The Truth About Dave Ramsey’s 7 Baby Steps

Baby Step 1: $1,000 Starter Emergency Fund (0:00)

Brian: No one can deny that Dave Ramsey has helped millions of people start taking their finances seriously and even get out of debt. And Brian, I am so excited about this because if you know Dave, you know his seven baby steps. There’s his step-by-step money management plan. And while we respect that Dave has led a lot of people to financial success, we do feel like there’s a better way to do money. We’re going to compare and contrast the baby steps with our very own system to show what we agree, disagree, or just want to fight. Just kidding. We don’t really want to fight, Dave. We’re going to start out with what might be the most controversial baby step. Baby step number one.

Bo: And Brian, I am so excited about this because if you know Dave, you know his seven baby steps. There’s his step-by-step money management plan. And while we respect that Dave has led a lot of people to financial success, we do feel like there’s a better way to do money.

Brian: We’re going to compare and contrast the baby steps with our very own system to show what we agree, disagree, or just want to fight. Just kidding. We don’t really want to fight, Dave. We’re going to start out with what might be the most controversial baby step. Baby step number one.

Bo: Baby step number one, according to Dave Ramsey, seven baby steps is save $1,000 for your starter emergency fund. Well, and look, Dave, when he wrote this, this is for people just starting to take their finances seriously and just starting out of the gates, but it’s harder than probably most people even realize. We know that 59% of Americans, literally six out of 10 Americans, don’t make it past this first baby step. But I do want to give Dave a little bit of grace because he has even said himself that they know $1,000 is not enough for an emergency fund. He goes, I think I’ve even heard Dave says, “It was never about the $1,000.”

Brian: This bothers me because they say it’s all about mastering the behavior, building good saving habits, you know, eliminating bad spending habits, but what’s the purpose? Was it just arbitrarily a thousand? Now look, in 1995 when this was written, maybe $1,000 was more than it was. But our take: $1,000 is just not enough.

Bo: Yeah. Even for a starter emergency fund, it’s not going to get the job done. Dave says it’s about mastering behaviors, but in our world, we think it’s more about not allowing your financial life to be taken off the rails. And in the world in which we live today, there are a number of things that can take you off the rails more.

Brian: We gave examples. These are basic things that could happen to anybody. If you just have to go to emergency room, look at that. It’s going to cost around $2,500 bucks. If you had a major home repair, something you had to do that blew up in your house, a hot water heater or so forth, $2,000 to $4,000. By the way, that didn’t even cover my HVAC system. That’s going to be even more. Car transmission, $2,300. If you had an emergency travel, meaning you had to go fly somewhere to go visit somebody in the hospital or or even worse, go to a funeral, that’s probably going to cost somewhere around $2,000. All those things would leave you making desperate decisions if you only had $1,000 to your name.

Bo: So, if that’s the case, this step has to be about more than just behavior. Your emergency fund is a crucial tool, like I said, to keep your life from going into the ditch. So, while $1,000 is a way to think about it, a way to start, we think that it should be different. It shouldn’t be this one-size-fits-all, when it comes to actually doing this well, we think that the solution should be unique to your unique circumstances and your unique risk.

Brian: Yeah. And I’ve seen other systems where they change a thousand to 2,000, but that once again, it’s not unique. We think that this is why let’s set up the compare and contrast to baby steps number one versus the Financial Order of Operations step number one. We think it needs to be customized to you and that’s why our step number one is have your highest insurance deductible covered.

Bo: And so the very first question you might be asking is okay guys well what is an insurance deductible? As a reminder this is the amount that you’re going to pay out of pocket annually for qualified expenses before insurance kicks in. And so for most of us with our health insurance, there might be a $1,000 deductible or a $500 deductible or a $2,500 deductible, it is very much dependent upon your unique health insurance plan. And you can walk this through all the different types of insurance you need. Again, it needs to be customized to your unique circumstances.

