As I’m sure is true for many people, Dave Ramsey was my first introduction to the world of personal finance gurus.
Prior to reading his book The Total Money Makeover, most of my education had focused on investing. I had studied finance in college, so I’d read many of the all-time classic business and investing books.
But while those books gave me a solid foundation for investing, I hadn’t thought much about my personal finances.
Reading The Total Money Makeover changed my mindset. I began to realize there was more to finance than just investing. And I started to recognize how much I enjoyed learning about that side of the financial world.
This was all happening around the time I graduated from college, so Ramsey’s advice was very useful. My wife and I paid off around $14,000 in student loans in just one year. Plus, we built an emergency fund and started saving 15% of our income.
Looking back, I have to credit his podcast and books with leading us to a number of good financial choices.
It’s been 10+ years since then, and I’ve dug much deeper into the rabbit hole of personal finance. I became a Certified Financial Planner™ and started this blog, and I continue to educate myself on the topic.
Even so, many of the lessons I learned from Ramsey still resonate with me today — and a few do not.
Let’s start with the lessons that have stood the test of time.
10 Dave Ramsey Money Tips Worth Knowing
#1. Give Every Dollar a Job
Using a zero-based budget — one in which every dollar has a job — is the most powerful way to save money fast.
If you’re not familiar with zero-based budgeting, it’s where your income minus expenses equals zero.
So, if you’re making $5,000 a month, you’re giving each and every one of your $5,000 a job.
Or as Ramsey says:
“You’re making every dollar behave. Giving every dollar a name before the month begins.”
Budgeting this way, rather than just tracking my income using an app, was eye-opening. What I thought was a pretty decent cushion between my monthly income and expenses was actually quite the opposite.
#2. Live Like No One Else
Total U.S. auto loan debt has increased steadily over the years, and now equals $1.3 trillion — more than the nation’s cumulative credit card debt.
Most Americans have come to see debt as a way of life. Buying a new car for $36,000 with little to no money down and high monthly payments is normal.
Just like buying as much house as you can qualify for is normal.
But just because these things are normal doesn’t mean they’re smart.
One of Ramsey’s oft-repeated phrases is:
“If you will live like no one else, later you can live like no one else.”
While I certainly wish it were different, this is a pretty accurate statement when it comes to how you need to think about managing your money.
The social pressure to keep up with the Jones’ is real, but you have to fight it if you want to properly allocate your income to build long-term wealth.
#3. Know the Power of Focus
Focusing on one goal is often the best thing to do, as typically there’s one clear objective that has the highest potential payoff.
Focusing also allows you to create momentum.
Instead of trying to build a three-month or six-month emergency fund, save for retirement, and pay off high-interest debt all at the same time, focusing on just one goal — which the baby steps would say is paying off your high-interest debt after building a $1,000 emergency fund — allows you to see actual results from your effort sooner.
While I wouldn’t adhere to this rule 100% of the time — e.g., by forgoing a 401(k) match to pay off low-interest student loans — it’s true more often than not.
#4. Remember That It Takes Two
To paraphrase one of my favorite pieces of advice Ramsey gives to those who call in to his radio show:
You don’t have a money problem, you have a marriage problem.
If you’re in a relationship, getting on the same page as your spouse for all things money-related is one of the most important steps you can take for not only a better financial life but also your overall quality of life.
My wife and I use monthly financial meetings.
#5. Understand The 80/20 Rule
Personal finance is 80% behavior and only 20% knowledge.
Many people criticize Ramsey’s debt snowball method for its approach of paying off the debt with the lowest balances first, rather than the debt with the highest interest rates.
And that’s fair criticism. All things being equal, paying off the highest-interest debt will save you the most money and ultimately get you out of debt the fastest.
But all things are not equal, because we humans are pretty irrational.
In fact, multiple studies have shown that paying off the lowest balance works better than focusing on the debts with the highest interest rates.
Why? Because it shows you a correlation between your actions and your desired outcomes. Building momentum — even though small wins — makes it easier to stick with your plan.
#6. Don’t Let Mistakes Compound
With so much auto debt (as noted in the first item on this list), it’s no surprise that many Americans owe more on their car than it’s actually worth. After all, new cars rapidly depreciate in value, while new car loans do not.
So it’s worth asking, as many people do, if it’s best to keep the car or sell it to pay off debt.
Ramsey has two good rules I like in this situation:
- The total value of all the vehicles in your household should not be worth more than half of your household’s annual income.
- Does selling the car allow you to become debt-free in less than two years?
#7. Define Affordability
It’s easy to rationalize making a monthly payment by looking at your monthly budget and identifying that you can “afford” whatever it is you want to buy.
