The Power Of Using Checklist-Style Financial Planning

Author: Derek Tharp, Ph.D., CFP, CLU, RICP

Team Kitces

Derek Tharp, Lead Researcher at Kitces.com and an assistant professor of finance at the University of Southern Maine. In addition to his work on this site, Derek assists clients through his RIA Conscious Capital. Derek is a Certified Financial Planner and earned his Ph.D. in Personal Financial Planning at Kansas State University. He can be reached at [email protected]

Read more of Derek’s articles here.

Dave Ramsey tends to be a polarizing figure among financial planners. On the one hand, there are those who may believe there’s wisdom in Dave’s teachings, and, on the other, there are those who think he is just flat-out wrong.

Setting that debate aside, however, it shouldn’t be hard for advisors to agree that, at least in terms of reach, Dave Ramsey has built what is almost certainly the most successful financial literacy program in the world. He captivates audiences, draws huge crowds, and has built a financial planning process that millions of people across America have subscribed to. Whether we agree or disagree with his teachings, this should at least pique our interest.

Why is Dave’s message so powerful? What about his approach gets people to take action? How can advisors learn from his success and use it to speak to and motivate our own clients?

At the heart of Dave Ramsey’s philosophy are his famous “Baby Steps”. Dave’s Baby Steps walk individuals through a seven-step process to building wealth, ultimately arriving at Baby Step 7, at which point individuals are completely debt-free, have been saving 15% for retirement, and can proceed to “live and give like no one else”.

The Baby Steps & Financial Order Of Operations: Checklist-Style Financial Planning

For those that aren’t familiar, here are Dave Ramsey’s Baby Steps:

1. Save a $1,000 starter emergency fund
2. Pay off all debt except a mortgage
3. Save up a 3- to 6-month emergency fund
4. Save 15% for retirement
5. Save for children’s education
6. Pay off the mortgage early
7. Build wealth and give

These Baby Steps are intended to be sequential, with the exception that Baby Steps 4/5/6 are often pursued simultaneously (albeit still starting with 4… and then 4 and 5… and then 4, 5, and 6). In other words, you need to get to saving 15% for retirement, and then you start saving for a child’s education, and only once you’ve funded college and maintained 15% savings for retirement would you start to pay off the mortgage early.

In a way, we can really think of the Baby Steps as a sort of checklist-style financial plan. The Baby Steps provide a map to guide one’s actions – i.e., do this, then this, then this. This approach is significantly different from the way that many financial advisors may currently think about and implement financial planning in their own practices, but it is still a step-by-step process for financial planning.

Notably, Ramsey’s Baby Steps are not the only checklist-style financial planning approach in existence. The Money Guy Show’s “Financial Order of Operations” is another methodology that is very similar in approach. While the steps themselves are somewhat different (more on that to come), it is still a sequential planning process instructing individuals on what to do next in the financial plan. Specifically, these steps include:

1. Cover deductibles with cash savings
2. Maximize 401(k) plan matching from your employer
3. Pay off high-interest debt (e.g., 8% or higher)
4. Save up a 3- to 6-month emergency fund
5. Maximize Roth IRA and HSA contributions
6. Maximize supplemental retirement options
7. Reach “hypersaving” (i.e., 25% or more of gross income)
8. Prepay future expenses (college savings, new car, etc.)
9. Pay off low-interest debt (e.g., mortgage)

Beyond the two methodologies we’ve looked at here, there are certainly many others that don’t have the popularity of Dave’s Baby Steps or The Money Guy’s Financial Order of Operations.

Many advisors are extremely dismissive of – if not outright hostile toward – rules of thumb like those found in the checklist-style plans above. Such plans may be perceived as too simplistic, to ‘one size fits all’, or simply just ‘wrong’ in terms of priorities.

However, judging by the millions of followers that Dave Ramsey and The Money Guy have, clearly something is resonating with the general public when it comes to these frameworks. So, rather than simply dismiss these approaches, perhaps we should take a closer look at them and see if there are any lessons to learn.

The World: A Forum For Action Or A Place Of Things?

In his book, Maps of Meaning, psychologist Jordan Peterson makes the case that there are two equally valid ways to think about the world around us; we can consider the objective, empirically verifiable nature of the things in our world, and we can also consider the more subjective or socially construed value that those things have to us:

The world can be validly construed as a forum for action, as well as a place of things. We describe the world as a place of things, using the formal methods of science. The techniques of narrative, however – myth, literature and drama – portray the world as a forum for action. The two forms of representation have been unnecessarily set at odds, because we have not yet formed a clear picture of their respective domains. The domain of the former is the objective world – what is, from the perspective of intersubjective perception. The domain of the latter is the world of value – what is and what should be, from the perspective of emotion and action.

