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Adapting the Baby Steps


There’s been a lot of talk on the blog lately about emergency funds and baby steps. So since we’re on that topic, I have a question: do most of you believe there are exceptions to Dave Ramsey’s Baby Steps?

Listening to his show, I feel like he’d say never. But I agree with commenters here that say people like me with huge, long-term debt should be adapting the Baby Steps, especially when it comes to emergency funds and retirement savings.

In case you’re not a Ramsey follower, he teaches people to follow seven Baby Steps:
1. Save $1,000 for your starter emergency fund.
2. Pay off all debt (except the house) using the debt snowball.
3. Save 3-6 months of expenses in a fully funded emergency fund.
4. Invest 15% of your household income in retirement.
5. Save for your children’s college fund.
6. Pay off your home early.
7. Build wealth and give

So here are the two adaptations I think apply:

1. Keep More Than $1,000 in Our “Starter” Emergency Fund

Currently we’re in Baby Step 2 paying off $291,000 of student loans. We have $8,000 in our emergency fund that we don’t touch. Dave would tell us to put $7,000 to our debt, and keep only $1,000 in our starter emergency fund until all our debt is gone.

But our debt is so large we’ll be dealing with it for years and years. It scares me to only have $1,000 cash available to us for that long! Paying off $7,000 of our debt would be good, but I don’t feel it’d be best. I’d rather have extra cash available to us in savings. $8,000 is not a full Step 3 that would cover 3-6 months of expenses, but it’d cover us for a month or two if something came up.

2. Invest Even While in Baby Step 2

We don’t want to put off investing for retirement for too long. We’re in our late 30s, after all. But how long is too long? Fortunately we started contributing to our retirement seven years ago, and we only stopped last summer when we got more aggressive with our debt. That means we have $100,000 in an IRA that’s slowly growing even while we take a break.

However, my husband is itching to contribute to our retirement again. I vote we make a good dent in our loans first—maybe for six to twelve more months—and then contribute 10% of our income instead of 15% so we can still work on the loans. I just feel like we can’t wait to save for retirement until our massive debt is paid off, but I still want to make those stupid loans disappear.

Would you justify adapting the Baby Steps in our situation? How would you tweak them?


  • Reply Margann34 |

    I would keep the $8000 as an emergency fund. Especially since you already have it saved up. Or maybe even take it down to $5000. But $1000 is just not a lot of money these days. Maybe Dave needs to adjust for inflation! I would NOT begin retirement yet. 10% is a good chunk of change that can probably reduce your loans by an extra $10,000 per year. Calculate how long it will take to pay off with/without saving for retirement. You actually have a fairly good start on retirement. And at late 30’s, you still have a good 20 years till retirement. I say stick to the baby steps idea for now. But I do think that Dave is a little too militant about his baby steps.

    • Reply Emily N. |

      Completely agree with everything you wrote! How many decades now has DR been sticking with his $1K? It definitely needs to be adjusted for inflation and cost of living. My husband and I have $3K for emergencies, are a month ahead on expenses (via YNAB) and have targeted savings funds for known/expected expenses.

      • Reply Sara |

        Thank you! Militant and outdated are exactly what I’ve been thinking for a long time. I appreciate you weighing in.

  • Reply SB |

    I’m most likely in the minority here, but I agree with your husband. The later you put in money for retirement the less it will grow overall for you later. Since your debt is down to one large debt and that large debt is going to be a marathon, not a sprint, I would put some in retirement, even if it is smaller than you normally would, and especially if you have any sort of employer match (I seem to recall you are self-employed though). I’d first put 2 months into my emergency fund for peace of mind, then move to adding a small retirement %, then everything else aggressively toward the debt.

  • Reply Angie |

    David Ramsey advice is good for those who are in financial ruin, can’t control their spend, and can’t do or don’t trust math. Once you grow beyond these traits you can apply some more reason and sound judgement to your money decisions and reap the rewards. I think you’re getting to that point now!

    Personally, I think you should jump back on retirement now. You’ll save so much money in taxes with your high income. Let’s say you’re at step 2 above. The way that I’ve seen it is to pay down high interest debt (not all debt). I set my bar at loans above 5%. Basically you’re looking for the break even point where investments long term will make you more money than you’re paying in extra interest on the student loans. Once I paid off all our loans >5% I started increasing our retirement contributions (we were able to max out annual contributions but you might not be there yet or feel comfortable with that). We are well into the 22% tax bracket so we’re getting an automatic 25% return on our money just from tax savings. On top of that the “free” money will be making you money in your retirement account year over year.

    Then once there is extra money above maxing out retirement accounts you can pay down the loans if they’re emotionally draining. Or, to optimize even further, you keep the loans and pay minimums only. Then direct what would have been extra payments to the loan to a brokerage investment account in an index fund. Since the market should go up 7% and our loans avg 3% (taking into account the tax deduction), long term we will earn more money in the market than we are paying excess in loans. Granted it’s been a pretty up market lately, but we started this approach in 2014 and have now made almost 25k on those “extra payments” and our retirement accounts are booming. Another bonus of this approach is you have more money on hand for emergencies and opportunities. If you ever get sick of your loans you can pay them off in one full swoop with the extra payments you put into the investment account.

    • Reply angie |

      I obviously ignored the steps in the post. But basically this is what Im proposing.

      1. Mini refund to cover cash emergencies.
      2. Invest in retirement to meet employer match.
      3. Pay down debts over 5%
      4. Save more efund to match your risk level.
      5. Max retirement.
      6. Extra to go to brokerage (ideal) / college fund or pay down low interest debt.
      7. Save for college fund.
      8. Don’t pay off house but invest the money instead.