Brian: This is the part where I know it seems more complicated, but if you think about the fact is where do bankruptcies come from? People usually file bankruptcy because they’re having to make desperate decisions when bad things have happened to them. This step, the way we’ve designed it is we’ve gone through all the catastrophic stuff, the car crashes, the home damage, the health emergencies, this stuff. Plus, it also is now going to force your behavior to where you actually go and account for and go see do I know what these what my risk are, what is catastrophic in my life. I think it’s a two-fer. Not only do you get to cover these risks, but you also are forced to go and do the exercise of figuring out what protections do I have or what do I need to seek to protect myself from.

Bo: And that’s why we like it being your highest deductible because if you can cover your highest deductibles, it means you can also cover all of the other deductibles that are less than that. So, it protects you from a wide range of emergencies. And we love that it is custom to you. While $1,000 may be enough for your neighbor, that’s not to suggest that it’s enough for you. We want to make sure that personal finance is indeed personal for you. And while it is likely going to be more than $1,000, I do think this step is great because it’s still small enough that most people can knock it out quickly. In most circumstances, depending on what your highest deductible is, it’s not going to take you 6, 8, 10, 12 months to be able to build up that amount of cash.

Brian: No, just go write down all your insurance deductibles and choose the highest. It’s not the sum of them. It’s the highest. So, you’re going to be able to move out of that pretty quickly. And then that leads to step number two.

Baby Step 2: Pay Off All Debt Using the Debt Snowball (5:50)

Bo: So, according to Dave Ramsey’s baby step, step number two would be pay off all debt using the debt snowball except for the house. And you may be wondering, okay, what’s the debt snowball? It’s this idea that I’m going to line up all my debts and whatever the smallest balance is, I’m going to pay that off and then I’m going to go off to the next smallest, next smallest, next smallest, next smallest so that I can build momentum through the strategy.

Brian: Now, this is where at a young age, when I was just 20-some year old Brian. I had a friend who was very successful starting out in their career and they basically paused doing 401k. They paused just Roth anything because they were trying to knock out their low-interest student loan debt because realize step number two is pay off all debt using debt snowball except for the house. And that’s the part where I was just like, “Oh yeah, I get it. You’re supposed to have intensity.” But do you realize the opportunity cost of what that intensity is going to cost you in the long term? Because there’s stats out there that show that it takes people 2 years to get to that point where you pay off all those debts. Well, I think about I mean, you’ve seen our wealth multiplier, Bo, that if you just took what the average person makes, we could be talking about something that is hundreds of thousands of dollars in the future. Plus, how many people get led down that primrose path of becoming debt crusaders and never get into building wealth through discipline and saving and investing through automatic saving strategy. This stuff scares me a little bit.

Bo: But I again I want to give Dave credit. One of the reasons why he says this is the debt snowball does help you stay motivated. So if it is something that is going to take two years, it is a mechanism to stay motivated. But again, we think that there is a better way to do money and we think that rather than paying off debt in step two, we agree that it’s dangerous and we agree that it should be eliminated and we agree that it should be a high priority, but we think that Dave is missing a step. We think while we can be on the same page with all those, there is something so exciting that Dave is missing that is likely leading a lot of his followers down the wrong path.

Brian: Well, I think this is where the optimizers, all of you guys who, you know, I think I think about my engineers out there, my attorneys, my pilots, people who just you respect what Dave has created, but then you start going, “Wait a minute, my student loan debt is like at 4.5%, 4%. I’m missing out on what?” So here’s where our take just completely takes you in a different place. We love get out there and get that free money because goodness gracious if your employer is offering you 50%, 100% guaranteed rates of return that blows that 20% you might be paying on credit cards. Look, I hate it. I hate credit card debt with a passion. You know we have “credit card use is okay, credit card debt? No way.” Because we don’t allow any credit card debt whatsoever, even if it’s 0% interest. But if I can get you to get out there and get that 100% dollar-for-dollar match from your employer, your future self is going to love you for making that decision. So rather than passing on getting that, rather than going and prioritizing paying off all of your debts, we indeed want you to go get that free money. We want you to recognize that a 50 to 100% rate of return is more powerful even than a 20% cost on interest rates. And if you don’t have a match, maybe you’re someone who says, “Hey, I don’t have access to a 401k or a 403b or I do have access, but there is no matching.” That’s okay. If you don’t have that, then great. Go on to step three. But if you are someone who has the opportunity for free money where all you have to do is show up and your employer is going to put money in your account, you cannot walk away from it even if you have high consumer loans standing out there.

