt paydown to take slightly longer.

But the amount of money you need for retirement will be less because your company match is an instant 50-100%+ return (depending on how your company matches).

Here’s an example.  Let’s say I have $50,000 in student loan debt today at 5% interest on a 10-year loan.  My annual income is $50,000 and my employer matches dollar-for-dollar up to 6% of my salary.

  • Scenario 1: Contribute nothing to my 401K.  I do not remove any pre-tax dollars from my annual pay, so $3,000 more will be taxed and go to my paychecks throughout the year.  At a $50,000 salary, this extra $3,000 will be taxed roughly $615 for Federal tax and $150 for state tax assuming a 5% rate (Note: these are estimates that vary by state and based on your individual deductions and tax credits).  This scenario puts $2,235 (post-tax) more into my paychecks throughout the year.
  • Scenario 2: Contribute the full 6% to my pre-tax 401K.  This removes $3,000 of pre-tax dollars from my annual pay this year, but also adds an additional $3,000 via a company match.  I contribute $6,000 (pre-tax) to my 401K this year.

How do these two scenarios compare if we are strictly trying to maximize debt payoff?  I do not recommend withdrawing funds from a 401K early since there are penalties and it encourages a potentially negative behavior.  But for the sake of this example, let’s assume that we pay the penalty and put all the 401K contributions to debt at the end of the year.

  • Scenario 1: Contribute nothing to my 401K.  Using the hypothetical $50,000 student loan at 5% interest and adding the $2,235 of extra dollars saved ($186 per month) by not contributing to a 401K, you would pay off $6,237 of the student loan over 12 months.

  • Scenario 2: Contribute the full 6% to my pre-tax 401K.  Using the same example, we would not contribute extra throughout the year since the money is going to our 401K.  But if we decided to withdraw the full $6,000 at the end of the year, we could apply that amount to the student loan.  The $6,000 withdrawal from our 401K would cost approximately $1,500 in Federal taxes, $300 in State taxes, and $600 for the 10% early withdrawal penalty.  By contributing the remaining $3,600 to the student loans, you would pay off $7,550 of the student loan over 12 months.

Again, I do not advocate early 401K withdrawals.  Just as the employer match is free money, paying the IRS a penalty is giving some of it back.  But the example serves a specific purpose — to show the value of the employer match.  This example shows that scenario 2 is $1,313 more beneficial over one year despite the penalty.

My wife and I have always received the full employer match and never made an early withdrawal from our retirement accounts.  It caused debt paydown to take slightly longer, but our net worth is better today because of it.  Taking advantage of any free income opportunities like company matches should be step one in any financial tips.

#2: Budgeting to Eliminate Wasteful Spending (see Update below)

The baby steps do not mention attempting to reduce living expenses.  You know…rent, groceries, etc.  The expenses that take away our ability to actually pay down debt or save.

Most people struggle with debt because the margin between their income and expenses is razor thin.  Telling them to pay down debt before investing is nice, but what if there isn’t enough money to do either?  The baby steps don’t address this, but I think they should.  And it should come before any of the remaining seven baby steps.

Budgeting to eliminate wasteful spending was how my family took control of our financial lives initially, and I documented some of our tips here.  Reducing monthly expenses opened up more income to actually make a dent in our debt and get ahead in our investments.

Update: a couple readers have pointed out that Dave Ramsey is a strong expense reduction advocate and even has an app to track expenses (Every Dollar). My blog post strictly relates to its absence in his baby steps, but perhaps expense reductions are excluded intentionally and the baby steps are a follow up to reducing expenses — more of a “where to put the money I save.” Thank you for your feedback!

#3: Never Using Credit Cards

Credit cards can be dangerous, no doubt.  The idea that a consumer can borrow thousands of dollars they don’t have, and pay 10-20% interest on the balance, is a recipe for disaster for many.  But what about consumers that never pay a penny of interest?  Those of us that use credit cards exclusively and pay off the statement balance in full each month are never hit with interest charges.

There are several advantages to using a credit card over cash or debit cards:

  • Rewards Rewards Rewards: There are so many generous rewards credit cards offering 1-10% cash back, sign up bonuses for airline points or hotel stays, even credit cards with rewards that automatically transfer to retirement investments or 529 college savings.  My wife and I have taken several vacations that were heavily funded by credit card rewards.
  • Security & Convenience: Fraud protection comes standard with credit cards, protecting cardholders from unauthorized use.  This is true for debit cards, but often to a lesser extent.  And it sure beats frequently visiting the ATM to withdraw more cash.  If you lose your wallet or purse, credit cards can easily be cancelled.  Good luck retrieving all your cash.
  • Build Credit: If you never borrow money, you cannot build credit.  This may be fine for a multi-millionaire like Dave Ramsey who can self-fund anything.  But the rest of us would like the option to borrow money for a house or a rewards-rich credit card to travel cheaply.