Peterson goes on to give an example of a toddler reaching for a glass sculpture on a countertop as a way to understand these two valid ways of thinking about the world. Thinking of the world as a place of things, the toddler grasping the glass sculpture could investigate the sculpture’s sensory properties much like a scientist would – its color, weight, temperature, smoothness, etc. This is, of course, a valid way to view the world, and these aspects of the vase are all ‘true’ – at least to the extent that the characteristics are independently verifiable and not just matters of subjective opinion.

However, Peterson notes that if the toddler’s mother were to walk in the room and “interferes, grasps her [the toddler’s] hand, tells her not to ever touch that object”, then the toddler has also learned something valuable. The toddler has learned something about the meaning of the sculpture – at least in so far as she may be thinking about how to orient her behavior in the presence of her mother.

In this case, the sculpture is an object not to touch. It’s an object that, unlike many others in the toddler’s world that might otherwise seem similar, is off-limits to her. This is the action-oriented interpretation of her world. The toddler learns, “Don’t touch!” and orients her future behavior towards the sculpture accordingly.

The key point here is that neither way of thinking is right or wrong. Both are valuable ways to learn about our environment. However, when it comes to learning what to do (or what not to do), the action-oriented perspective is far more helpful in guiding behavior. You could give the toddler a full technical breakdown of the composition of the sculpture, but that does nothing to orient the toddler’s behavior. By contrast, learning that the sculpture is something not to be touched gives the toddler a clear understanding of how to behave in the future.

The Action-Oriented Checklist-Style Financial Plan: A Guide For How To Behave

Viewing Ramsey’s Baby Steps through the lens of understanding the world as a forum for action, versus a place of things, is actually quite insightful in terms of understanding both some of the disagreements between advisors and Dave, as well as why the Baby Steps resonate – sometimes to an advisor’s dismay – with so many people.

A lot of the criticism from advisors of Dave Ramsey focuses on the technical details of various elements of his teachings – consistent with viewing the world as a place of things. For instance, consider Dave’s assumption that the stock market has historically averaged a 12% return. Many advisors disagree with this 12% assumption either due to contentions around how historical returns should be reported (e.g., whether the focus should be on arithmetic returns or geometric returns), or because they may feel that historical US returns may be overly optimistic for projecting forward-looking returns (notably, as a counterpoint, I’ve argued elsewhere for why using a higher assumed rate of growth could actually be beneficial – at least behaviorally – for heightening the perceived need to start saving sooner rather than later). But setting aside the argument of what rate should actually be used, disagreements like this ultimately have no clearly discernable implication for the action a typical individual should take when saving for retirement.

Suppose you think 10%, 8%, or some other number is the right long-term assumption. So what? What should the client do? Of course, the assumption itself may have some downstream implications when used to run a financial plan and formulate a recommendation, but arguing over 12% or 10% or 8% is ultimately an argument in the realm of the world as a place of things rather than a forum for action.

We can argue about the importance of technical accuracy but, at the end of the day, the behavior that ultimately improves any financial plan is the action that is taken to save and invest.

Notably, it is within the view of the world as a forum for action that Ramsey’s Baby Steps shine. The Baby Steps provide a very clear and concise checklist for behavior:

• Step 1: Save $1,000
• Step 2: Pay off all debt except a mortgage
• Step 3: Save up a 3- to 6-month emergency fund
• Step 4: Save 15% of income for retirement
• Step 5: Save for children’s education
• Step 6: Pay off the mortgage early
• Step 7: Build wealth and give

The Baby Steps are so simple that almost anyone could follow them. There is almost no complicated math or other distractions. They are also highly action-oriented. Almost every Baby Step itself is a direct action. The major exception is probably Baby Step 5, which is a little bit abstract and does require some math. Whereas each step before Baby Step 5 is very clear and requires little interpretation, Baby Step 5 can be a natural stumbling block because someone might reasonably not know how much they should be saving for a child’s future education expenses.

Notably, this is where Dave’s system has built in some additional support through partnering with SmartVestor Pros (i.e., financial advisors who participate in Ramsey Solutions’ network), which is really relevant for Baby Steps 4–7, where additional questions such as, “What types of accounts should I save into?”, “Is it 15% of net or gross?”, “What investments should I select?” etc., naturally arise.

And even within the earlier Baby Steps, there’s still some additional guidance that is provided within those steps. For instance, the debt snowball (i.e., paying off debt from smallest to largest balance) provides a clear plan of action for executing Baby Step 2.

Moreover, while the debt snowball is another area some like to criticize, it is worth noting that in addition to the potential behavioral advantages of the snowball approach, it is also a clearer path for action. There’s no need to get hung up on details like what interest rates someone might be paying that could require some additional research and investigation on their part. Instead, they just start attacking the debt from smallest balance to largest, which is information that is generally much easier to come by. In other words, like the Baby Steps, the debt snowball is better oriented for driving action.

