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How to Achieve Financial Freedom with Dave Ramsey’s Baby Steps

This post is a summary of Dave Ramsey “Baby Steps“.

I came across this book when I was struggling with finance stress.

I was seeing so many success stories on social media and I started to feel frustrated. And I wondered if I would ever achieve financial freedom and success too.

7 Baby Steps really helped me understand wealth and improve my relationship with money. And it showed me how to bridge the dichotomy between LinkedIn and real life.

What Dave Ramsey’s Baby Steps Is About

Dave Ramsey raised a million dollars in his early adulthood. Then he went on to lose it all over the subsequent months.

Ramsey spent the next years of his life building wealth in a sustainable manner. Baby Steps is the result of this quest.

The author shows how ordinary people can build extraordinary wealth through examples and anecdotes. 

He presents an easy, seven-step action-plan to achieve financial independence.

Let’s dissect the 7 Baby Steps of Dave Ramsey.

1. Save $1,000 for Your Starter Emergency Fund

Think about how we dream of becoming “successful” as children.

As we grow up, we acquire education, housing, a vehicle and other vital prerequisites for a modern life.

But society’s underlying design is subtle. It doesn’t let people notice how these essential milestones push them into debt.

Debt is anathema to financial freedom. It is the first enemy you have to beat on your journey towards independence.

Once you’re under, it’s a nightmarish climb back out of the hole of debt.

And the exigencies of life keep pushing you further down. And thus, the cycle of debt accelerates.

This is why the best way to start this fight is by setting up an emergency fund.

It serves as a hedge for you to fall back upon during lean times, so you can avoid borrowing even more money.

Ramsey suggests to start small: begin by saving up $1000.

This will be your starter emergency fund — something to give you breathing room in case of emergencies.

Make sure to keep this money in a separate bank account so you don’t inadvertently spend it.

2. Pay Off All Debt – Except the House

With the first step, you take control of your spending.

Your next target should be to pay off your debt.

Begin by taking an afternoon off.

Clear your mind, and list out all the credit you owe: car loans, credit card debt, college fees, etc.

You can ignore mortgage in this step — for now, we are focusing on the small problems.

When the list is ready, you can begin applying Ramsey’s formula.

The debt snowball method

The snowball method allows you to methodically claw your way out of debt. It lets you reclaim your independence one hurdle at a time.

  • Sort your debts in ascending order;
  • Start by paying off your smallest debt;
  • Use the money you were putting toward that payment to pay the next debt in your list;
  • Rinse and repeat, until you pay off all your debt.

The key lies in starting small, and working your way upwards.

3. Sort Out Your Emergency Fund

After paying off all your debts, it’s time to go back on the defensive: you must sort out your emergency fund.

The size of this fund depends on your lifestyle. 

Ideally, you should have enough money saved up to cover six months. That way, you won’t need to fall back into debt in case you lose your job or have an emergency.

A healthy emergency fund safeguards your finances against unpredictable outcomes like:

  • Layoffs
  • Sickness
  • Accidents and maintenance costs

And here’s the best part: the preceding steps serve as a good preparation for this step.

By now, you will have gained experience in maintaining multiple cash flows. Now, you can divert that money towards your emergency fund.

4. Build a Retirement Corpus

So far, you were settling existing obligations.

You must focus on the future now. Remember: you don’t want to keep working for the rest of your life.

That’s what Ramsey’s fourth Step is all about start saving for your retirement. You need to build a retirement corpus.

This is what will take care of you when you don’t earn a salary anymore. As such, it should be large enough to support your lifestyle.

Ramsey suggests you put 15% of your monthly income into the retirement fund.

Additionally, your retirement fund should be safe. You must have a shrewd plan, and choose a safe investment vehicle.

Take your time with this step.

5. Build a Higher Education Corpus

You don’t want your child to bear the same debts as you did. That’s why it’s important to have a fund for higher education.

There are multiple avenues for building education funds. Popular options in the US are:

529 savings plans

Education boards and stage governments sponsor qualified tuition plans all over the country. Known as “529 plans”, section 529 of the Internal Revenue Code authorizes them.

