The Rachel Cruze Show - Where Dave Ramsey’s Baby Steps Really Came From

Episode Date: April 28, 2025

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Well, hey you guys. So today we're going to go back in time. We have a little story time with Rachel. Because I thought it would be really interesting to talk through kind of the history, the backstory of the Ramsey Baby Steps. We talk about the Baby Steps so much on this show because it really is the plan that we use, the filter we use when it comes to talking about your money on a really tactical level. Now, if you've not heard of the Ramsey Baby Steps, there's seven steps that are the basics of personal finance that you do. due in order, everything from paying off debt to saving, investing, kids' college, paying your house off, all of it. So if you've ever wondered, like, where they came from, again, we're going to kind of just give you a little deep dive into it because I think it does give you some perspective. And it's interesting, too, that these steps have stayed the same pretty much since the beginning.

So this all started back in 1988 when Dave and Sharon Ramsey filed for bankruptcy. So long story short, dad was in real estate. was doing flips, so he would, you know, take money from the bank, do a flip, make more on it, pay off the loan, have money, go get another loan, do the same thing. But he was doing that like 20, 30 properties at a time. And then what can happen, it doesn't happen often, but it did. One bank can look down and say, wow, this guy has a lot of debt out and he's young. It feels like a lot of risk.

We just want all over our money back. So they do a thing called they call your notes. And that's what happened. So it took about 90 days and it was to pay back like, I don't know, millions of one point something million dollars in debt. That was all tied up in real estate. So he had to go and try to sell real estate. When you try to sell real estate fast because you're in a pinch like old Davey was,

then you sell it usually for cheaper and you've got to get it through quick. And so there wasn't enough money coming in after it was selling to pay the bank off. So basically what had to happen was a lot of these properties got foreclosed on and he had to file for bankruptcy. So when that happened at the very bottom of everything, I was a baby at the time. My sister was a toddler. It was kind of this like moment of realizing, wow, I thought I knew what I was doing when it comes to money. I thought I was being smart.

And obviously my plan didn't work. So what really is this thing with money? Like how do I really get myself in a position that I can be successful, but do it the right way? And then at the same time, people were coming to him being like, hey, we're in trouble. and we may have to file for bankruptcy. Can you walk us through it? You know, what did that look like? How are you doing now?

And then he slowly but surely, really organically, started coaching people when it came to the subject of money and people that were struggling. And so that compounded and compounded. And then he wrote a book and then got a, you know, a radio show on this broke radio station here in Nashville. And, you know, it just kind of kept building and realizing there was such a need out there for people

that were struggling with this subject in life, which is money. But while he was coaching people, he realized that some of it, you know, wasn't clicking because people, you know, were paying off all of their debts, you know, at the same time trying to like attack all of them and then something would happen and their car would break down or their roof would leak and then suddenly they got a big bill and they were back in debt. And so it was kind of this light bulb moment that went off where he was like, okay, I need to like rethink some of this and how this really works. And if you don't have money saved and something happens because

things will happen, you go right back to the bottom again, back into debt. So that's, that is when these steps started to form, and that's when baby step one was born, and that is to save a $1,000 emergency fund. And establishing that safety net is really, really key, and that $1,000, you guys, has not changed since then. And with inflation, you know, cost of living, everything, it hasn't changed. Because in one sense, it's not so much about the dollar amount. It really is about the behavior that is changing. And so he wanted this step to be one that you could do really quickly. I mean, if you sell stuff, you work extra, you do what you can, you cut things out. I mean, to get $1,000, you want to get a quick win because so much about money is behavior change.

And if you don't have a quick win, it's easier, you know, more than ever to fall off the train. So to get that quick win, it was really key. And then over time, it's like, okay, for most things, it's not $1,000, most emergencies, things that don't have to be put it off. Now, if something big happens, you obviously pause everything and work on that emergency, But that quick win was really the basis for the $1,000. And that's why that amount hasn't changed. So the $1,000 emergency fund was there. And then that's when you started paying off debt and realizing, again, that this was all

behaviorally based. So paying off the smallest debt first was key. And so if you hear about the debt snowball, it is not about the highest interest rate. It's not about math. It's really about paying off that smallest debt first because that quick win was what was really, really important. So if you're on that step, we tell you to list out all of your debts, smallest to largest, regardless of the interest rate, pay minimum payments on everything, stay current, but pay off that smallest bill first. And studies have been done, like from Harvard and all these places between the debt snowball, which is that way versus the debt avalanche, which is paying off the highest interest rate first.

And studies are showing more and more that you pay off faster all of your debt using the debt snowball method because there is something about the momentum that occurs in the human space. spirit that is so, so important. So that's what occurred in Baby Step 2. Now, one subscription that's much more affordable and so worth it is delete me. This is one of my favorite services, you guys, because Delete Me goes in and removes your online information from Data Broker websites. Because you don't realize it, but there's companies out there that will collect your data, and then they sell your data. They make money off of your information. And then you get spammers and scammers and scammers and all the things, and it's exhausting and annoying. So Delete Me. That's what they say. They delete you from the internet.