As noted above, the Baby Steps are not the only checklist-style financial plan with some significant following. The Money Guy Show’s “Financial Order of Operations” (FOO) is another common example. However, when comparing the two, FOO has a possibly slightly weaker orientation for action. Recall that the steps here include:

1. Cover deductibles with cash savings
2. Maximize 401(k) plan matching from your employer
3. Pay off high-interest debt (e.g., 8% or higher)
4. Save up a 3- to 6-month emergency fund
5. Maximize Roth IRA and HSA contributions
6. Maximize supplemental retirement options
7. Reach “hypersaving” (i.e., 25% or more of gross income)
8. Prepay future expenses (college savings, new car, etc.)
9. Pay off low-interest debt (e.g., mortgage)

While each action is still pretty clearly tied to some action and a guide like FOO provides a much clearer map for orienting one’s behavior than one would otherwise have, consider the complexities associated with Step 1 in FOO (cover deductibles with cash savings) versus Baby Step 1 (save $1,000).

Many individuals probably aren’t 100% sure what their deductibles are, or even what a deductible is or how it works. These are great things to learn, but when you put learning as a barrier to taking action, there’s a risk that action gets severely delayed or, worse yet, never taken. Furthermore, this step is a little bit ambiguous. Do you just need to cover the largest deductible? Do the deductibles stack? These are just a couple of the many questions that individuals might ask before tackling the first step of the FOO checklist. Of course, individuals can dive into The Money Guy Show’s additional commentary and resources to get answers to some of these questions – including their online course on FOO – but there’s still real friction toward action that should be considered.

Certainly, the counterargument to that friction is that a more simplistic solution, such as the $1,000 emergency fund suggested by Dave Ramsey’s Baby Step 1, may be inadequate for all short-term emergencies and that there is a natural trade-off between orientation for action and the prudence of a course of action that should be considered. The main point here, though, is that checklist-style plans themselves can vary in how much they orient an individual to take action. Sometimes that friction may be worthwhile, but oftentimes it may simply be a barrier to moving in the right direction.

(Notably, Ramsey has argued that the real point of his first Baby Step of saving $1,000 in a starter emergency fund serves more as a psychological feature that helps shift a person’s mindset onto reaching their financial goals and is only a part of the starter emergency fund, which grows into a larger fully funded emergency fund in Baby Step 3. Its main purpose is to “light a fire underneath you” to keep a person motivated to follow through with the rest of the steps.)

Developing An Action-Oriented Checklist-Style Plan For Your Niche

Contrasting the typical financial planning process carried out by advisors with a checklist-style process may be a worthwhile project, particularly when considering the popularity of checklist-style plans among consumers.

At a minimum, follow-up items coming out of a planning meeting could be presented in a sequential manner of tasks that help guide a client’s actions (e.g., do this, then this, then this). However, going even further, there may be real benefits in fleshing out an overarching prioritization or philosophy for individuals within an advisor’s niche. For instance, perhaps an advisor who works with dentists knows that dentists have some unique ‘steps’ in their process of building wealth that could differ from what one finds in Ramsey’s Baby Steps or The Money Guy’s FOO.

The planning process that many clients get from advisors can likely feel quite ‘black-boxy’. The client provides the information, the advisor runs some analyses (through the black box of planning protocols the advisor uses behind the scenes), and the advisor presents some recommended actions to the client. The client may only be aware of the inputs and outputs involved in the process and has no awareness of how the inputs are processed or prioritized.

Ideally, the client trusts the advisor and is fine moving forward accordingly, but there may still be something lost from not having a clearer understanding, and thus a broader orientation, of where a client is at and why they are doing what they are doing. But with the Baby Steps and FOO frameworks, there’s an appealing cohesiveness that motivates someone to keep moving along, and that can even help them get reoriented if they fall off track.

For instance, suppose someone who was following FOO was at Step 7 (‘hypersaving’ 25% of their gross income) and their pay gets cut in half. Perhaps they go back and scale back on Step 6, reducing their supplemental retirement contributions, and also scale back on Step 5, making only a partial contribution to their Roth IRA. A major benefit of following FOO was that they were able to take one step back at a time until their budget was able to work again, and now, going forward, they’ll know what steps to prioritize (maximizing their Roth IRA, and then their other retirement plan contributions) as they build back up to hypersaving (Step 7) and beyond. By contrast, a client without a simple overarching framework to guide them through clear steps of getting from point A (where they are now) to point B (their ultimate goal) may not be as motivated to get back on track as easily, especially if they need to consult with their financial advisor to figure out how they need to course-correct each time they stray from the plan as originally outlined.

For an advisor who is really well-niched, you can probably think of some customized, action-oriented steps that might work really well for their particular clientele. Or perhaps an advisor who happens to like the Baby Steps, FOO, or some other orientation could choose to simply adopt that. But by giving clients a clear overarching framework to operate within, advisors can probably help better orient clients for action over the long term.

