Dave Ramsey’s “7 Baby Steps” Are Flawed: Get Rid of Debt Quicker Like THIS

by | BiggerPockets.com

For many people out there, just uttering his name is enough to bring emotions of rage or praise to the surface.

For those of you who are not familiar, Dave Ramsey (he who must not be named in some circles) is the author of several very popular personal finance books, such as The Total Money Makeover, as well as the host of “The Dave Ramsey Show.”

Ramsey is famous for his aggressive stance on never using debt to purchase anything—including your house or real estate investments.

Being a part of the real estate investing community, I, of course, consider debt on cash flowing investment properties “leverage” rather than “debt.” Ramsey does not share this point of view (to say the least).

He also hates consumer debt, like credit cards and car loans, and believes they are crippling to a person’s financial position and future. This is the only place I agree with him.

Ramsey has come up with a method designed to get people out of debt and on a path toward building wealth. He’s dubbed this method the “7 Baby Steps.”

Dave Ramsey’s 7 Baby Steps

These are the steps:

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

Now, these steps have helped thousands and thousands of people get out of debt and reach a sound financial position.

If you are someone with little or no knowledge of personal finance—someone who is only interested in getting out of debt and retiring in your 60s—go ahead and follow Dave Ramsey’s “Baby Steps.” It will get you there.

However, if you are interested in getting out of debt and then building a sizable net worth through real estate, index funds, stocks, bonds, Smoothie King franchises, or a combination of all these things—and someone interested in reaching financial freedom at an early age—I would suggest you follow a more optimized path.

So what is the biggest flaw in Dave Ramsey’s “Baby Steps”?

Here it comes: not investing your money and making it work for you as soon as you possibly can is a huge mistake!

With Dave Ramsey’s approach, once you finish the second step—paying off all consumer debt (credit cards, car, student loans, personal loans, etc.)—you will have a $1,000 net worth.

But guess what? That $1,000 is likely earning you 0.01 percent interest in a savings account. That $1,000 is not working for you. It’s not making you rich.

In actuality, that $1,000 has lost you money over the multiple years you just spent paying off your credit cards, car, student loans, RV, and whatever else you financed. That $1,000 you put in a savings account in 2015 is now worth significantly less than $1,000 in 2019 (inflation, people!).

Plain and simple, Ramsey’s method of reaching a financially sound place in life is extremely flawed.

But is there a better way? Of course!

Here’s what I’m calling my “7 Financially Savvy Adult Steps” to get out of debt and reach a financially sound position in life. This method is both faster and more efficient than those little “Baby Steps” will ever be.

Related: Unpopular Opinion: Dave Ramsey is Overrated

7 Financially Savvy Adult Steps to Rid Yourself of Debt and Achieve Financial Independence

  • Step 1 – Save $1,000 for an emergency fund.
  • Step 2 – Pay off high-interest debt only (8% or higher).
  • Step 3 – Save 25%+ of your income to invest until you have $10,000 to $25,000 in assets working for you.
  • Step 4 – Save three to six months of expenses in a fully-funded emergency fund, while still saving 25%+ of your income to invest.
  • Step 5 – Pay off low-interest debt (8% or lower), while still saving 25%+ of your income to invest.
  • Step 6 – Save for your children’s college fund, while still saving 25%+ of your income to invest.
  • Step 7 – Give, while still saving 25%+ of your income to invest.

No need to build wealth here like in the “Baby Steps.” If you execute this strategy, you will already be wealthy at this point.

The reason that these “7 Financially Savvy Adult Steps” are more effective than Ramsey’s is that they focus on investing as soon as possible and continually investing 25 percent of your income rather than only 15 percent.

Why pay off 5 percent student loans or car loans when you can make an average of 8 percent a year in an index fund? Is paying off your 4.2 percent mortgage optimal when you could use that money to invest in rental properties that have a cash on cash return of 10 percent a year and appreciate at 8 percent a year?

The answer to both of those questions should be obvious.

Related: The Dave Ramsey Dilemma: Should Real Estate Investors Really Avoid Using Debt?

Real-Life Example of 7 Financially Savvy Adult Steps in Action

How about we use me as a real-life example to see these more optimized steps in action?

About 6 months after I graduated college, I had just financed a car for $20,000, had about $4,000 in credit card debt, $60,000 in student loans, and earned a $50,000 salary per year plus bonuses. This is a pretty normal situation for people in their mid 20s to early 30s.

That adds up to  -$84,000 in debt. But 18 months later I now have a net worth of $0. How is that possible?

Did I follow Dave Ramsey’s “7 Baby Steps”? Not a chance! I would still be in the negative 1,000s of dollars if I had done that!

