values based planning

A Comparison of Dave Ramsey’s 7 Baby Steps to a Values Based Planning Approach

“Is there a difference between your values based planning approach and Dave Ramsey’s program?” a reader asked.

“How do they compare?”

My reader had read several of Ramsey’s books and she wanted to know why I would create a different system.

First of all, he’s HUGE in the world of personal finance. He’s written a heap of books, has his own podcast and a radio show.

Second, he has helped scores of people pay off their debt.

Why reinvent the wheel?

Great question.

I didn’t reinvent the wheel; I improved it.

Here is a summary of Dave Ramsey’s 7 Baby Steps program and a comparison to my Values-Based Planning System. I’ll discuss the points of weakness in the system and how you can use a values-based approach to get personalized results.


If it works, don’t change it

Before I dive into a compare and contrast, I want to start by giving props to Dave Ramsey. He has helped a lot of people pay off debt.

And if his approach has worked for you and continues to work beautifully for you, don’t change it, though I will suggest that what follows will help you get even more value from your system.


Dave Ramsey’s Program

You have to hand it to Ramsey; he’s very confident in his system.

At the very top of his website, where he outlines his 7 Baby Steps to manage money, he says the following:

It’s time to start managing money the right way.

Clearly, he’s suggesting that his way is the right way.

Good that he’s certain of his program, but I have some counterpoints to make. Let’s take a closer look.


His 7-Step program consists of the following so-called Baby Steps:

Baby Step 1

  • Save $1,000 for your starter emergency fund. When you click on this step, it takes you to a sales page for a course on how to budget.

Baby Step 2

  • Pay off all debt, except your house, using the Debt Snowball method.

Baby Step 3

  • Save 3-6 months of expenses in a fully funded Emergency Fund.

Baby Step 4

  • Invest 15% of your household income in retirement.

Baby Step 5

  • Save for your children’s college fund.

Baby Step 6

  • Pay off your home early.

Baby Step 7

  • Build wealth and give.


The challenge with a prescriptive approach

You’ll notice that he’s very specific and categorical in his steps. It’s not a “you might consider…” approach; it’s a “do this: Save $1,000 dollars; save 3-6 months of expenses; invest 15% of your income.”

There’s no discussion of what your situation is, where you’re at, and what your priorities are. This is a prescriptive approach to money management. He prescribes the steps, the approach, and the amounts.

The challenge with this approach is that we are not all one size fits all. Putting $1,000 aside in a starter Emergency Fund might work for you, but not the next person. Ditto for 15% of your income.

An example

One of my clients is dealing with a lot of credit card debt. The reality for her is that putting money aside in a savings account that yields less than 1.5% interest, at best these days, might not be the right choice when there is debt costing over 20%.

The math is clear: Setting money aside in a savings account costs you money in this situation.

However, it may be worth it for my client to start an Emergency Fund if having some money set aside for “what ifs” provides her with peace of mind.

A values based planning approach has as its guiding principle that your money needs to serve you in the best way possible as defined by you, not a generic program. You use your core values and priorities as a framework from which to make all decisions.

If saving more money in interest costs every month is what you value, then forget about the Emergency Fund and focus all your efforts on eradicating corrosive debt (a term I created to describe debt that costs you more than you could earn if you invest the money).

Also, if you value the peace of mind that comes from having some money set aside, then a values-based approach doesn’t define the amount for you. It lets you determine how much would make you feel more comfortable. Selecting $1,000 is arbitrary. Why $1,000? Why not $800 or $1,200 or $2,000?

One of my clients decided that having $500 set aside in an Emergency Fund would make her feel more comfortable. Another client chose $250.

As for saving 3-6 months of expenses in a “fully funded Emergency Fund”, will that be enough for you? I suspect that Covid-19 demonstrated to a lot of people that we may want to check our assumptions. Once again, it all depends on your unique situation.

Use the amount and the approach that works for you. If you want some values-based guidance regarding an Emergency Fund, take a look at my Emergency Fund decision tree.

The same goes for investing

It would have been a much stronger suggestion to say, “Start with an investment target of 15% of your income, then determine if that will meet your retirement goals and needs.”

