The 7 Baby Steps
Save $1,000 for a starter emergency fund
A small buffer so an unplanned expense doesn't become new debt.
Pay off all debt (except the house) — the debt snowball
List debts smallest balance to largest, regardless of interest rate. Minimum payments on everything except the smallest; throw every extra dollar at that one until it's gone, then roll the payment into the next.
Save 3–6 months of expenses — fully funded emergency fund
Based on expenses, not income. One-income households lean toward 6 months; two-income households can lean toward 3.
Invest 15% of household income into retirement
15% of gross household income. Typical order: employer 401(k) match first, then Roth IRA, then back to the 401(k) if there's room left.
Save for children's college fund
Steps 4–6 are worked in this order, but often run in parallel rather than strictly sequentially.
Pay off your home early
Any extra paid toward principal can save significant interest over the life of the loan.
Build wealth and give
Debt-free, fully invested, house paid off — the final step is building wealth and giving generously.
Don't borrow money is a separate, recurring Ramsey principle — not formally Baby Step 7. The official 7th step is "build wealth and give," above.
Reordered to match Ramsey's official 7 Baby Steps (Step 5, saving for college, was missing from the original notes). One note also had "HHI" defined as the Herfindahl-Hirschman Index — that's an unrelated antitrust/economics term and was likely a mix-up; in this context "HHI" means household income, so that definition was left out.
College Savings
- Avoid: insurance-based plans, savings bonds, zero-coupon bonds, and prepaid tuition plans as primary savings vehicles.
- Apply for grants and scholarships before borrowing.
- Work part-time during school to offset costs.
- Knock out required/general-ed classes at a local community college, then transfer to a four-year university.
- Use an Education Savings Account (Coverdell ESA) for tax-advantaged growth.
Coverdell ESA, 2026: capped at $2,000/year per beneficiary (not inflation-indexed), with contributor income limits — full contributions phase out above $95,000 single / $190,000 joint MAGI, eliminated entirely at $110,000 / $220,000.
Core Money Rules
The 20/10 Rule
For consumer loans (cars, personal loans) — not mortgages:
- Never borrow more than 20% of yearly net income, total.
- Monthly payments should stay under 10% of monthly net income.
- Keeps total debt load in check and protects your credit profile.
Rule of 72
Estimates how long an investment takes to double at a fixed annual rate.
t ≈ 72 / r
t = years to double · r = annual rate (%)
Example: at 8% annual growth, an investment roughly doubles in 9 years (72 ÷ 8).
Inflation
To grow real purchasing power, your investment return needs to outpace inflation — earning a nominal 5% during 6% inflation is a real loss, even though the account balance grew.
Automotive
- Pay cash. Get a lightly used vehicle rather than new.
- Bank repossession auctions and private sellers motivated to offload a car can be sources of good deals.
- Cars lose roughly 40% of their value within the first two years — this is a general average, not a fixed rule, and varies a lot by make/model.
- Leasing means you're always making a payment and never own the car outright.
- If you can't pay off a car within 18 months, consider selling it for something cheaper that still gets you from A to B, and save toward a better used car instead.
- Reserve new-car purchases for when you can pay cash without it affecting your financial plan.
- Total value of all vehicles (cars, trucks, boats, motorcycles) shouldn't exceed half your annual income.
- Whatever you'd otherwise spend on a car payment ($300–400/mo is a common range) — save it instead, so you can pay cash for the next car within ~2 years.
- Refinance only if it gets you a meaningfully better interest rate.
- Don't take over someone else's car payments, and don't let someone take over yours — their creditors can still come after the asset, and it muddies legal ownership.
- Skip extended warranties. They're effectively insurance with a markup — saving that money for future repairs usually nets out ahead.
Fund Screening Guidelines
Ramsey's rule-of-thumb filters for picking actively managed mutual funds:
2–6%
Dividend yield (10%+ flagged risky)
0.5–0.75%
Expense ratio (mutual funds run higher)
Worth flagging: the 12% growth assumption is Ramsey's own long-run S&P 500 estimate and is widely considered optimistic — most planners model ~10% nominal / ~7% real, which is also what's used elsewhere in your own FIRE dashboard. Likewise, 0.5–0.75% expense ratios reflect actively managed funds; the index funds in your actual Roth IRA run far lower (0.02–0.06%). Treat these as one author's framework, not universal benchmarks.
Asset Allocation by Age
Classic rule of thumb: 100 − your age = % allocated to stocks. One of several competing frameworks (others run 110 or 120 minus age, reflecting longer life expectancies).
- Growth → mid-cap, medium-size equity
- Growth + income → large-cap, the calmest tier
- Aggressive growth → small-cap, emerging companies
- International → overseas exposure
60/40 Portfolio
A classic balanced allocation: 60% stocks / 40% bonds, pairing equity-driven growth with fixed-income stability. Used as a benchmark for moderate-risk portfolios.
Mutual Fund Types
Equity Funds — ~55% of the market
Pool money to buy a basket of publicly traded stocks. Higher growth potential, higher volatility.
| Tier | Company size |
|---|
| Large-cap | $10B+ |
| Mid-cap | $2B – $10B |
| Small-cap | $300M – $2B |
Sector funds let you diversify across industries, so losses in one are offset by gains elsewhere. Growth funds chase above-average expected returns; value funds target stocks the manager believes are undervalued by the market.
Bond Funds
The most common type of fixed-income fund — invests in government and corporate debt. Safer than stocks, but less growth potential than equity funds.
Money Market Funds
Fixed-income funds investing in high-quality, short-term debt (Treasuries, CDs, commercial paper). Considered one of the safest investment types; roughly 15% of the total mutual fund market.