Here is what I did instead.

Step 1: Save $1,000 for an emergency fund.

Easy enough. I made 90 percent of my meals and said no to going out to the bars more than I said yes.

At this point, if my car’s brakes go out, I wouldn’t have to turn to credit cards. This took about two months.

Step 2: Pay off high-interest debt only (8% or higher).

Luckily the $4,000 in credit card debt was at a 0 percent introductory rate for 18 months. I still treated this like high-interest debt though and paid it off ASAP. I did this because as soon as the 18-month period ended, it would carry a 20 percent or higher interest rate.

My next quarterly bonus was used to pay off all my credit card debt rather than buy some shiny new object like the rest of my co-workers.


Step 3: Save at least 25% of your income to invest until you have $10,000 to $25,000 in assets working for you.

My advice is to first identify what asset or assets you want to invest in. There are a number of options and different tax strategies, including but not limited to Roth IRA, 401(k), index funds, stocks, bonds, and real estate. Decide what is best for you and attack it.

For me, I decided investing my savings in real estate was my best course of action. For roughly eight months, I saved as much as I possibly could (50 percent or more of my income) to put 3.5 percent down on a house hack. This meant renting out my car, biking to work, and almost never going out to eat or drink.

After eight months of determination, I bought a 2-bed/2.5-bath townhouse in Denver for $260,000, which was $10,000 under asking. After an additional $4,000 in materials and labor, I added a third bedroom in the basement.

Next, I placed two roommates in the upstairs room. They cover my mortgage, taxes, and insurance.

I now have a house that is worth about $285,000, and I get to live there for free. There is my $25,000-plus in assets working for me!

Hey, Dave, which “Baby Step” is that?

Step 4: Save three to six months of expenses in a fully funded emergency fund, while still saving 25%+ of your income to invest.

Now that I get to live for free in a townhouse in a decent suburb of Denver, saving three to six months of living expenses took no time at all.

The reason? Since I don’t have to pay anything for a roof over my head, my monthly expenses are pretty low and I can save a large portion of my income. I checked off this step in about three months’ time.

Step 5: Pay off low-interest debt (8% or lower), while still saving 25%+ of your income to invest.

Here’s where I am currently. Right now, since I live for free, I save well above half of my income and live very comfortably. (Yes, I did add in eating and drinks out on occasion.)

Those savings are currently being invested in a Roth IRA, a savings account designated for buying my second house hack in 12 months, and paying down my student loans using the “Debt Avalanche” method, rather than the “Debt Snowball” method.

At this moment, my net worth is roughly $0. But guess what? I have $25,000-plus in assets that are working hard earning me money while I sleep—and they’ll continue to do so for years and years to come.

If I had followed Dave Ramey’s “Baby Steps,” not only would I still have a net worth of negative 1,000s of dollars, but when I finally dug myself out of that hole, I would have zero assets to speak of.

There are a number of ways to go about getting out of debt outside of Dave Ramsey’s method and Connor Anderson’s “7 Financially Savvy Adult Steps.” But the key is to start investing in assets as soon as possible and continue to do so forever.

My journey has involved a lot of hard work and sacrifice, but I promise you it is repeatable and a significantly more optimized path out of debt and into a financially sound position in life.

Are you a Dave Ramsey fan? Why or why not? How do you think my method stacks up against his? 

Let me know in a comment below!


About Author

Connor Anderson

Connor fell in love with the idea of investing in real estate in college and in a matter of 4 months listened to at the time all 250+ episodes of the BiggerPockets Podcast. After college Connor worked a job in the corporate world but quickly realized it was in a field that he was not passionate about. Luckily because of some networking and his passion for BiggerPockets Connor was able to land a job at BiggerPockets in a Business Development role. Shortly after that, he bought a 2-bed townhouse in Denver that he turned into a 3 bed that he House Hacks. Now that he lives for free he plans to aggressively save for his next deal. Connor's areas of interest are personal finance, real estate investing, and house hacking. Connor also has a passion for spending time in the mountains doing his two favorite activities skiing and camping.


  1. Michael Frasier

    I’m a Dave fan but I have noticed that real estate and debt seem to have an interesting relationship. So I’ll probably do some sort of version of the baby steps myself. I guess the only thing I see sort of flawed in your plan is that your investment that you’re saving for instead of paying debt still has risk associated with it. And not everything always works out as we plan it to.

    For example what If you had trouble renting out those units. and then you had back to back evictions ( I dunno whatever doomsday event you can think of)

    • Connor Anderson

      Thanks for the comment Michael! To combat some sort of doomsday scenario I have built a nice sized emergency fun to cover myself in case of a disaster and I would advise others to do the same. Luckily with House Hacking, if you don’t have renters you still have a roof over your head, you just have to pay 100% of the mortgage, which is the situation most Americans are in!