Dave Ramsey is not a fan of credit cards, even for cardholders that never pay interest.  He quotes studies that credit card users spend 12-18% more than cash users due to impulse buying and the fact that using cash or a debit card invokes more feelings than using credit.

While this is true for some (the statistics back it up), it is not true for everyone.  Do I go to McDonald’s, super size my meal, and pay for the guy behind me because I use a plastic?  No, because our budget — whether I am using cash or credit — does not include $30 trips to McDonald’s.

If I felt that credit cards caused my family to increase our monthly expenses, my solution would not be to cut up the plastic.  My solution would be to keep a rewards credit card in a drawer to only use for fixed expenses that I don’t consciously control, like medical bills or utilities.  That way I continue to accumulate rewards and establish strong credit.

#4: Always Prioritizing Debt Payoff before Non-Retirement Savings

The 7 Baby Steps are supposed to be generic and built for just about anyone, but they fail to account for a significant population — parents planning to send their children to private school.  Based on tuition costs today and accounting for future increases, my wife and I expect to spend over $500,000 on private school education before our kids even reach college.

This future expense is so high, my wife and I started investing for it in 2014 — two years before we finished paying off our own student loans.  For Dave Ramsey, this is a big no no.  Investing before completing step two is unheard of in Baby Step land, and would undoubtedly be the subject of a Dave Ramsey rant if I told him our story.

(In fact, I don’t even need to call.  Check out the clip below as Dave addresses the topic of investing versus paying down low-interest debt.)

Our thought process was this — the student loans we still had in 2014 were at a very low 2.5% interest rate.  Rather than throwing all our extra money at it, we adjusted spending habits and decided to pay off the loan in two years — a pretty quick rate, but we still had money to spare each month.  The extra money went to investments.  First to maxing out tax-advantaged Roth IRAs (retirement accounts, but not penalized when used for education purposes), then to a taxable investment account.

We eventually paid off the student loans in February 2016.  But we were also left with a substantial start toward saving for our kids’ private educations.  Since opening our Roth IRAs and taxable investment accounts with Betterment in 2014, the accounts have a time-weighted return of 18.1% investing in low cost ETFs.  While this type of return is atypical over the long haul, it shows the significant upside potential compared to the 2.5% student loan debt interest.  High risk, high return.


“Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.”  ~Maimonides

I am not trying to persuade anyone to stop following Dave Ramsey.  In fact, I encourage seeking as much information from as many sources as possible, and he has a track record of encouraging many on their path toward financial wellness.  The best financial advice I can give is to be open to different ideas.

But I do think some of Dave Ramsey’s advice is too close-minded.  By creating steps that cannot be modified or accomplished out of order, he is doing his followers a disservice because they might not understand how to evaluate unique financial situations in the future.  For us, that was how to save for private school education.

The baby steps should be guidelines, not rules.  Dave Ramsey should encourage modifications because in our quest for financial freedom, we all have unique circumstances to navigate along the way.

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2017-05-18T07:20:24+00:00 April 5, 2017 7:15 am|Categories: Budgeting, Building Credit, Debt, Featured, Recommendations|Tags: , , , |21 Comments


  1. Danielle @ The Pennies We Saved April 5, 2017 at 10:16 pm - Reply

    Nice! I must say, I agree with you.

    We started our journey following the 7 baby steps, but eventually made some adjustments to our debt payoff plan.

    We use our ONE credit card responsibly and ALWAYS pay it off same day or the start of the following months (we like our rewards), we contribute to our retirement (matching is a great thing!), we have 6 months of savings in our account.

    Yes, we can pay off a ton of debt with our current savings, but choose not to. Having a $1,000 emergency fund just wasn’t enough to rely on!

    I will always be a Dave fan…we just made some changes in the ordering of his baby steps and broke some of his rules lol. We felt they were right for us.

    • Matt @ Lacking Cents April 5, 2017 at 11:40 pm - Reply

      Yeah, I still consider myself a Dave fan. Don’t think I would take the time to write so in depth if I didn’t follow/relate to a lot of what he says. And I think people need a figure like Dave Ramsey to help guide them.