Differentiating High-Interest vs. Low-Interest Debt (9:55)

Brian: Well, and that leads to because look, I want to make sure people don’t mishear us. If you look and compare step two to FOO, Financial Order of Operations, steps two and three, we also hate debt, but we want you to understand and differentiate. Not all debts are created equally is that there is we differentiate between high interest debt, not just all debt except mortgage. We say you need to know what’s high interest debt versus what’s low interest debt so you can prioritize and not work against your long-term wealth building and optimize the path.

Bo: Yeah, we know that our dollars can be powerful and we want every dollar to be used in the best way that it can be used. And so satisfying high interest debts might be a good way to use that. But satisfying low interest debts might not be. So that naturally begs the question and a lot of people ask us, well, how do I know if something is high interest or if something is low interest? We have a few benchmarks that you can use. For example, student loans, which a lot of people now in this country are coming out of higher education. They have student loans. Well, if you’re someone in your 20s and your student loans are below 6%, it might not make sense to prioritize paying those off quickly. By the time you get to your 30s, that number is 5% and by the time you get to your 40s, that number is 4%. When it comes to auto loans, again, assuming that you’re following 20/3/8, meaning you put down 20%, you do not finance for any more than 36 or 3 months, and your total auto payments don’t exceed 8% of your gross income. If your car loan is below 10% in your 20s and you’re inside of 20/3/8, you might not want to accelerate that. In your 30s, it drops to 9%. In your 40s, it drops to 8%. And Brian, you already alluded to this. When it comes to credit cards, you got a pithy little saying you love to say.

Brian: Yeah, I like to say credit card use is okay. We got love the miles, love the rebates I get on that, but credit card debt, no way. So, we also don’t want you to have any credit card debt whatsoever. But it’s just that we think that there’s an optimization. Now, a lot of people are gonna say, “Man, this seems like y’all have added some layers of complexity.” Yes. Because money, if you’re going to optimize to do this, that’s why we try to teach you. This is not one of those things where we make it so simple that it’s well-intentioned, but it doesn’t actually give you the road map to actually how you create and build for the long term. That’s why we’ve tried to go into the details. So the 22-year-old version of yourself actually feels like they know what to do with their next dollar.

Debt Snowball vs. Debt Avalanche (12:25)

Bo: And so one of the places or one of the ways that even we think that adding some sophistication on the thought process can improve the efficiency of the plan is even how you pay off your debt. We’ve already noted that Dave likes the debt snowball. I’m going to list all my balances. I’m going to attack the smallest balances first. And while that is behavioral and that will give you some motivation to stay motivated, we actually love the avalanche method. Rather, I’m going to list all of my debts from the highest interest rate to the lowest interest rate, and I’m going to start paying off the highest interest rate because that’s going to have the biggest bang for my buck, the biggest ROI on my strategy. Now, even though we love the avalanche, we think it is superior to the snowball, do you know what method we want you to pursue? Whichever method you’re going to stick to, whichever method you will have the staying power to get out of step three to get out of that high-interest debt. So then you can move on to the further steps in the Financial Order of Operations. So know thyself. We don’t if you need to do the snowball, knock yourself out. We just we’re optimizers. That’s why we like Avalanche.

Baby Step 3: Fully Funded Emergency Fund (13:30)

Brian: But that does lead and look I’m feeling a little guilty Bo about because I mean if you watch this and see my passion on this a lot of people might think “these guys must not like what Ramsey does.” No, we love how Dave gets everybody out of debt and that’s why I think it’s good. Let’s start doing some consensus building back. If you look at baby step number three save three to six months in a fully funded emergency fund. I do want to give credit to the fact that both in baby steps and in the Financial Order of Operations, we both have two steps devoted to a fully funded emergency fund.