  2. Andrew Syrios

    Focusing on the high interest debt first is a really good idea. One of my biggest complaints with Dave Ramsey, although I don’t think it applies to most people who aren’t active investors, is that he doesn’t seem to see much if any use for good debt. Debt on investment properties and even your home makes sense as long as you have good equity because the rates are low and you can get a much higher return on it then you’re paying.

  3. Katie Rogers

    “How about we use me” proves nothing. It is just an anecdote that fails to acknowledge the role of luck or opportunity, neither of which is equitably distributed, never mind other differences in individual situations. Someone else could just as easily say “why don’t we use me” to “prove” that the 7 adult step do not necessarily work as advertised.

    Maybe you invested 25%+ in an index fund at the beginning of the 20-year period when the average annualized return was 2% (See SPY 04/1999-04/2019), not 8%. Maybe you live in a market where average annualized real estate appreciation is more like the historical 3%, or where cash-on-cash return is nowhere near 10%. Or maybe when you were in a position to pay a 20-25% down payment, you actually needed 100% in order to outbid the hedge funds. Or….

    Lucky you that in your job you get quarterly bonuses. Lucky you that you were a single guy who could fill your house with roommates. If you were a family, you probably would not be able to do that.

  4. I couldn’t disagree more that Dave’s method is “extremely flawed.” I’ve been following him for years, mostly abiding by his principles. I’m financially independent and own three rentals while I work a W2 job. Dave does allow for his “disciples” to use a mortgage to purchase their home once they’ve become debt free and saved for a down payment. Risk, and all of its variables, is a large factor in his philosophy and those who tend to over-leverage discount the math behind that because frankly it’s too tempting to keep building that rocky foundation using OPM. Sir, your article may have been better served to compare and contrast your steps to his more objectively rather than attempting to discredit him, which seems to be the overtone. I see where you are going, but you’re in a precarious position to make a standpoint on this when, as you stated, you have a net worth of exactly $0. Honestly, you might want to take another look at what Dave is preaching — if for nothing more than to more accurately understand his philosophy in order to make your case because I think you’re not getting the full picture.

    • Connor Anderson

      Thank you for your comment Stevie! That is awesome you have reached financial independence! Dave has a very low tolerance for risk in his teachings. My tolerance for risk is a little higher than his. I decided that for me it was riskier to continue to pay rent and attempt to pay down my loans with brute force rather than to buy a house, eliminate my living expense, and then pay down my low-interest loans. Personal finance is personal and we should all chose what works best for ourselves. It’s exciting to hear you found a path that worked out for you.

    • Mike Wilcox

      I agree with you. I wouldn’t have been put off by the article if there wasn’t so many condescending tones. If Connor had wrote the article as respectful as his comments are, would have been much better. All he needed to do was lay out his plan and reasons for it.

  5. Michael Zau

    I disagree with your opinion Dave Ramsey, not because you are wrong, because you have an excellent way of performance on a whole planning scale. Because much of the D.R. demographic has issues with saving in a general way. Also the demographic on this website will be heavily skewed towards debt and real estate, which I am a part of as well. That being said, money isn’t emotional, people are; and have that tendency when money becomes scarce in their regular w-2 life. Also, working with both Kiyosaki and Ramsey disciples is an interesting conversation everytime for me. Mainly because of the debt (mortgage debt that is, ) laden, vs the debt free tribe. I dont think that either camp is wrong because of the emotional triggers that different families will have in regards to debt. It is definitely a hot topic and will be from years to come. Great work on the article, thanks for posting your details.

  6. Anthony Gayden

    Here is the problem with your plan. It disregards the psychology. It is the one thing that Dave Ramsey knows. Mathematically his plan isn’t the optimal way to do things. The problem is that human psychology gets in the way of math and logic.

    • Connor Anderson

      Great point Anthony! Some people might be a better psychological fit for Ramsey’s method, some may like mine, and others will find a number of other paths that work best for their psyche. The real mission here is to get people to think a little outside of the box and take action!

  7. Ricarrdo Spencer

    I’m a huge fan of Dave Ramsey’s Baby Steps, but I’m really liking the idea you put forward of starting to invest a lot and early. Have you put any consideration to calling into his show and putting forth these ideas of the Financially Savvy Adult? I feel like that would be a great exchange of ideas, plus he has a very large audience and hearing a different viewpoint never hurts.