      • Reply Sara |

        This is extremely helpful, Angie. Thank you. We need to do some math, but I see the logic in your approach. Did you have some high student loans too?

  • Reply SMS |

    I would go back to adding to your retirement savings, but a smaller percentage. It will take a while to pay off the student loans and you just can’t wait that long to save for retirement. Agree that you should not touch the 8k!

  • Reply Kerry |

    Oh good grief. Look, Dave Ramsey is a grifter and wannabe cult leader who gets off on people’s unthinkingly following/quoting the 1 idea he has, the 1 idea that he hadn’t bothered to update in 30 years because when you can shout and shame and bully, why bother with facts and nuanced understanding?

    Sara, from what you’ve said I think your husband is a medical professional (hence the high student loans) with his own practice (so, startup business debt)? Your situation is common among those professions. Dave Ramsey is not relevant. What you need is a long term asset protection and growth plan. Do you have adequate insurance and a plan in case of your husband’s death or disability? How are the recent tax changes affecting your long term financial picture, since so many deductions are now gone? He’s absolutely right you have to save for retirement NOW. Those are the assets you can tap if god forbid he dies or can’t EARN. Extinguishing debt at all costs doesn’t help if there’s no income coming in.

    • Reply Sara |

      This is helpful, thank you. He has tons of insurance, so we’re good there. We need to talk about how the tax changes will affect us… I have no idea!

      I remember listening to the DR show one day and hearing someone similar to us call in. Dave was really critical of her, making it sound like she should have hustled to get through school debt-free instead. That was the first time I realized he had no idea the challenges of our industry and just how freaking expensive education and start-up is. Yes, we should have been smart and wiser with our loans, but his resources and advice definitely don’t apply to every situation.

  • Reply Laura |

    Dave’s numbers are woefully out of date. $1000 emergency fund isn’t enough for homeowners with kids. Keep your $8000. Start saving for retirement again, but at a lower rate, maybe 5-8% until your debt is gone.

  • Reply Joe |

    Agreed with all above. $8000 is a much more reasonable emergency fund (I’d personally bump it up to an even $10,000).
    Not to pick on her (honest!), but Elisabeths recent post on Christmas spending illustrated just how quickly $1000 can evaporate these days.

  • Reply Drmaddog |

    Dave Ramsey is okay for getting out of debt generally, but some of his advice, especially investing, is very flawed. Plus, first and foremost, he’s a salesman, and in order to sell his products, he must be 100% behind them. So he can never contradict himself or vary from his message.

    With your amount of debt, type of debt, and the length of time it will take to pay it off, I would absolutely contribute to retirement at least 10% and would consider maxing it out. You cannot recapture contributions and gains you lose in the past. And keep in mind, a 10% contribution amount is usually suggested for people in their early 20s. If you are starting in your thirties, you really need to be putting aside at least 15%, and it goes up from there the older you get.

    There’s a podcast I like with a couple that had your level of debt that was consumer and a lot of law school loans. They followed Dave Ramsey strictly for 7 years, I think. And in that time a whole lot of life happened. They had two kids, then adopted one, and then were approached by the state asking if they would also adopt the other siblings. So they went from 0 kids to 6 boys in short order. They ended up abandoning DR but really really regret not investing all that time because now they are in their 40s, still with debt (although with less) and almost no retirement, and they are really behind. Don’t do that to yourself.

    This is also why I am a fan of selling your house, paying down the debt to a much more manageable level, and renting for a while, as discussed in your earlier post. That way, this decision isn’t as much of a conflict because you would be better able to do both.

    • Reply Sara |

      Thanks for commenting, Drmaddog. I’d love to know the name of that podcast. I enjoy listening to the DR show for motivation and focus, but it’d be helpful to hear about people succeeding who are in the same situation as us.

      • Reply Drmaddog |

        The podcast is House if FI, if the administrators allow that to post. Last time I praised another blog, they deleted it.

  • Reply Kate |

    Yes, I definitely agree with having more than $1000 in your EF and saving for retirement!
    $1000 with a house and kids doesn’t get you far at all. I think I have commented on this before but as a doc who paid off about $120,000 in loans I am so glad I saved for retirement as I did. I suppose I might have paid off my loans sooner but would have lost out on all that time in the market.

  • Reply Sara |

    Thank you, everyone! Dave Ramsey has been so important to me because he was the first one to really give me a good shake and wake me up to our situation. I’ve learned so much from him about debt and finances and managing money that I felt like his word was gospel. But thanks for validating those nagging feelings I had that his steps aren’t the black-and-white solution to every financial problem. This has been on my mind for a long time.

  • Reply mr |

    I have to disagree. The point of having a $1000 emergency fund isn’t to cover all emergencies. It’s to limit the number of emergencies that require you to derail your plan.

    Unless I missed something, we have no idea how much extra you are paying on debts monthly and how many years you expect it to take to get all of it paid off at your current rate. If you’re paying any extra, that should be used FIRST to cash flow most emergencies. Considering the extreme debt you have is from becoming a practicing physician, I’m hoping the amount you’re paying extra each month is considerable.

    The point of the baby steps is that you are SUPPOSED to be uncomfortable to motivate getting out of debt. If you are comfortable in debt–have the house/car/kids/vacations you want–you will have no reason to get out. It’s entirely psychological.

So, what do you think ?