Bo: That’s right. Dave says, you know, you need three months of an emergency fund if you have a stable income or no dependence or you might need six months for more variable incomes or if you’re like a single income household. Are there other potential risk factors that would cause you need a bigger cash buffer? Well, that’s not a whole lot different than what we say. When you look at baby step three, fully funded emergency fund, it’s almost identical to FOO step number four, fully fund your emergency fund of 3 to 6 months of living expenses at your disposal. And by the way, this is real cash. This is like an emergency fund, high yield FDIC type accounts. I don’t want you to fall into the access to cash trap. Both Dave’s plan, our plan. We want you to actually have emergency reserves so you don’t make those desperate decisions when life happens.

Baby Step 4: Invest 15% for Retirement (14:55)

Bo: Now, okay, you said you want to come back to consensus building. You want us to be on the same page and that was great. We were there for approximately one step. But now it changes a little bit because according to Dave Ramsey’s baby steps, he wants you doing baby step four, baby step five, baby step six all at the same time. Now, they do recognize if there is scarcity, they want you to prioritize retirement saving. But we’re going to talk in a moment about why we don’t think that that’s good enough. We think that you can improve upon that by focusing on how you order the steps that you pursue. But before we get into that, let’s dive into baby step number four. Dave says that in baby step number four, he wants you investing 15% of your household income for retirement. That household income is gross household income.

Brian: It’s 15% and then it can be you can do it in your 401k, you can do it in an IRA. And this is pretty straightforward. Now, this is where I’ve been around the block for a while and I’ve told you guys this is right in line with you know, you see industry advice in the 1990s in the previous century. Sure. Everybody was saying, “Hey, you need to save 10 to 15%.” I mean, if you read The Wealthy Barber, which influenced me back in the 90s, it was 10%. Dave is doing 15%. And that makes a lot more sense when you understand the context that when these books were written, we had pension funds. We had, you know, social security and other things that the government safety nets. We were like, these things are going to be much more stable. Now, we’ve kind of the curtains have been open and we realize those are a bunch of promises that maybe weren’t fully funded. The world has changed from these and I feel like there needed to be just like we say there’s a better way to do money. Let’s bring this into the modern century we’re in now. How do we compare and contrast on this?

Why 25% is Better Than 15% (16:46)

Bo: So our take is that 15% is a great start but we’d argue that it’s not quite enough. Rather than shooting for saving 15% for retirement for future financial independence we actually want you saving 25%. It is a larger number than what Dave’s baby steps would recommend. So the question was, okay, why why would we suggest that? Well, there are a few reasons. Number one, people are starting to save much later in life. I mean, yeah, maybe if you’re someone who comes out at age 20, 21, 22, 15% would likely be okay. But we know that right now most people don’t actually start saving for retirement until they get into their early 30s or maybe even late 20s at the best. So, it’s a little bit later than people have saved historically.

Brian: Well, and even people want more flexibility. I mean, look, the traditional thing in the past was you go get a job in your early 20s and you retire at 65 and that’s just normal. But now, we have so many movements out there where people want to own their life that much sooner. Well, guess what? If you want to retire sooner than 65 to 70 years of age, you’re going to have to take more accountability and put more pressure on your shoulders and save more than that 10% to 15% of the latter years of what people thought was the standard.

Bo: You said you have to take more of that responsibility on your shoulders because you don’t want to have to rely on the social safety nets. It is less certain today than it might have been 20 or 30 years ago that those safety nets will even be there or be there in their current form. So while 15% is a great start, when we actually analyze and look at the numbers and think about savings rates and we said, “Okay, well let’s play this through. What’s it look like if someone saves 15% versus someone who saves 25% and how do these numbers contrast?” And when we looked at it, it seemed pretty clear to us that one of these strategies is more likely to get you to the outcome you want to have than the other.

Brian: How dare you do some math on this stuff. Go to moneyguy.com/resources. This is one of our favorite deliverables for you to go out there and download for free. And look, we even say this. If somebody is starting to save and invest in your 20s, saving 25% is very much aspirational. And the research shows this too. You can see both of our systems. 15% in your 20s is going to yield a great retirement for you. But here’s the problem. If you just like we showed the average investor starts saving and investing at age 33. They just realize this. They don’t have the blessing of understanding this content sooner than that. And you quickly see 15% is in the yellow danger zone where you’re not getting a fully funded retirement.