  8. Brian K Buff

    I think your net worth calculations are off. Most notably, if you buy a car for $20k and have a $20k note, it would not be contributing to your net worth deficit, it would just be zero. I understand net worth to be assets minus liabilities.

    Also, I think your spot on with the Dave Ramsey critique. I would actually be more harsh. I’ve heard him tell people to avoid taking on low interest debt that could significantly increase revenues in a small business, with improved cash flow and limited risk exposure. I’ve heard him tell people not to go on vacation who just got a $20k bonus and only had $40k left to payoff their house, and hadn’t been on a vacation in 5 years with kids nearing their teens.

    If you are a worker bee making a very basic salary and probably always will, the Dave Ramsey way will do you a lot of good. However, if you have a skill, an idea, a professional skillset, you would be better off borrowing to help fund those ventures with low interest debt, if and when necessary.

    • Connor Anderson

      Great insight Brian. I tend to not include my car in my net worth just because it is more of a liability than an asset but you are correct. Dave is often times an extremist, but hopefully, people pick and chose what advice makes sense for them and disregard what doesn’t.

  9. Danie Stover

    Thank you for writing this! I’m currently on your Step 6. I’ve been struggling with not being confident that it was the best approach, but also not wanting to wait until all of my student loans are paid off before I start investing. Especially since investing in a house hack can help me pay off those loans faster. It’s good to know this method actually works!

  10. Wenda Kennedy JD

    I have done just about exactly what you are talking about — over the last 40+ years. BUT, I have learned to keep my LTVs (loan to value ratios) very low. I have people around me who are maxed out on their loans on their real estate investments. Scary! This is my 5th business cycle in my career, and I tend to be very careful about debt. I learned all about it when I was younger. Those payments and debt loads can really raise their nasty heads at the worst times. (Yes, they badly bit me, creating a well-remembered lesson.)
    We’re going into a recession in my area. Hopefully, I’ll be financially ready for that nadir. I wanna purchase myself some real estate “stud-card-deals” without using OPM (other people’s money). That goal includes NOT using the friendly bank’s money from up the highway. This time it is all about the fun of making the deals so there is no race to win.

  11. Matthew S.

    Set a reminder to read this article in 15 years and see you left out risk. I say this with no snark – you are young and haven’t experienced the junk that life can (and will) throw at you. You have a $0 net worth, Ramsey is a decamillioniare that has experienced the pain of being a millionaire and going broke (probably at around your age). His steps are the most sure-fire way to build wealth.

    • Connor Anderson

      Hi Matthew! I do plan to revisit this in some years and see if there are any glaring mistakes in my plan in. But so far so good, I track my net-worth and set quarterly goals and review my progress towards those goals. Setbacks are inevitable but that’s life!

  12. Wenda Kennedy JD

    My point exactly, Matthew S. I totally agree with you. Most people must make their fortune 3 times before it sticks. I have seen a lot of people around me end up in BK court with their hats in their hands. And they were lucky to still have their hats. I have, at times, worked for years and years only to be wiped out by a sudden downturn. No, a lot of those events were NOT my fault and they were NOT foreseeable. But I had to pay the piper anyway.

    (Who knew that the good people of Los Angeles were going to burn down the part of the City where I had purchased those buildings? No, fire insurance doesn’t work during civil unrest…
    Who knew that someone was going to invent personal computers and voice mail — which killed the office market.
    Who knew that my husband at that time, was going to fall in love with Asia and go get himself a Chinese wife by moving overseas.
    Who knew that my mother would have all those strokes.
    And on and on…)

    Slow and steady wins the race. In the long run, it’s the only thing that continues to work.

    Yes, today I could again lose everything. Maybe I could quickly make it back — BUT, this level has taken me 20+ years of blood, sweat, and tears. And, to get here, I used the financial base, the education and the knowledge that I had built -up over the 20+ years before that.

    There is no short cut to any of this. Good planning, hard work and some breaks along the way are our yellow brick road to the Emerald City of financial independence.

  13. Bryan Buxton

    This is exactly what I told my dad after he asked me to read Dave Ramsey in college. Luckily (or providentially) I had already read Rich Dad Poor Dad.
    I’m about a year ahead of you Connor on Step 5 and my family is doing great! I would not have a small side buisness returning much more then my stocks or even have the stocks if I had only focused on paying off low income debt.
    Also, a major flaw with Dave’s book is his hatred of credit cards. By being diciplined and using credit cards to pay regualr bills, gas, etc. we get enough airline points to travel every couple years, while the Dave Ramsey fans are still staying home avoiding vacations and credit cards.
    Another point you don’t make is how your steps can sometimes mitigate risk even better then Dave Ramsey’s methods. Dave relies on a W2 job with just enough savings to get you to the next job in the event you lose it. Although you are at risk of losing your income producing assets, they keep making money after you lose your job. In my opinion, no strategy is without risk in life. You must just have a mitigation strategy in place: can you live with the worst case?