      The only gripe I have is how close-minded he is about how people tackle debt and I wanted to share the ways I think modifications benefitted us.

      Thanks for sharing some of your experiences! I read your Dave Ramsey article too…glad to hear you and your husband are doing so well tackling your own debt!

  2. Kevin April 6, 2017 at 12:27 am - Reply

    To be upfront we only followed Dave Ramsey during our debt payoff. Once we started to invest I branched out quite a bit to learn more as his specialty is really helping people to get out of debt. I wouldn’t change how we approached it for one second. Our loans ranged from 4.75% – 7.75% and for student loans alone we had $900 a month in minimum payments. If someone told me they would rather invest their money than pay off their 2.5% loan I would say OK but if they hear that advice and just use it as an excuse to not pay it off and still don’t invest then they should have paid it off. Dave Ramsey is for the people in the latter part of that example.

    Since he has such a large audience I feel he has to be extra stubborn in order to keep that maximum reach. If he added more nuance I think it might water down his message and he clearly has decided not to get more nuanced. I wish more truly listened to him but then took the time to understand what it means for them. Unfortunately, most people seem more interested in just following someone’s instructions while barely understanding why.

    In my mind being debt free is the catalyst to one’s future financial success but I am really gearing that towards average people who are in debt and feel lost overall. That process for getting out of debt set us up to believe that no financial goal was too big. That experience I feel changed our life and for that I will always hold a soft spot for Dave Ramsey.

  3. Martin Cintz April 6, 2017 at 7:57 am - Reply

    I listen to him but only in small doses. It keeps me motivated and thinking about my finances. Too much DR frustrates me though because a guy worth $50 million dollars doesn’t always relate to someone making minimum wage and paying child support (not me just an example).

    • Matt @ Lacking Cents April 6, 2017 at 10:57 pm - Reply

      Totally get what you’re saying. I had a number of Dave Ramsey followers get fairly defensive about his approach, and my constant reply was that I am a Dave Ramsey fan/listener, I just think it’s healthy to be critical of things we are taught. If we blindly trust everything we are told, we never truly learn for ourselves. I think I found Dave late in the game after I had already established a game plan for my finances. Maybe it would have been different if I found Dave several years earlier.

      Thanks for reading, Martin!

  4. MustardSeedMoney April 7, 2017 at 8:47 pm - Reply

    I think Dave does a great job of getting people in the door with his name but I agree some of his advice is terrible. I hate that he tells people to ignore mutual fund fees and to pick active mutual funds. I want to pull out my hair when he says these things because it’s wrong. He’s a great foot in the door with finances but that’s about it.

    • Matt @ Lacking Cents April 7, 2017 at 9:05 pm - Reply

      He consistently claims his mutual funds return 12-14% on average and uses this figure when he teaches people how to track their expected investment earnings. It causes crazy inflated numbers, especially calculating over 30 years as he frequently does.

      My question is — if he truly thinks it’s easy to find mutual funds that return 12%, why does he go on rants when people want to invest instead of paying down a debt at 3%?

      His advice with investments is inconsistent at best, but I would argue it’s just poor. Thanks for the comment! Great stuff.

  5. My Sons Father April 8, 2017 at 8:16 am - Reply

    I couldn’t agree more on your first point. We continued to contribute to our 401k while paying off debt and would have regretted it had we not done so. I found Dave Ramsey’s material really encouraging during the debt repayment process, but I think you highlight some very valid points of disagreement.

    My philosophy is to read as much as I can from as many different people as I can find. Then take what works and discard the rest. Great post!

    • Matt @ Lacking Cents April 8, 2017 at 9:06 am - Reply

      Thank you. It never hurts to seek a second opinion. Or third, or fourth. So much good stuff related to personal finance out there, but I think too many people latch to one philosophy and miss out.

      Love your story by the way. Sorry for the loss of your dad. You seem to be honoring him well by documenting your boys’ lives through your blog. My wife and I have a daughter and are expecting our first son next month…great inspiration for us!

  6. retirelazy April 8, 2017 at 9:36 am - Reply

    Nice post Matt, I definitely agree that his can miss the mark. Before I really got into the early retirement game my dad would always mention Dave Ramsey, telling me to look him up for financial advice. Even then he rubbed me the wrong way a little bit but his steps are generally good for someone with zero financial health. Its definitely more awkward if he brings up Dave Ramsey as I’ve already developed a strong plan. It can be hard to talk to my family about early retirement, as if they think “oh that’s cute you’re saving like that.” But if their basis is Dave Ramsey I can certainly see why they would feel that way.