Bo: That’s right. It would suggest that you could replace about 71% of your pre-retirement income. So you’re not at the place where you’re actually able to maintain the same lifestyle that you had pre-retirement. Whereas if you save 25% now you can actually replace 119% of your pre-retirement income at age at full retirement at 65.

Brian: So the reality here is: take control of your life. We’re not just giving you mantras. We’re actually putting math to this thing so you can personalize your financial walk towards independence and know that you’re going to be in a good place. And for many people, especially if you’re discovering this 30 plus, you need to be saving and investing 25% of your gross income.

How You Save Matters: Tax-Advantaged Accounts (20:11)

Bo: So, we differentiate on that. We think you should be doing 25% as opposed to 15%. But we also think that where you put your dollars is important. In Dave’s baby step number four, he just said, “Okay, well, you can save in a 401k or an IRA.” But we believe that there’s a better way to do money. And inside of that better way to do money, there’s a better way that you can deploy your dollars to work just as hard as you.

Brian: Now, look, this is where the context matters, too. Dave specifically talks about retirement savings, and that makes sense. And back when the book was written and a lot of this plan was developed, that’s what you had. But think about what has happened since all this content was written back in the 90s. We’ve got Roth IRAs. We got Roth 401ks. We’ve got health savings accounts. And I think about my 22-year-old self that I came out of school, University of Georgia, with this accounting degree. But I didn’t come from money. Nobody ever told me how money works. And I had all this opportunity, but nobody was actually giving me the instruction manual for how do you make this happen? So, I wanted to create a system that actually told you what to do with your next dollar and the different account structures actually come into play because you need to know the difference between Roth accounts, health savings accounts, it’s not good enough. It’s kind of like if somebody says, “Hey, if you come to me and say I want to lose weight, is it better to just say just go eat better or is it better for somebody to actually come up with a nutritious plan that actually takes into account the calories, takes into account the protein, and that’s what we try to do. Yes, it adds complication to it, but it also adds the teeth of success that’s going to make this stick and work for you in the long term.”

Bo: So, when we think about Dave’s baby step number four, invest 15%, we would compare it to a few of our Financial Order of Operation steps. First, we think that when it comes to saving that 25%, the first place that you should stop after you’ve done your employer match in your 401k are the tax-free savings vehicles. We love Roth IRAs and we love HSAs for those are eligible. You get to put dollars in these and they will grow tax-free in retirement. So, this is some of the most powerful dollars that you will save inside your army of dollar bills. Take advantage of that tax-free money. And then you move into FOO step six, which is maxing out your retirement options. These are the 401ks, the 403bs, the simple IRAs, the 457s, the other incentivized savings opportunities that you have that will grow tax deferred where you put money in, you get a present-year tax deduction, and when you pull them out in retirement, then you pay tax on them. And the government incentivized you to be able to take advantage of these. If you want to know more about employer sponsored plans and 401ks, we actually have a great episode that just released called 401k by age that walks through everything you need to know about 401ks, why they’re awesome, and why you should take advantage of.

Brian: And I don’t mind sharing the why behind all this. When you look at steps, you know, five and six, they’re very much tax advantage, trying to get you to reach 25% savings rate, taking advantage of the account structures, the tax benefits, and all the other things. But then that does lead to our step seven. And this is something I also think is very unique is a lot of these other systems out there, they just tell you to do this, but then where’s the part where you pause and say, not only should we be tax favored, but how are we going to use this money? Because I will tell you, you can graduate from step six if you even if you’re in a lower income situation. You might not fully fund a your retirement account at your employer, your 401k. Because if you make say you make $70,000, $80,000, you know, even if you’re doing 25% between your Roth IRA and your employer plan got the full match, you still might not be getting the full $23,000 that the government allows. That’s okay. You can still move on to step seven because you’ve reached the 25%. Because I like it when we reach step seven. Now you think about, am I ahead of the curve, behind the curve, or right where I need? Because maybe I’m retiring at 55. You actually start thinking about how you’re going to use this money. And you once again repurpose or restructure what do I need to be saving my next dollar going forward because it might look different if you need to have an after tax brokerage account because you’re retiring earlier. The customization is very important and we tried to once again not just tell you feel-good stuff like “eat better to lose weight.” We actually try to give you the tactical process so you can actually accomplish this and know what to do with your next dollar.