Furthermore, if a client does have a preferred framework to operate within, advisors should give some serious consideration to respecting that framework and working with it rather than against it. Sticking to a broader philosophy that a client appreciates might be more beneficial than deviating from a cohesive framework because an advisor feels there’s some capacity for optimization (which might simply backfire, serving to distract or discourage the client from sticking to a familiar and preferred plan of action).

For instance, if you are working with a regular listener of The Money Guy Show who knows FOO well, it may not be what’s best for the client to encourage them to break FOO based on some minor disagreement somewhere. And even if it’s a more major disagreement (e.g., if you are an advisor who thinks the mortgage should be paid down sooner than recommended by FOO), it’s still worth considering honoring that framework (or at least creating your own compelling alternative). Because if the client is going to listen to their advisor regularly yet always feels a tension of, “Why am I doing this differently when FOO seems so much easier and makes so much more sense to me?” there’s a good chance that this may eventually sap the client of their energy and motivation toward what they were doing and ultimately be a negative in the long run.

The Planning Efficiencies Of Checklist-Style Planning

I personally work with a number of Dave Ramsey fans and have been in his SmartVestor Pro network for over a year now. While I have long felt that there is a lot of wisdom embedded in Ramsey’s teachings that are underappreciated by advisors, one thing I did not anticipate about the transition to working more directly with Ramsey fans – who already know and are following the Baby Steps – is how much more efficient financial planning would become (at least in the accumulating stages) when advising these clients from this perspective.

Rather than running projections, coming up with a recommended savings rate, etc., I can instead simply encourage these clients to follow the Baby Steps framework. With just a few minutes of fact-finding, I often have a pretty good sense of where someone is at and what their immediate priority should be within the framework (and those individuals often know where they are at as well). Moreover, by operating within an action-oriented framework like the Baby Steps, I also feel that the Ramsey fans I’m working with have a better understanding of why they are doing what they are doing than they would have if I were to step away and run a Monte Carlo analysis for them. Furthermore, there’s often deeper buy-in and motivation to stick with a course of action when it is nested within a broader philosophy.

For instance, if I know a household has two individuals, each age 30, each making $75k, with $100k left on a mortgage, a 6-month emergency fund, no other debt, and no kids, I can reach a savings plan very quickly. This household has met Baby Step 1 (starter emergency fund), Baby Step 2 (no consumer debt), and Baby Step 3 (6-month emergency fund). That leaves them at Baby Step 4. How much should they be saving? Baby Step 4 tells us 15% of their total income, which means that their total savings target is $22.5k ($75k × 2 × 0.15).

Furthermore, Dave teaches that “match beats Roth beats traditional” (a sequence or prioritization that I personally agree with in most cases), so that means $6k would go into his Roth IRA, $6k would go into her Roth IRA, and the remaining $10.5k of their savings target would go into their 401(k) plans.

If, after those savings, there’s another $1,000 of cash flow available, then they would put an extra $1,000 toward their mortgage each month. Done. Simple. Furthermore, by explaining the recommendations within a broader framework of the 7-part Baby Steps process, they also have a better understanding of why they are doing what they are doing.

While advisors will certainly differ in determining what model is right for their clients, the key point here is that by having an overarching model that a client is already on board with (and that an advisor can generally work from), there are both efficiencies gained in the planning process and clarity gained from the client’s perspective.

Of course, in my case, I generally benefit from prospects coming in and already knowing Dave’s philosophy. Much of the efficiency could be lost if someone were to come in cold, and I had to teach them the general philosophy toward building wealth – not to mention the fact that they may not even agree with that philosophy itself. Many of the Ramsey fans connecting with me have spent years, if not decades, listening to Dave’s content, internalizing his framework, and vetting whether it is right for them.

As a result, if an advisor is going to try and develop their own unique checklist-style financial planning approach, it is probably best to leverage some sort of content-based marketing that brings them leads who understand and have already been exposed to their framework. For instance, advisors using podcasts, YouTube, webinars, books, etc., to discuss their own financial planning philosophies could be better positioned to have already explained their approach and to meet with leads who have self-selected into learning more about that approach.

Ultimately, while advisors tend to butt heads with financial personalities, it is worthwhile to take a step back and appreciate what they do that is so broadly appealing to their many followers. While no single framework is going to be right for every advisor or client, using checklist-style financial planning is a powerful opportunity that is likely underutilized today by advisors.

We can see from the massive followings of personalities that do use checklist-style financial plans that there is something about this approach that really resonates with consumers. A likely reason for that resonance is the action orientation of good checklist-style plans, as action orientation can help clients both understand what action they should be taking immediately, as well as what they are doing and what they are working toward embedded within a broader philosophy.