What's Wrong with Dave Ramsey's Baby Steps? Nothing and Everything.

Dave Ramsey's popular Baby Steps have helped over 20,000,000 people get out of debt... just kidding. That's his claim, not mine. Even if true, there are exceptions. Do you really want to be that exception and lose your financial stability because you didn't think and instead followed the crowd? Dave Ramsey obviously doesn't advertise how many people weren't helped by the Baby Steps. Regardless, you shouldn't be in that statistic.

So what's wrong with the Baby Steps. Nothing if you like taking risks and following a financial celebrity without question. Everything if you're a critical thinker who can create the knowledge necessary to make sound decisions yourself.

Most popular does not necessarily equate to most effective. Ramsey's Baby Steps proliferate the personal finance world through podcasts, websites, and paid subscriptions accompanied by slick marketing and (unfortunately) logical fallacies. These tactics bias consumers into accepting a suboptimal solution while believing it's the best on the market. Baby Steps are the microwave meal of the financial world--quick and simple, but sorely lacking in substance and options. Fancy infographics need to be scrutinized just as the food on the box cover, otherwise you may end up consuming something distasteful or dangerous.

Let's look at the first 3 Baby Steps and what's wrong with them. We'll go into more detail in future blog posts and show how the Stone Money Foundations are a much better alternative. For now, we'll keep it brief...

Step 1: Save $1,000 for your starter emergency fund.

$1,000 isn't enough, even for a starter emergency fund. We cannot emphasize this enough. Ramsey even admits this, but then gets indignant with anyone who questions it with, "It's more than you've got now!" Sure, you should save $1,000 or so immediately, but then you need to continue adding to that while paying off debt. Keeping only $1,000 in an emergency fund for years and years while using the Debt Snowball to pay off debt is downright foolish, especially when you already have more on-hand and use it toward debt.

Step 2: Pay off all debt (except the house) using the Debt Snowball.

The Debt Snowball focuses on psychological "quick wins". It works, but so does the Debt Avalanche, which focuses more on math, thus resulting in faster debt payoff with less accrued interest. Some people need the psychology of the Snowball while others can rely on math of the Avalanche. Either is fine. You just have to know the advantages and disadvantages to each method.

Ramsey will not concede that the Debt Avalanche works. In fact, he lies repeatedly on his blog and other venues about the Avalanche working at all. "How does the Debt Avalanche work? It doesn't," he says. "And the steps are a bit vague." That's absolute bullshit and unethical coming from a financial advisor.

We say, "Understand the psychology, but trust the math."

The Baby Steps don't account for what the Stone Money Foundations call Critical Debts. These are debts like payday loans that will cost you so much interest you can never pay them off, same-as-cash programs that accrue back interest if not paid on time, and family loans that can ruin relationships. These must be paid as fast as possible. The Debt Snowball isn't going to do that.

"List all debts smallest to largest without regard to interest" is just too simplistic. A hybrid approach of paying critical debts, smaller debts, and higher-interest debts is best. Best because it's flexible. Don't be fooled that one single inflexible method is best.

Step 3: Save 3-6 months of expenses in a fully funded emergency fund.

Having only 3-6 months of an emergency fund is failure waiting to happen unless you are in a special situation (e.g., drawing a government pension). Recent history with the COVID-19 pandemic has proven that 9-12 months may be necessary. This is an area where you have to do some analysis and decide for yourself what's best. Don't limit yourself to 6 months if you think you need more.

People must consider two categories within their emergency funds: 1) funds to replace lost income (job loss, loss of commissions) and 2) funds to cover expenditures (major items breaking, replacement of items). Kimberly Lankford of Kiplinger calls these supply-side and demand-side emergencies. So, having 3 months of living expenses as an emergency fund as Dave Ramsey teaches really isn't 3 months if something breaks. This is why critical thinking is so important when establishing your emergency fund. Ramsey doesn't differentiate the emergency fund this way, which is a mistake (for you).

[Edited to add] We believe a Contingency Resource Plan (CRP) is your best methodology to handle crises. The commonly used term emergency and the concept of an emergency fund is too restrictive. It discounts everything other than a pot of money stashed away for a rainy day. CRP better describes not only the fund you establish, but the overall plan you'll use to implement unforeseen spending during a crisis. A CRP may include cash-on-hand in the form of hard currency or a savings account, lines of credit like credit cards/HELOCs, and other ways to pay for goods and services during a crisis.

Basing your future on some magical numbers some financial celebrity posts on his site is setting you up for a hard fall. Why assume such a risk? Be smarter than that. The Stone Money Foundations are a guide, not a step-by-step process that locks you into someone else's interpretation of what's best for you. Foundations give you choices through critical thinking, knowledge, and sound decision-making.

We want you to succeed on your own terms, not ours. You can determine what's best for you using our free guidance.