Bo: Dave’s baby steps, especially in this section, seem to focus on what you do. But we don’t think it just matters what you do. We think how you do it also matters. So we want to equip you with the tools to be able to do that. It’s why we have detailed FOO step five, FOO step six, and FOO step seven the way that we have.

Baby Step 5: Save for Children’s College Fund (25:10)

Brian: So now, as we continue to move on in Dave’s baby steps, we go from baby step number four, invest 15%. To Dave then just jumps immediately to baby step number five, save for your children’s college fund. And when Dave recommends saving for college costs, he recommends using either an educational savings account or a 529 account. They want you to prioritize saving for retirement, but then saving for the kids.

Bo: But I think that there’s once again more nuance that we need to go into in our take and don’t mishear us when we talk about our take. We love saving for kids college. It’s an important part of our financial plans. And Brian, you even are on the other end of this now having save for college. You’re now at a place where the planning that you put into that has paid off.

Brian: I’ve got a daughter who’s about to graduate from college and the 529 was a blessing. But I will tell you this. We recognize that college is important, but your retirement is more important than the kids. So, you have to make sure you get the priority right because if that, you know, and maybe for some of you, it’s not the same because some of you might, your kids might be going to trade school or you just, you don’t even want to, you want to make them work through college just like you did. We think that this is a personal take in the personal finance and people’s goals for college might be different.

Bo: Yeah. So where Dave says, “Hey, baby step number five is save for college.” As financial advisors, we recognize our job is to help you reach your financial goals, whatever those goals may be. If they are college, that’s certainly something that you can pursue and you can move towards. But our Financial Order of Operation step is a little bit different where Dave says in baby step five save for college. We would wrap that into a bit bigger category in FOO step 8 that we want you to save for any prepaid future expenses that you might have.

Brian: And look the good time uncle Bobby calling this is the abundance goals is because when you get to saving and investing 25% for the future, I want you to feel released to start living your abundant life. And that’s going to be different things for different people. For some people, yes, step eight is going to be funding the kids college, but for others, it’s going to be a choose your own adventure of a lot of other different choices.

Bo: Yeah, maybe you want to take that dream trip that you’ve always thought about. Or maybe now is the time that you’re at the place in your financial journey where you can do the home renovation. Or you want to begin investing in real estate or you want to try to buy your first rental property or maybe you want to upgrade the automobile to now the car that’s a luxury automobile that you’ve not driven. Whatever priority you have, we want you to be able to define that inside of step eight once you’ve taken care of your future self. Then you can begin to make decisions to take care of your current self.

Brian: Yeah. I mean, because I think that this is the part when you’re doing the make the good habits as easy as possible. And that’s what saving and investing 25%. It does free you to now make the best decisions for what you want abundance to look like. And that’s going to be so unique that I hate to just pigeonhole you into one little path. We want to give you multiple choices to reward you, give you a dividend for all the good decisions that came up from steps one through seven.

Baby Step 6: Pay Off Your Home Early (28:26)

Bo: Now remember Dave says that all he wants baby steps four, five, and six to happen simultaneously. So save 15% for retirement and save for college. And then we get into baby step number six. And baby step number six according to Dave Ramsey baby steps is he wants you to pay off your home early. You’ve already exhausted all of your other debts earlier on in his plan. And now they want you to pay off the mortgage and they want you to be house debt-free.

Brian: And look, Dave loves people to be 100% debt-free. I mean, we’ve all heard the debt-free screams. I gotta tell you, we live in Dave country. So, we know a lot of people and a lot of his folks, I mean, it always it’s one of those things. I meet them and then they’re in like their early 30s and they’re like, I was completely debt-free. I paid off my house when I was 32, 33 years old. And I’m always like, that’s great. I just hope that you didn’t skip all the make wealth stuff that you didn’t just jump right into the maintain wealth. That’s the part that does give me a little pause that I think we ought to explore. And what is our take in compare and contrast these differences?

