Dave Ramsey's Baby Steps and the 12% Return, Checked
Dave Ramsey is the US radio host behind the 7 Baby Steps, a debt-first money plan that reaches investing 15% of income at Step 4. His 12% return is an average of yearly S&P 500 returns; from 1989 to 2025 that average was 12.80%, while money actually compounded at 11.32% a year.
Dave Ramsey is the founder and CEO of Ramsey Solutions and hosts The Ramsey Show, and his site says he has helped people with their money since 1992. The 7 Baby Steps are the plan that site teaches. This page sets out the steps as his own site states them, then checks the one number the plan leans on, the 12% return, against S&P 500 data.
How it works
The plan is a sequence. The steps are numbered and taken in order, and investing waits until the consumer debt is gone. Ramsey’s site gives the order below (read 2 Oct 2026).
The seven Baby Steps
| step | what it says to do |
|---|---|
| 1 | Save $1,000 as a starter emergency fund |
| 2 | Pay off all debt except the house, smallest balance first |
| 3 | Save three to six months of expenses as a full emergency fund |
| 4 | Invest 15% of household income for retirement |
| 5 | Save for children’s college |
| 6 | Pay off the home early |
| 7 | Build wealth and give |
Step 2 is the debt snowball. Debts are listed from the smallest balance to the largest, minimum payments go on all but the smallest, and each paid-off payment rolls into the next. The paying off debt page measures what that order costs against paying the highest rate first.
Step 3 is a larger cash buffer. Three to six months of expenses is the same range the emergency fund page works through, and it comes before any long-term investing.
Step 4 is where the 12% comes in. A Ramsey Solutions article says the S&P 500’s historical average annual return is 10-12% and gives 11.86% for 1928 through 2025. Its retirement example, worked below, uses 12%.
A worked example
Ramsey’s article works one case: 15% of a $50,000 salary, invested from age 25 to 65 at a 12% average annual return, which it says comes to more than $7 million, and $1.2 million at 6%.
- 15% of $50,000 is $7,500 a year, or $625 a month, for 40 years, which is 480 deposits.
- Growing $625 a month at 1% a month gives $625 x (1.01^480 - 1) / 0.01 = $7,352,982.82. At 0.5% a month the same formula gives $1,244,681.71. Both match the article’s figures.
- But 1% a month compounds to 1.01^12 - 1 = 12.68% a year, not 12%. Paying in $7,500 once a year at 12% gives $5,753,185.65.
- So the headline figure rests on two choices: a 12% average and monthly compounding at a twelfth of it.
The original data
Average and compound are different numbers. The S&P 500 total return index, with dividends reinvested, has full calendar years from 1989 to 2025 on Yahoo Finance.
| period | yearly returns | arithmetic average | compound rate |
|---|---|---|---|
| 1989-2025, total return | 37 | 12.80% | 11.32% |
| 1996-2025, total return | 30 | 11.93% | 10.35% |
| 1928-2025, price only | 98 | 8.10% | 6.27% |
The arithmetic average adds up each year’s return and divides by the count. The compound rate is the one that turns the starting value into the ending value. Swings open a gap between them: a year of -37.00%, as in 2008, takes more than a +37.00% year to repair. Over 1996-2025 the average, 11.93%, is close to the 11.80% Ramsey’s article gives for the same years, while the money grew at 10.35%.
7 of the 37 years were negative. The worst was 2008 at -37.00% and the best 1995 at +37.58%. After consumer prices, from Dec 1988 to Dec 2025, the index compounded at 8.37% a year. The price-only index, without dividends, goes back to 1928 and compounded at 6.27%. Every year is in the calendar-year returns file.
What $625 a month actually did
The same deposit, run through real closes. Investing $625 at each month-end close of the total return index from Jan 1989 to Dec 2025 is 444 deposits and $277,500 paid in. At the Dec 2025 close the account was worth $3,187,155.09. The same 444 deposits growing at 1% a month would have reached $5,120,365.96, 1.61 times as much. The growth rate that matches the real outcome is 10.83% a year.
Over a full 40 years, growing monthly at the rate that equals 11.32% a year turns $625 a month into $5,004,964.46. At the 8.37% after-inflation rate, with each deposit and the result counted in constant dollars, it comes to $2,222,067.93. The month-by-month path is in the monthly deposits file.
When it fails
The average is not the growth rate. Planning on 12% when the compound rate over the same data is lower overstates the end figure, and the gap widens every year it compounds.
Inflation is left out. A dollar figure 40 years ahead is not in today’s money. On this data the real rate was about 3 points below the nominal one.
Returns arrive in a sequence. The 1989 start was followed by the strong 1990s. An investor near retirement in 2008 met a -37.00% year at the point when the balance was largest, and no average shows that.
Fees and funds differ from the index. The figures here are for the index itself, with no fund costs. A fund that charges more, or holds something other than the index, will not match them.
The index data starts in 1988. The total return series used here covers 37 full years. That is long, but it is one path through history.
Related
Compound interest explains why the growth rate sets the end value, and the S&P 500 page covers the index behind these returns. The emergency fund and paying off debt pages work through Baby Steps 1 to 3 with their own numbers, and the 401(k) page covers the usual home for Step 4.
When a plan quotes an average return, ask whether it is the average of the yearly numbers or the rate the money actually grew at. Plan with the second one, and with it after inflation.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.