If you have a generous pension waiting for you at retirement and you currently have no debt, you may choose to invest a lesser amount. On the other hand, investing 15% of your income might not yield the lifestyle you hope to have at retirement, depending on your current income, upcoming financial obligations, and your goals for retirement.

Investing 15% is a great start. Is it enough? You won’t know unless you look at your own situation.

This is where an adaptive approach proves more effective and resilient.


Are they baby steps?

Ramsey’s second Baby Step lists paying off all debt, except the house, using the Debt Snowball method.

If “pay off all debt” is a baby step, I’d hate to see what one of his regular steps consists of! Paying off debt is a HUGE step for so many people, especially if it means tackling consumer debt that’s been on the books for years.

It is not a small step. In fifteen years of working with people to strengthen their finances and clean up challenges, I can tell you that this step alone requires a plan, a balancing act, tough choices, and consistent effort over many months, and sometimes even years depending on the situation.

Let’s call a spade a spade: debt elimination is a substantial step that is necessary, tough, but worthwhile. Yes, this steps gets broken down into smaller, manageable steps in a values based planning approach, but there’s nothing “baby” about it.


Is the Snowball Debt Elimination Method the way to go?

According to Ramsey, it’s the only way that works. There’s that prescriptive approach again. The problem with categorical statements is that they’re typically easy to disprove. This one is no different.

In this blog post, I explain why Ramsey makes this claim. It revolves around the psychology of money.

The Snowball Method attacks debt from the smallest balance up to the largest. You knock off one small debt, chop up the card, then move on to the next smallest. The thinking goes that this is the more encouraging approach and will keep you engaged in the debt elimination process.

The Avalanche Method, by contrast, tackles the most expensive debt first. The strength of this approach is that it makes mathematical sense. You begin by tackling the debt that costs you the most, then work your way down to the cheapest debt.

The problem with the Avalanche Method, says Ramsey, is that it can be discouraging and lead to debt fatigue, where you throw in the towel and say, “To hell with this,” and go back to living with debt.

I agree – but only for some people. Ramsey’s dogmatic approach suggests that we are all motivated by the same things.

We are not.

I have countless examples of clients who have successfully used either a straight-up Avalanche Method approach or a hybrid of Snowball and Avalanche to eliminate thousands of dollars of debt.

My values based planning approach starts with a consideration of your situation and who you are.

What motivates you? What do you value more – knocking off smaller debts and paying more in interest, or going for the more expensive debt first and paying less in interest but not getting the immediate reward of checking a debt off your list if your dealing with a large balance right out of the gate?

You decide. There is no prescription in a values-based approach. Instead, we explore the options, define the opportunity costs (i.e. what you gain and what you give up with a given choice), and you choose the method that is the best fit for you.


Pay off your home early?

Which do you value more: the peace of mind that comes from knowing your mortgage is paid off or having a larger investment nest egg?

Once your debts are paid off, except your house, and you’re investing 15% of your household income, Ramsey would have you go after your mortgage.

In my values-based approach, we would ask the question above. What’s more important to you? Which do you value more?

At the time of writing, mortgage rates are below 2%. If your investment portfolio is yielding more than 4% after tax, the math would say that you’re better off investing your extra dollars. Even with inflation factored in, you’d be ahead of the game and you would benefit from compounding over time.

If, however, you’re worried about your income and paying off the mortgage makes you feel better, then that’s clearly the right choice for you.

Once again, it boils down to your values, your priorities, your situation, and your choice.


Bottom line: Values-based planning is adaptive

An effective financial system is adaptive to you and your needs. That’s also what makes the system resilient. It works no matter what weird stuff happens in the world, like a pandemic.

It adapts to your situation – lost your job; got a huge promotion; just had a baby; have to care for a sick relative.

And it’s easy to implement, because every step of the way you keep checking in with yourself by answering a couple key questions: What are my core values? What are my values-based goals? Is this choice in line with them?

No prescriptions required.


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Photo by Fernando Pelaez Cubas on Unsplash

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