A CFA’s Take on Dave Ramsey’s Baby Steps: A Young Retiree’s Comprehensive Analysis

Dave Ramsey’s Baby Steps have become a widely recognized and followed framework for personal finance in America. They offer a structured, step-by-step guide aimed at helping individuals and families gain control over their finances, get out of debt, and build wealth.

In general, I believe the Baby Steps are an excellent foundation for financial education, particularly for the vast majority of Americans who may not have received any formal financial training.

These steps offer a clear, simplified approach that is easy to understand and implement, making them accessible to people at various stages of their financial journey.

While I appreciate the simplicity and practicality of the Baby Steps, I do not personally follow them. My financial philosophy diverges in key areas, particularly in how I approach debt repayment, investing, and the concept of giving back.

In this article, I will provide an in-depth analysis of each Baby Step, sharing both my agreement with and critiques of Ramsey’s approach.

I will explore the role I believe these steps could play in our educational system, advocating for their integration into public school curricula to help build a financially literate society.

Why Listen To Dad Is FIRE?

With so many opinions out there about Dave Ramsey’s Baby Steps, you might wonder why my perspective stands out. I’m a Chartered Financial Analyst (CFA) with over 20 years of experience in senior roles within the financial services industry.

My career has been focused on designing investment products, providing sound financial advice, and developing tools to help people make informed decisions. I also led an Investment Risk team and ran the Investment Policy Committee at one of the country’s largest Financial Services firms.

Beyond my professional background, I have over two decades of experience investing in real estate, starting my career as a mortgage broker. These experiences have given me a well-rounded understanding of both the theoretical and practical aspects of finance.

Most importantly, I retired at 42. This early retirement wasn’t just a goal but a carefully planned decision based on years of disciplined financial management. My insights come from a place of genuine experience and expertise, not just theory.

Unlike other Fake Gurus, I have actually have experience, credentials, expertise, and retired young.

What Are the Dave Ramsey Baby Steps?

Before diving into my analysis, it’s important to outline what Dave Ramsey’s Baby Steps entail. The Baby Steps are a seven-step plan designed to help individuals achieve financial stability and eventually build wealth.

These steps are:

1. Save $1,000 for a starter emergency fund.
2. Pay off all debt (except the house) using the debt snowball method.
3. Save 3-6 months of expenses in a fully funded emergency fund.
4. Invest 15% of household income into retirement.
5. Save for your children’s college fund.
6. Pay off your home early.
7. Build wealth and give generously.

Each step builds on the previous one, creating a path that, in theory, should lead to financial freedom and security. Now, let’s delve into each step, comparing Ramsey’s approach with my own financial philosophy.

Step 1: Save $1,000 for a Starter Emergency Fund

The first step in Ramsey’s plan is to save $1,000 as a starter emergency fund. This step is intended to provide a small cushion against unexpected expenses, such as car repairs or medical bills, that could otherwise derail one’s financial progress.

I fully agree with this step. It’s a good starting point because it creates the habit of saving and establishes a psychological safety net. The amount may seem small, but it’s attainable for most people and serves as an essential first step in building financial discipline.

This small, yet critical, amount gives people a sense of security and a taste of financial stability, encouraging them to continue with the remaining steps.

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

Ramsey advocates for using the debt snowball method to pay off all debt except for the mortgage. This method involves paying off the smallest debts first, regardless of interest rates, and then moving on to larger ones.

The idea is that by knocking out smaller debts quickly, individuals gain momentum and confidence, which helps them stay motivated to tackle larger debts.

Financially speaking, it would make more sense to pay off the highest interest rate debts first, as this would minimize the total amount of interest paid over time.

I appreciate the administrative simplicity of the debt snowball method. Reducing the number of accounts and seeing debts disappear can be incredibly motivating for people who may not have strong financial discipline.

I like the idea of making the process easier from a psychological and administrative standpoint. After all, if someone had the discipline to focus solely on the highest interest rate debt, they probably wouldn’t have gotten into debt in the first place.

Making it easier to manage by reducing the number of accounts makes it more likely that people will follow through with the plan.

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

Step 3 involves building a fully funded emergency fund that covers 3-6 months of living expenses. This step is designed to provide a more substantial financial buffer against life’s uncertainties, such as job loss or major medical emergencies.

I agree wholeheartedly with the value of an emergency fund.

I think the appropriate amount for an emergency fund should depend on an individual’s or family’s ability to create or access money elsewhere.

For example, someone in a career where they can quickly find new employment may need a smaller emergency fund compared to someone in a less stable or harder-to-replace position.

The size of the emergency fund should be a function of one’s expenses. In my case, I analyze rolling 24 months of expenses to determine the appropriate amount to keep in my emergency fund.

While the Baby Steps are great at simplifying the concept, the “right” amount can vary significantly from person to person.

Step 4: Invest 15% of Household Income into Retirement

Ramsey recommends investing 15% of household income into retirement accounts, such as 401(k)s and IRAs.

