The Pros and Cons of Dave Ramsey’s 7 Baby Steps

Millions of people are in debt every day. Being in debt is a constant struggle, and often people feel helpless and clueless as to what steps to take.

These people eventually find out about Dave Ramsey and his seven-step plan to pay off debt. While it has helped many people climb out of the hole, some of the plan’s advice isn’t so great.

Let’s break down Ramsey’s advice into pros and cons and see if it’s worth following.

Step 1: Save $1000 for an Emergency Fund

Ramsey says that having this $1000 safety net temporarily prevents you from taking on new debt when something unexpected happens in your life. This includes losing a job, having expensive car troubles, etc.

Pros:

• Having an emergency fund is always a good idea.

Cons:

• If you’re in debt, how could you save $1000 before you even save $10 or $100?
• $1000 is not even close to enough money to fall back on temporarily. Try more like $5,000 or make a plan that makes sense.

Step 2: Pay Down Debt Using the Debt Snowball

In order to pay off debt quickly, you need to stay motivated. Ramsey claims his debt snowball method can help keep you committed. Target the small debts with low interest rates first because the more small debts you pay off, the better you’ll feel about lowering the total number of your debts. Re-allocate your funds to pay off the next smallest debt so that over time, your payments will increase.

Pros:

• You’ll be paying off some debt.

Cons:

• This does not take interest rates into account.
• Paying down debt is not saving — it is still spending your money.

Step 3: Save 3-6 Months’ Worth of Expenses

After canceling out smaller payments, Ramsey suggests that you save enough to fully handle unexpected life events for a few months. This means around $10,000 to $15,000 is ideal.

Pros:

• It’s always a good idea to have an emergency fund in case you lose your job, have health complications or get into an accident.

Cons:

• Credit cards. If you pay off expenses each month on a credit card, then worry about paying the credit card bill later, you’re going to find yourself chasing that balance each month. Many people’s financial plans consist of only having a month’s worth of cash and the rest of their money invested. You might run into a bit of a hurdle when you have to pay a credit card balance in an emergency. If you have the money saved in cash, you avoid the credit card con altogether.

Step 4: Invest 15% of Household Income Into Retirement — After You Pay off Your Debts

At this point, Ramsey assumes you’ve already paid off all your debt. That means you can take the money you were using to chip away at your debt and put 15% toward your retirement.

Pros:

• It’s smart to save for retirement. That is definitely certain.

Cons:

• Ramsey’s 15% recommendation is a one-size-fits-all approach. Everyone’s lives are different, and saving 15% could be more than enough or less than enough for certain individuals.
• Saving should occur as you pay down debt, not right after you finish paying it off. Good saving habits can be lost if they aren’t continued over time.

Step 5: Save Money for Sending Your Kids to College

Ramsey wants you to save now in order to put your kids through college.

Pros:

• It’ll definitely put you at an advantage to have a decent amount of money saved by the time your kids finish high school.

Cons:

• Saving to put your kids through college is your choice. You absolutely don’t have to start doing this. Ramsey just assumed here.
• When your kids graduate college, their degrees won’t help you with your retirement. Success in your retirement years is up to you.

Step 6: Pay off Your Mortgage Early

Ramsey is obviously striving toward one of the greatest goals of a homeowner: actually owning your house. That’s the point where you’re in the clear, and you can be proud of what you’ve accomplished!

Pros:

• It gives you peace of mind knowing you own your house.
• Eliminating this debt will leave more room for money to enjoy your retirement.

Cons:

• Sometimes it’s wiser not to pay off your mortgage early, even if you have the money.
• Wrapping up your assets into a house that you want to keep living in can be almost as bad as having a lot of debt.

Step 7: Build Wealth and Give Back

According to Ramsey, now that you’ve built wealth, it’s time to become generous. You can donate money and leave some to your children and future generations.

Pros:

• The more you get, the more you give. It’s just the nice thing to do.

Cons:

• The rest of Ramsey’s plan says you should focus on yourself first, then become generous. While this makes sense in some cases, it shouldn’t be unreasonable to give a little bit to help someone else out.

These strategies certainly have merit, but it’s important to consider them from all angles. The biggest thing to remember is you do want to pay as much debt down as possible — except maybe in the case of your mortgage — and you’ll just need to figure out your plan of attack to make it happen.

Image via:  AP Photo/ Mark Humphrey