Balanced Funds
A mix of equity and fixed-income holdings in a fixed ratio — one fund spanning both growth and stability.
Index Funds
Holdings designed to match or track a specific market index, rather than being actively picked.
International, Global & Emerging Market Funds
- International — companies doing business outside the US.
- Global — companies doing business both in and outside the US.
- Emerging market — targets countries with small but growing economies.
ETFs vs. Mutual Funds
ETF advantages
- Trade any time the market is open, like a stock.
- Required to publish holdings daily — full transparency.
- Generally more tax-efficient — fewer capital gains distributions.
- Support a variety of order types (limit, stop, etc.).
ETF disadvantages
- Trading costs can add up if investing small amounts frequently — buying straight from a mutual fund may be cheaper for that pattern.
- Intraday price swings mean you can buy at a daily high and sell at a daily low.
- Tracking error — technical issues can cause small gaps versus the index they follow.
Mutual fund settlement
Mutual fund sales typically settle 1–2 business days after the transaction, so proceeds aren't immediately available to reinvest — unlike ETFs, which trade and settle more like stocks.
REITs — Real Estate Investment Trusts
Diversified real estate exposure without the commitment of owning property directly. Management quality and tenant quality matter as much as the sector. Required by law to pay out 90% of taxable income to shareholders.
Some REITs own properties directly (equity REITs); others hold debt or mortgages (mortgage REITs). Funds/ETFs of REITs add professional management at the cost of some potential upside.
FFO (Funds From Operations) — the standard metric for REIT cash flow:
FFO = net income + depreciation − gains on sale
REIT Sectors
- Retail — income from tenant rent; favors strong anchor tenants (grocery, big-box). Watch: ongoing shift to online shopping.
- Residential — concentrated in large urban centers; population/job growth, falling vacancy, and rising rent all signal healthy demand.
- Healthcare — hospitals, medical centers, nursing/retirement homes; performance tied directly to the broader healthcare system.
- Office — income from long-term leases; sensitive to the broader economy and unemployment rate.
- Mortgage — rising interest rates tend to push mortgage REIT stock value down.
Specialty / Alternative
Includes hedge funds, managed futures, commodities, and specialty REITs.
+ Convenience
+ Built-in diversification
+ Professional management
− High fees
− Uncontrollable tax events
− No intraday trading
Cryptocurrency
Digital/virtual currency secured by cryptography, making it nearly impossible to counterfeit. Used to buy goods and services, or traded for profit. Runs on blockchain — a digital ledger maintained across a network of computers, designed to be difficult to hack or alter — which lets people transact directly without an intermediary like a bank or government.
+ Decentralization
+ Transparency & anonymity
+ Accuracy & security
− Used in criminal activity
− High volatility
− Still a niche asset class
− Environmental impact (mining)
− Regulatory adoption is slow
Retirement — Roth IRA
- Withdrawals of earnings are penalty-free after age 59½, and only once the account has met the 5-year holding period.
- Exceptions that avoid the early withdrawal penalty: first-time home purchase (up to $10,000 lifetime); qualified college expenses; birth or adoption expenses; disability or death; unreimbursed medical expenses, or health insurance while unemployed; substantially equal periodic payments (SEPP).
- Early withdrawals outside those exceptions trigger a 10% penalty on top of any tax owed.
| 2026 limit |
|---|
| Contribution (under 50) | $7,500/yr |
| Contribution (50+, catch-up) | $8,600/yr |
| Full contribution phases out from | $153,000 MAGI (single) |
| Eliminated entirely at | $168,000 MAGI (single) |
The original notes listed $3,000/$6,000 combined and a $140,000 income cap — those track an older edition of the book. Updated to 2026 IRS figures above.
Real Estate & Mortgage
- Buy a house once you're out of debt.
- Put 20% down to avoid Private Mortgage Insurance (PMI) — PMI protects the lender against your default, not you, so it's effectively foreclosure insurance for the broker.
- Get a 15-year fixed mortgage rather than a 30-year.
- Keep the payment at or under 25% of take-home pay.
- Skip biweekly payment programs — they often charge a setup/processing fee for something you can replicate yourself for free by adding 1/12th of a payment each month.
- Ask the lender for manual underwriting instead of a hard credit pull, where possible.
- Avoid 80/20 loans (a second mortgage used to dodge PMI) — the higher interest rate on the second loan usually costs more over time than PMI would have.
Insurance
Life Insurance
8–10x salary in term life insurance, no whole life or other specialty/cash-value policies. This is Ramsey's well-known "buy term, invest the difference" philosophy — a widely held but not universally agreed-upon approach; some planners see a role for permanent insurance in specific estate or business contexts.
Child term rider > standalone kid policy
A child term rider added to your own policy is generally cheaper than a separate policy for a child — redirect what you'd have spent on a standalone policy into their ESA instead.
HSA
Tax-free, but pairs with a High-Deductible Health Plan — lower premiums in exchange for a higher deductible.
Long-Term Care
Consider adding coverage around age 60+.
Homeowners Insurance
Get replacement-cost coverage where it's available. If not, keep your declared property value updated — underinsuring against current rebuild cost is the real risk.
The original note cited insurance covering "120% of policy value." Extended-replacement-cost riders exist and commonly run somewhere in the 110–150% range, but the exact figure is policy- and insurer-specific — worth confirming directly with your provider rather than treating 120% as a fixed industry number.
Estate Planning
- Don't prepay for a funeral — invest that money instead, so it stays flexible and keeps growing.
- Get a mirror-image will drafted, so each spouse leaves everything to the other. An estate attorney can draft this.