Education Saving Account (ESA)

The US government also helps families pay for higher education through the ESA. The main reason that makes ESAs attractive is tax-deferral.

This allows you to increase investment earnings: your profits aren’t taxed until the beneficiary enrolls in a college.

6. Pay Off Your Mortgage

We avoided confronting the largest debt — your mortgage — back in step 2.

It was the start of your journey, and you didn’t have much experience.

After following Ramsey’s plan so far, your finances should be secure and your retirement plan is in motion.

Now you’re ready to tackle the last enemy.

Letting interests accumulate is always more expensive than paying off loans early.

That’s why you must bring all your skills to bear. Use your financial acumen like budgeting and extra cash flows to settle your mortgage.

And the results are tremendous. When you complete this step, you’ll be completely free of debts.

It is at this point that you’ll truly own your money.

7. Build Wealth and Give

Congratulations on making it this far.

By now, you’re completely debt-free. It’s time for you to spread your wings and live your best life.

Simultaneously, you can practice the skills this journey taught you. Leverage your expertise like budgeting and creating multiple cash flows, and build wealth.

And that’s the beauty of Ramsey’s strategy: it becomes self-sustaining after a point.

That said, let’s talk about a few actionable steps for growing wealth.

Assets vs. liabilities

The key to wealth building lies in learning the difference between assets and liabilities.

Now this is a complex, multifaceted debate. It’s fit for an entire finance seminar. For brevity’s sake, let’s summarize it:

  • An asset earns you money
  • liability costs you money

Remembering this core concept will set you free.

You’ll see where most people go wrong: they acquire liabilities disguised as assets.

Status symbols like sports cars and luxury condos accrue massive maintenance costs. This becomes a permanent drain on resources, and people end up squandering their savings.

On the other side of the equation are assets. Acquiring growth-focused assets allows you to organically grow your wealth: you use your money to create more money.

Robert Kiyosaki’s Rich Dad, Poor Dad really brings these ideas together. It’s a great book about how the rich manage their money.


The best way for an average working-class person to build their wealth is investing.

Depending on your financial target and risk-appetite, there’s various options to choose from:

  • A bond is like a loan you lend to an organization. The borrower then uses the money for business or operation. In return, you get regular interest payouts. And these returns generally keep up with inflation. Bonds offer a great balance of growth and safety. They are the best investment vehicles for those without much risk-appetite.
  • Stocks are Ramsey’s favorite investment method. These represent partial ownership of a company. Through stocks, you tie your wealth to the performance of an organization. They are highly volatile, but they also offer great growth potential. A time-tested formula, stock investing is great for those that are comfortable taking risks with their money.
  • Cryptocurrencies form the third rung in the risk-reward ladder. These were originally designed to address issues with fiat currency. Cryptos are a new player in the investment space. In fact, most large investors won’t even acknowledge cryptos. However, they offer explosive growth potential. You can consider building positions here, provided you understand the extreme risk. Just make sure you’re using a purely speculative corpus, at least to begin with.

Final Thoughts

This brings us to the conclusion of my summary of Dave Ramsey’s 7 Baby Steps.

Ramsey’s 7 Steps are easy to understand. However, its implementation can be challenging.

Remembering the following structure helps keep things in perspective —

  • The sprint to financial stability: You need to complete the first three steps sequentially and as fast as possible. The idea is to get debt-free so you can plan for the future. You’ll learn to manage cash-flows along the way.
  • The marathon to financial freedom: Now it’s time for you to put in massive action to secure your future. You must increase your earning power and thus create extra cash-flows. This will allow you to work on the next three steps simultaneously.
  • Reaping the rewards: Achieving financial freedom opens you up to the limitless possibilities of wealth. You can choose to retire, or keep on building your empire. Ramsey suggests you build good habits, and keep growing your wealth.

Baby Steps helps understand lot of diverse ideas about money. To me, it is the keystone that knits many popular personal finance books.

Here you can find the summary of Dave Ramsey’s Baby Steps in pdf.

So, which was your favorite takeaway from this book? Let me know in the comments.

And if you like reading about personal finance, books and life lessons in general, you might find my Medium page interesting.

Photo by Andrew DesLauriers on Unsplash

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