Bo: Yeah, we also love for folks to be completely debt-free, but we love for that to be our retirees, our people moving towards financial independence. That’s when we want you to have 100% debt freedom because being completely debt-free is wonderful. And it’s an amazing thing so long as you’re hitting your other financial goals first. But we’ve seen this firsthand where people will get so excited about the Ramsey plan that they will now begin to pursue and attack paying off that mortgage when there’s a good chance they’re not actually on the path to reach financial independence on the timeline they wanted to.

Brian: Here’s where you pair multiple baby steps that I see potentially impairing the make wealth phase. If we kept investing for the future at 15% and then now we marry that with now we’re going to be completely debt-free even on our low-interest mortgage, you might run afoul of because look I’m very clear when I wrote Millionaire Mission that for somebody who’s under 45, please, please, please make sure you’re harnessing the full complete power of compounding growth. But then yes, once you’re post 45 and you’ve hopefully set up the ground rules of good financial management and you’ve set on the rules of the Financial Order of Operations, yeah, I want you to have everything paid off. There’s a time and a place for all these things, but it breaks my heart when I find out that 32 year olds, stopped after they hit 15% and then paid off a 3.5% mortgage. They have to be looking at the world now and being like, “why did I pay off a 3.5% mortgage when now mortgage rates are 6.5%, 7% and all those years I didn’t fully fund my Roth for my IRA or the work. What could that be now?” I mean there’s just those things would have should have could have just tears me up inside a little bit.

Bo: But don’t miss we do like paying off debt. We even like paying off low interest debt. Why you can contrast Dave Ramsey’s baby step number six, pay off your home to what we would call in our FOO step number nine, pay off low interest debt. Because yeah, you might have a mortgage, but this also might be the stage where you have that low interest student loan debt that it did not make sense to prioritize earlier in your journey, but now at this stage, we’re okay with it. So, it’s not just mortgages. If you are on the path to be debt-free, this is where we want you to knock off all of those other debts, assuming that you’ve taken care of your saving and your other financial goals first.

Brian: Yeah. And this brings back remember how I was talking about that friend who was an attorney. She was paying off her low-interest student loan debt before she was getting the free money from her employer match before she funded a Roth IRA. That’s why I love that when we talk about low interest debt, it’s not just mortgages. It’s talking about those if you got low interest student loan debt, that’s okay because it frees you to go make wealth versus, you know, just focusing on maintain when maybe you haven’t even built the wealth in the background in the first place.

Bo: Now, and this is where I think our stance is a little bit different than Dave’s too. If you’re not at or nearing retirement, even doing step number nine becomes an option. You may be someone who is all the way to step 9 in the Financial Order of Operations, but you’re still 10, 12, 15 years away from retirement and you have a 2.5% mortgage. You say, “Yeah, okay. I could do that.” Or, “I really like the idea of continue to put my dollars to work.” And I think that I can earn more by investing my dollars than I can by paying off this low interest debt. We want you to be in the driver’s seat to be able to make that decision because above and beyond 25% you get to decide what you do with your dollar. So that’s how our paying off low interest debt contrasts with Dave’s paying off your home.

Why Order Matters (33:17)

Bo: Now we made this illusion earlier, Brian, that Dave wants you doing four, five, and six all at the same time, but we feel a little bit different because we think that the order matters.

Brian: This is back to the point that instead of I want it to be more nuanced so you feel like you know what to do with your next dollar and yes he gives you priority but it’s still kind of nebulous. It’s like you know it’s like what’s the next thing I need to do whereas I actually wanted you to feel like it was prescriptive. So you felt like you had somebody who was right there in the co-pilot seat with you telling you, “Hey, this is what you need to do to optimize, to get yourself through this and have success,” but then also give you enough slack in the system that when you do these things, you know that there’s light at the end of the tunnel for all this hard work. So you don’t feel like you’re being repressed or pushed upon. You’re actually looking at this as you get freedom elements through every stage of your wealth building process.

Brian: And we want it to be super easy to get your head wrapped around. And Dave’s okay. I want supposed to do four, five, and six all at the same time. Well, how much do I put and what and what? That’s why we designed the Financial Order of Operations so you can go from one step to the next step to the next step to the next step to the next step so that you can be confident that you’re on the right path, that you’re moving in the right direction.