  14. Wenda Kennedy JD

    It depends on where you are in your journey. How old are you? What kind of housing do you have? How much are you paying? Do you have a family? Can you handle having rentals? Are you handy? What do you do for a living? How much do you make? Can you make a good decision under pressure? And then follow through on that decision? etc. I know questions, questions, questions…

  15. Lina Bibikov

    I love Dave Ramsey and appreciate everything he’s trying to do, escpecially influencing young people who do NOT get taught any kind of finance in school. In my opinion his baby steps are to get your mind around…
    1. Personal debt is bad AKA debt for a purse or something
    2. Saving is a must for financial independence
    3. Frugality allows you to live like no one else later
    4. Think of the future &
    5. Invest!

    The steps can be different for each person, but the basic principles are still there.

  16. Dustin Larsen

    Thank you Conner! I appreciate the time you put into putting this all on paper! I love how you put forth effort into paying off debt in a sensible way whilst continuing your investments and not having to put either on hold. The human psychology portion for me personally would be satisfied going this route. I agree the Ramsay plan is best for MOST people but just the fact that we have found our way to this website means we are not most people.

    • Connor Anderson

      You’re right Dustin, Dave is for most people, but BP is not that place most people hang out. For me, this was also the best psychological route I could take. Banging my head for years paying off all that debt would have made me go insane. Now I cash flow $1000 a month and can use that money to pay off debt faster and with less pain.

  17. jonah Freedman

    I love this article. I think Dave Ramsey has some good advise especially for spenders. Though if I followed his advice I would have exactly zero rental properties and a net worth of zero doing a job I do not like. Instead I became financially free in just over 5 years from buying rentals. Yes I have debt, lots of it. In fact I still have college debt. All debt is not created equally.

  18. Jace Mattinson

    I grew up on Dave Ramsey as my parents tended to follow his advice. I think he has some great things to say but I also think it is important to see the arena he gives his advice. He once was over leveraged and lost it all and has since built a multi million dollar empire on teaching people not to borrow money which is great advice for some people.

    His baby steps are somewhat elementary I think in how the majority of people build substantial wealth. In fact nearly all the very wealthy people I know have borrowed money outside of a primary residence whether it be for business, investments or investment real estate or a combo. Is there an element of risk in that sure, but Dave is ultra conservative and will always be since that’s how he built his wealth…selling books, radio ads, live events, ect telling people to not borrow money.

  19. Trina Shelton

    This is a very interesting article. I am close to paying off high interest debt and will only have my car and a student loan which totals $21,000. I already have $1,000 in savings for emergency and I would really like to start saving so that I can start investing by mid year 2020.

  20. Jeff White

    Good stuff Connor! I think it is great for people to get multiple perspectives of advice, and then, he or she chooses what is best.

    For people that are comfortable utilizing leverage, risk, and don’t have major credit issues, making your money work via assets that you can control like a house hack will give you the best chance long-term to achieve the highest returns and give you the opportunity to achieve FI sooner rather than at 65.

    Also, I think a big issue is Dave Ramsey’s audience. His target market is the financially unsavvy, people that don’t know why they have 50K of credit card debt, two bankruptcies, go out to eat every day, and don’t have any savings to their name. These people just have some bad habits. His advice is fantastic for people just starting out and cleaning up their credit, financial problems, etc, but long-term, his way would be the slow, methodical, low risk, and take the longest to achieve for someone interested in early retirement.

    Once someone cleans up the bad personal finance habits, they will be able to take more risk, achieve higher returns, and reach FI much sooner, even as a median income earner. In my opinion, by having good personal finance habits, which you allude to in your Steps, you are actually not taking high risk because you are living a low cost and efficient way of living that gives you options if the market tanks, you lose your job, rent prices go down, and so on. You will be able to cover your mortgage(s), food, car, etc because of the multiple streams of income that generate higher returns.

    By developing good habits, you can sleep at night with a mortgage. You can utilize credit cards to eliminate your travel cost. You can automate your real estate assets to exponentially grow your net worth.
    Saving and waiting 40+ years might work for some, but that sounds boring and overtly reliant on the stock market going up.

    I’d rather have 10 properties all paid off by my tenants by the time I’m 55 than just one paid off property primary residence property and a big 401K.

    Thus, it starts with recognizing your bad habits, making them good habits, and then you won’t need Baby Steps anymore!!

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