While I appreciate the emphasis on retirement savings, I find the 15% figure to be somewhat arbitrary. In my view, a more aggressive “waterfall” approach is optimal.

I believe in maximizing contributions to tax-advantaged accounts like a 401(k) and an HSA first. After these accounts are maxed out, the remainder of one’s income should be used for living expenses.

If there is anything left over, that amount should be invested as well. This approach may be challenging for many people, but getting as close to it as possible can create significant wealth over time.

I view retirement and HSA funds as “future me’s money,” which means they shouldn’t be used now, even if I want to. This mindset helps to ensure that these funds are preserved and continue to grow until they are needed in the future.

Related: Should I Max Out My 401k? A CFA Who Retired Young Answers

Step 5: Save for Your Children’s College Fund

When it comes to saving for children’s education, Ramsey suggests using 529 plans or other tax-advantaged college savings accounts.

I’m torn on this step. On one hand, I do have 529 plans for my kids, recognizing the potential burden of rising college costs. On the other hand, I place a significant emphasis on teaching my children the tools they need to learn and earn money on their own.

My role as a parent is to help develop self-sustaining individuals. If I simply hand them money for college without requiring any effort on their part, I feel that I’m doing them a disservice.

While I do save for their education, I also encourage them to make their own money, learn financial responsibility, and develop skills that will make them self-reliant.

Related: How I Teach My Kids About Money Using a Lemonade Stand

Step 6: Pay Off Your Home Early

Paying off the mortgage early is a key component of Ramsey’s plan, and on this point, I fully agree.

I believe that paying off the house should be a priority and that one should never take out a mortgage longer than 15 years. There is no reason to stretch out a mortgage for 30 years, as this simply results in paying more interest over time.

Assume that 30-year mortgages didn’t exist. I strongly believe a 15-year mortgage should be the standard term. By eliminating mortgage debt as quickly as possible, individuals free up resources that can then be directed toward other financial goals, such as investing or giving back.

Step 7: Build Wealth and Give Generously

The final step in the Baby Steps is to build wealth and give generously. This step embodies the idea that financial success isn’t just about accumulating money for oneself but also about using that wealth to help others.

While I agree with the principle of giving back, I’m torn on this step. Since I retired early, I still feel the need to hoard my money to ensure that I remain financially secure throughout my retirement.

I believe more in giving back time rather than money at this stage in my life. Volunteering, mentoring, or sharing knowledge can be just as valuable as financial contributions, if not more so.

I would challenge Ramsey on this point: if he truly believes in the importance of giving back, he should consider offering all of his advice for free. That would be the ultimate expression of this step.

The Role of Cash in Ramsey’s Philosophy

While Dave Ramsey emphasizes the use of cash as a key element in his broader financial philosophy, particularly through his well-known envelope system, I strongly disagree with his stance on cash versus credit.

Ramsey advocates for using cash for everyday expenses to help control spending and avoid debt, often discouraging the use of credit cards altogether. He believes that paying with cash creates a more tangible awareness of spending, which can lead to better financial discipline.

I feel strongly that credit cards are a great tool when used correctly. They allow for precise tracking of where your money goes, which can be incredibly valuable for budgeting and financial planning.

The trick is having the discipline to use credit cards responsibly. When managed properly, credit cards can offer convenience, rewards, and detailed financial records without leading to debt or overspending.

In my view, the benefits of credit cards, when paired with disciplined spending habits, far outweigh the simplicity of using cash.

Rather than avoiding credit cards, I believe in embracing them as a powerful financial tool, provided that one exercises the necessary self-control and pays off the balance in full each month.

Related: Finance Expert (With 820+ Credit Score) Debunks Credit Card Myths

The Role of Baby Steps in the School System

Beyond their applicability to individual financial situations, I believe the Baby Steps should be integrated into the public school system as part of a comprehensive financial education curriculum.

Financial literacy is sorely lacking in today’s educational environment, and the Baby Steps provide a clear and structured approach that could help bridge this gap.

Each grade could go a level deeper into the principles outlined in the Baby Steps. For younger students, the focus could be on basic concepts such as saving, spending, and the importance of an emergency fund.

As students progress through school, more complex topics like debt management, investing, and long-term financial planning could be introduced. By the time students graduate, they would have a solid foundation in personal finance, equipping them to make informed financial decisions as they enter adulthood.

The Baby Steps: Better Than Nothing

While I find Dave Ramsey’s Baby Steps to be an excellent foundation for financial education, my own approach to personal finance differs in several key areas.

I agree with the overall structure and many of the principles behind the Baby Steps, but I believe in a more nuanced and aggressive approach to debt repayment, investing, and wealth-building.

While the concept of giving back is commendable, I believe it can be fulfilled through time and knowledge as well as money.

Integrating the Baby Steps into the public school system could have a profound impact on financial literacy in America, providing future generations with the tools they need to achieve financial independence.

Ramsey’s plan is a great starting point, but as with any financial advice, it should be adapted to fit individual circumstances and goals. By understanding the strengths and limitations of the Baby Steps, individuals can create a financial plan that works best for them.

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