Baby Step 7: Build Wealth and Give (34:40)

Bo: And then that brings us to baby step number seven. Dave’s final baby step is to build wealth and give. This is the stage where he says, “I want you to live like no one else that one day you can live and give like no one else.”

Brian: And look, we’re united on this. I love that we kind of get to close out in something that we’re consolidated on is that Dave, just like we believe, we say that giving and being generous is rewarding because really it’s an amplifier of who you are. If you’re generous, when you have nothing to your name, guess what? When you actually have success, we think it’s going to amplify the person you are. So why not go ahead even when you don’t have resources, we want you giving early and often. And I think Dave is the same way. He wants you, but he also is built in with step seven is not only were you maybe tithing or giving generously with a cheerful heart when you were starting out. He has this step seven where now you can even give above and beyond even beyond that point.

Bo: Now I think what’s interesting is he calls step seven build wealth. Now, our take is a little bit different because we would argue that as you’re working through the Financial Order of Operations, you’re not trying to get to the point to where you can start building wealth. You’re actually building wealth the entire time. Every thing that you do is part of building wealth. It’s not like you go from this stage of not being wealthy to all of a sudden being wealthy. This is what the make wealth phase is. So, we would reframe it. We would say that at this stage rather than build wealth and give this should be the stage that Dave calls continue building wealth and continue giving to others not just okay start those two things at this stage.

Brian: And as I’ve already shared we think the generosity is completely rewarding and that’s why when you compare and contrast I think we’re very united on looking at what Dave does in step seven as well as what we talk about in FOO, it’s not even a step because it’s a ground rule. Ground rule. Generosity is rewarding. We think everyone, whether you have resources, whether you’re just starting out, you need to give with a generous heart because it is an amplifier of who you are and what we think gives you purpose on this planet.

Final Thoughts (36:58)

Bo: Now, please don’t mishear us. We are Dave fans and there’s no doubt that what Dave has been able to do and the financial influence that he has had has been amazing and remarkable. But we believe that there is a better way to do money when it comes to systems to setting people up for long-term financial success. We feel that the Financial Order of Operations is superior because it gives you literally a nine-step instruction manual of what you should do with your next dollar so that you can live the life of abundance you want to live.

Brian: Both of these plans are going to be successful because they’re a plan. They actually give you steps to start doing things. But Dave’s plan is set up for debt freedom. I like to think of what makes our mousetrap better is it’s set up for optimizing and building financial freedom. So know thyself. If you’re somebody you are stuck, you just can’t even you’re stuck in maybe you heard that stat that close to 60% of Americans can’t come up with $1,000 and you look at yourself and go that’s me. You know, Dave is going to be tremendous for you because I know nobody that gets people out of debt better than the Ramsey organization. They crush it on getting people motivated on paying off that debt, focusing on those behaviors. But I think there’s going to be a number of you who are going to watch this and you’re going to see our heart and you’re going to say, “Yeah, these guys, they didn’t really beat up on Dave.” But I have noticed just like the 20-some version of myself, it was like, “Wait a minute. This brilliant attorney friend of mine is not going to go get that free money from their employer. We’re not going to use credit cards at all just because Dave had trouble paying down debt and I can go get that 2% on every dollar because I’m a financial mutant and let my dollar go that much further.” There’s going to be just things that you’re going to whisper in your ear and go, “I think this is good, but I think I need something better. I need a graduate level because I don’t have discipline problems with debt. I don’t struggle with this.” And that’s what we get. More Americans definitely fall into this debt servitude problem that Dave is addressing. But I think that we can address that, but also help you optimize. And that’s why if you are more comfortable with that, come on in. The water’s warm. We welcome more and more financial mutants every day. I think that’s why it exists that Dave can do good for the financial world. We can do good for the financial world. And I just love that we live in a time that there’s great resources out there for you to maximize not only every moment of your time, but what your money can become. So you can actually focus on what matters to you. Build your time to do what you want, when you want, how you want on your terms. I’m your host, Brian Preston. Mr. Bo Hansen, Money Guy Team out.