    • Matt @ Lacking Cents April 8, 2017 at 9:56 am - Reply

      Thanks for reading! Love that a lot of people do shop around for their financial advice and don’t rely solely on one person’s generic plan.

      I will say though…it’s much better that your dad knows of and follows Dave Ramsey than neglecting finances altogether.

  7. Finance For Geek April 9, 2017 at 1:38 pm - Reply

    Yes totally agree with you that it’s lacking on a few points! That’s a really nice breakdown you made on this post I like it. I think your point #1 is really really important as a lot of people I know simply opt out of their company free matching without realizing that they’re leaving free money on the table.

    • Matt @ Lacking Cents April 9, 2017 at 3:27 pm - Reply

      A lot of this comes down to lack of education about personal finance from a young age…not enough emphasis is placed on it in school. Young adults enter the real world with a little bit of income and a lot of debt, but no idea what to do with it. Dave Ramsey is a voice (perhaps the loudest one) telling them how to handle it. Problem is, people don’t always realize that there’s alternatives to Dave Ramsey’s advice…and that the advice he gives isn’t necessarily the best for everyone’s situation.

      Thanks for reading, Vincent!

  8. Omar April 24, 2017 at 11:25 am - Reply

    Uhhh…There are funds out there that have averaged more than the S&P for over 30 years including the fees. What I wouldn’t do is pay a financial adviser a fee to find them for me and to convince me to not sell during hard times. I can decide on my own that I’m not going to sell during hard times.

  9. Matt @ Lacking Cents April 24, 2017 at 1:22 pm - Reply

    Hi Omar. Thanks for reading!

    So if this is true, then why does Dave Ramsey focus all his attention on debt payoff? Why not make minimum payments on a 3% loan if 12% investment returns are a cinch?

    • Omar@thinkingofsomeday April 24, 2017 at 1:45 pm - Reply

      I can’t speak for him but I think he would say that the spread is not accurate because it doesn’t account for risk and that the presence of debt puts those investments at greater risk of being lost. This is just a guess though. Why not call his show?

      I just wanted to point out that there are mutual funds that have outperformed the S&P for decades including the fees.

  10. Ricardo Pereyra April 27, 2017 at 9:09 am - Reply

    Good morning,so you are saying that it is ok to invest while paying off your debts?

    • Matt @ Lacking Cents April 27, 2017 at 9:15 am - Reply

      Well, we did! But our debt was at 2.5% and we had a plan to still pay it off within two years by making extra payments (student loans).

      I think a lot depends on an individual’s situation. No two people are the same, which is why I am a little critical of Dave Ramsey’s Baby Steps.

      If you have debt and are considering investing, perhaps consult with a couple financial advisors first. Multiple opinions are always best. Good luck!

  11. Trisha May 3, 2017 at 9:20 am - Reply

    Thank you for this article!! I don’t have a company 401K, but I do have Roth. I’ve been only putting in $100 a month via Betterment while paying off debt, but my loans are 5.5% interest. Maybe I need to revisit this and put more into retirement. It’s all I have, with no pension or 401K options. I also agree that credit cards, when used the RIGHT WAY, with no monthly interest accrual due to paying in full add so many perks to my lower income situation. I’ve been able to purchase a few fun things that weren’t “in the budget” because of rewards points. I pay off my cards like a debit, when the charges clear the bank so I don’t accidentally forget. 🙂 Thanks for this!!

    • Matt @ Lacking Cents May 3, 2017 at 9:47 am - Reply

      Thanks for the comment, Trisha! Lots of good ideas in your post.

      One of my three pillars of personal finance is “evolving.” I am always evaluating and reevaluating my personal finance decisions. If I’m feeling pretty good about my investment prospects, I don’t hesitate to put a little extra cash to an investment goal versus paying down extra debt, especially if that debt is low interest.

      Good luck! Sounds like you’re on a good path to me.

  12. Lily @ The Frugal Gene July 6, 2017 at 12:20 am - Reply

    Yup, you hit all the nails on the head there. DR is good for people who need/have their hands held constantly like a baby.

    You can also see he celebrates small wins to encourage everyone to follow along that would have probably quit. Now the good thing is he did get people talking about it and that’s what I think is the best thing about Dave.

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