Dave Ramsey’s Baby Steps Say You Shouldn’t Chase Dividend Income Until You’ve Done This

The Baby Steps put dividend investing at a specific spot in line, and it comes late. Ramsey Solutions, the company Dave Ramsey started, states the priority simply: “your first priority is to invest 15% of your gross income for retirement in good growth stock mutual funds through tax-advantaged retirement accounts, like 401(k)s and Roth IRAs.” Dividend-paying funds in a regular brokerage account come only after that.

If you’re near retirement and want monthly income, the order matters greatly. Build an income portfolio first and you may still be paying credit card interest, lack cash for emergencies, and leave tax breaks unused.

The Baby Steps get this right. Dividend income is a fine goal. It simply goes near the end of the plan.

Five Steps That Come Before Your First Dividend Check

The Baby Steps follow this order:

1. Starter emergency fund and the debt snowball. You set away a small cash buffer first. Then you pay off every consumer debt from the smallest balance to the largest, rolling each freed-up payment into the next one.
2. Fully funded emergency fund. Next you build three to six months of expenses and keep it in a high-yield savings account. That way the money is easy to reach and still earns interest.
3. Retirement investing in tax-advantaged accounts. This is the 401(k) and Roth IRA step. Here, money grows without an annual tax bill.
4. Dividend funds in a taxable brokerage. Only once your tax-advantaged room is maxed out does a taxable income portfolio make sense.
5. Real estate investment trusts. REITs, which own income-producing property and pay out most of their earnings, sit at the final Baby Step.

Many near-retirees remain stuck in early steps. The FINRA Foundation’s latest National Financial Capability Study found that only 59% of adults 55 and older have three months of expenses saved. Across all ages, 46% do. Without that buffer, a dividend fund cannot cover a job loss. You’d sell shares, possibly in a down market.

Your Debt’s Interest Rate Decides Whether You’re Ready

The key variable is your debt’s interest rate. Paying off debt earns a guaranteed return equal to its rate.

Here’s a example. A $10,000 credit card balance at a 22% rate costs about $2,200 a year in interest.

Put that same $10,000 into a dividend fund yielding 1.25%, the figure Ramsey Solutions uses, and it pays about $125. Buying income while you carry that card is going backward.

Low-rate debt works out otherwise. The Baby Steps leave mortgage payoff until after retirement investing begins. A cheap home loan doesn’t block Step 4, and it doesn’t stop you from moving toward a taxable income portfolio after that.

Why $104 a Month Matters

Ramsey Solutions makes the case with a simple example: “If you invested $100,000 in dividend-paying mutual funds that earned 1.25%, you’d only get about $1,250 per year ($104 per month) of passive income before taxes.”

Picture saving six figures and earning roughly a cell phone bill each month. That’s the problem with skipping ahead. A dividend portfolio grows only as large as the money funding it, and earlier steps build that money.

Scale it up and it still falls short. Northwestern Mutual’s 2025 study sets Americans’ retirement “magic number” at $1.26 million. At a 1.25% yield, that full nest egg would pay about $15,750 a year, or about $1,313 a month, according to Ramsey Solutions.

To be fair, those figures describe broad dividend mutual funds. Individual dividend stocks and higher-yield funds can pay well more. On the same $100,000, a sample 4% yield would produce about $4,000 a year, or about $333 a month. If you own those names, your income really is higher.

The trade-offs are usually less diversification and a higher chance the dividend gets cut. Those dividends are also taxed every year in a brokerage account. Inside a Roth they would grow tax-free.

Run These Checks Before Buying an Income Fund

1. List every debt by interest rate. Anything that charges more than a dividend fund yields is your best guaranteed return. Clear that debt before buying income.
2. Count your cash in months. Divide your high-yield savings balance by your monthly expenses. If the result is under three, fund that before anything else.
3. Check your retirement contribution rate. Compare your 401(k) and IRA contributions with the 15% of gross income that Ramsey Solutions recommends. Then check whether you’re reaching this year’s IRS limits.
4. Price your income goal. Divide the monthly income you want by your fund’s actual yield to find the principal required. Then decide whether a taxable account is the right place to hold it.

Watch your debt rates, your fund’s real yield and this year’s IRS limits before buying income.

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