And you love that. So you can get 20% off an annual plan at join deleteme.com slash rachel or click the link in the description. And then once all your debts paid off, then you have all this free income to be able to say, hey, I can take this income and I can save up, which is babysat three, three to six months of expenses. And this is a really important part of the process because having cash on hand for big expenses and even big things that happen in life from health to losing a job, you know, it's really powerful to say, gosh, I have money in the bank that can keep my family afloat.

And the stress when something big happens just isn't there. It's more of an inconvenience than a stress point. So that baby step three was big. So then once that fully funded emergency fund is there, then you move on the baby step three B. And this one actually came a little later in the history of the baby steps. So we kind of added this as an asterisk because people were like, okay, great, I don't have debt. I have an emergency fund, but I need to buy a house. So when do I do that in this process?

And you don't want to buy a house when you're deeply in debt. want to buy a house when you don't have an emergency fund. So we call this Babyset 3B, where you save up a down payment on a home. So that's kind of the asterisk there. And then once you do that, then you move on to babysap forward. So you're going to invest 15% of your income into retirement. So this is 401Ks, Roth IRAs, 403Bs. And we say to pause investing while you're doing the first three baby steps, because again, it's this focused intensity that we found you get progress. You make progress so much faster when you do that. And when you get to babysept four, you can invest 15% of your income where a lot of people that are investing in retirement are investing like

four to five percent of their income. So you really get to bulk up and you'll catch up for sure and actually have the income to do it and it's sustainable. And then once you're doing that, you're going to do baby step five at the same time. So after you fund your retirement, then kids college is next. So if you have kids saving up in a 529 or an ESA and looking into options for your kids college to prep for them to go to school if you can. And then anything extra is baby step six where you pay off the house early. And we're finding people are paying off their homes from like nine to 11 years on average, which is pretty awesome. So there's something powerful about seeing people do the baby steps because it's been around for so long that we're seeing people on the baby steps

six and seven, you know, parts of this plan, which is great because it does take a while, right? I mean, some of this, I mean, it's going to take years for some of these steps to happen. But that's the great thing is we're seeing people do it in real time and it's happening and it's just a really amazing thing. So paying off your house, it's an option, which is crazy. And we're seeing people do it. And then once you do that, no house payment, nothing. Then you're on to Baby Step 7 and that's to build wealth and be generous. And so you continue to invest your income and continue to up your giving because giving should be a part of your plan, regardless of what babysep you're on.

but especially on Baby Step 7, I mean, you're able to give so much of your income away, so much of what you're making because you don't have any other payments. And that's when you really, really get to make a big dent into that part, which is just a beautiful thing. So again, the Baby Steps, it is the plan, you guys, that I think it's been so effective because it's a plan. And I think we've learned this a lot in the way you build habits and psychology and sociology and sociology.

Like you pair all these parts of life together and see how humans, how we interact. towards parts of our lives. And when you give people a step and a clear plan, a clear path, they're much more effective. And they're actually probably going to do it more than just principles and ideas. And so that's one of the powerful things about the baby steps as you get, you see the finish line, which is an amazing thing. So another great part of this entire puzzle, if you will,

when it comes to the baby steps and Ramsey Solutions, is one thing that I love is that it came out of failure. Like it came out of big money, mistakes that were made to the point of bankruptcy. And so what I also think is that it gives hope because when you are so honest about where you are and yet you're changing for the better and you're actually have a plan that gives you hope, that is something to stick to. And so not only did Dave do that, hopefully I show you along the way the humanity of which I live and the imperfections that happen, but I would also encourage you that if you have been a listener for a while or you have

been watching this stuff and you're applied this, share your mistakes with people. I think it really resonates with people when in the struggle and in the hurts, the times that it's like, gosh, I don't know what I'm doing. That's where people relate. And so if that's part of your story, dive into that because, again, I think that's where a lot of redemption can happen for other people because people change people. And so you could be part of that change. So that's one reason, again, at Ramsey, we're so passionate about helping people is because money does create a lot of pain. It does create a lot of shame, but when you can give someone hope and a plan, it is a beautiful, beautiful thing. And I just love that at the end of the day, it's a plan that gives people freedom and

autonomy over their life and their money. It's really an incredible thing. So no matter where you are on the baby steps, continue to push forward towards your financial journey, one step at a time, because life is this, okay? There are going to be ups and downs for sure, and we've all experienced that. But keep moving forward. You have got this. Now, if you want to hear it, even more about the wealth building process. I have a great video with Dave about using the baby steps to become a millionaire. So check that out.

All right, you guys, as always, make sure to take control of your money and create a life you love.