For example, you may be able to afford an extra $300 in payments for a luxury car. But while that math may be true, it’s first important to examine what afford actually means — and, in some cases, to develop a better definition of that term.
According to Ramsey:
“If you can’t write a check or pay for a car with cash on the spot, you can’t afford it.”
While this is a much simpler version of the term, it can surely help prevent many major financial mistakes.
#8. Remember Murphy’s Law
One thing I’ve come to believe, based on both personal and professional experience, is that everyone will face a personal financial crisis in their lifetime.
It may be because of a job loss, a failed business, a lawsuit, a down economy, a family situation, bad partnerships or investment losses — the list of possible financial crises is almost infinite.
That’s why it’s important to look at your finances through the lens of Murphy’s Law, which says “anything that can go wrong will go wrong.”
I’m not saying you should be a pessimist. But if you’re honest with yourself about the fact that bad things are bound to happen, then you can prepare for them and avoid catastrophe if and when they occur.
The two best ways to prepare for these worst-case scenarios are to avoid high-interest debt and to make sure you have a fully-funded emergency fund.
#9. Utilize Sinking Funds
When I first started paying attention to my finances, I’d feel great about coming in below budget one month. Then, the next month, I’d beat myself up for going over budget.
Taking a closer look, however, I realized that in the months I went over budget, most of my living expenses were the same. I was going over budget because of infrequent expenses (such as a wedding gift or my annual life insurance premiums) that just so happened to pop up.
This is when I first started utilizing Ramsey’s sinking funds account concept, which has you set aside money this month to pay for future expenses.
For example, you could choose to save $50 a month in a sinking funds account to pay for Christmas every year.
This helps eliminate wild swings in your monthly budget. And, just as importantly, it helps you avoid beating yourself up for going over budget because of an expense that was predictable.
#10. Don’t Overlook the Power of a Tribe
In the best-selling book Atomic Habits, author James Clear writes:
“As a general rule, the closer we are to someone, the more likely we are to imitate some of their habits. One groundbreaking study tracked twelve thousand people for thirty-two years and found that “a person’s chances of becoming obese increased by 57 percent if he or she had a friend who became obese.”
It works the other way, too. Another study found that if one person in a relationship lost weight, the other partner would also slim down about one third of the time. Our friends and family provide a sort of invisible peer pressure that pulls us in their direction.”
Ramsey has created a community where working two jobs, eating rice and beans, and buying a $1,000 car with cash — all in an effort to pay off debt as fast as possible — is the norm.
This is one of the most underrated reasons why you’ll find the hashtag #DebtFreeScream filled with so many success stories.
When you’re part of a community where behaviors like this are the norm, it makes it far easier to succeed in your goal.
While this isn’t something you’ll learn from Ramsey directly, it’s something you’ll learn by watching him. At the end of the day, he’s helped many people get out from living paycheck to paycheck, and the sense of community he creates is a powerful part of that.
Being part of a tribe is something you can implement across the other areas of your life where you’re trying to improve.
For example, when I started building an online business in 2009, I joined a mastermind group of others who were doing the same.
Back then, outside of this community, building an online business sounded crazy. So it was helpful to be part of a group of likeminded people, where talking about SEO or making money online didn’t look like you were trying to scam people.
The Worst Dave Ramsey Advice
Here’s the thing about any financial guru: blindly following the advice of others, especially with your money, can get you in trouble. For any decision, it’s important to understand what’s best for you.
I say this because I disagree with a lot of what Ramsey says, as well as how he says it.
I find his worst advice to be on topics such as:
- Investing. I disagree with the asset allocation he recommends to carry in your portfolio, as well as other investing advice like using actively-managed funds and the idea that you can expect an average return of 12% a year.
- Withdrawal rate. His 8% suggested safe withdrawal rate in retirement is far too high. (See: How Long Will My Money Last In Retirement.)
- Emergency fund. If you’re eligible for a 401(k) match, I don’t agree that you should prioritize building a six-month emergency fund and/or paying off all your low-interest student debt before starting to invest (as Ramsey suggests). Instead, invest up to the 401(k) match first, because that’s essentially free money. Then allocate whatever is left over to your debt reduction plan.
Yes it’s easy to nitpick how rigid his baby steps are, or his investment advice. But it’s more important to understand the fundamentals of the pros and cons of his advice.
So, this is where it’s important to continue to read good personal finance books for beginners that may go against what Ramsey has to say; that diversity of knowledge will help you know you’re indeed making the best possible decision.
Final Thoughts on Dave Ramsey
At the end of the day, Ramsey has helped many people get out of debt and stop living paycheck to paycheck. That’s something I can get completely on board with.
And, from a personal perspective, finding his advice early in my life was beneficial. But, as many others have learned, personal finance and building wealth are often far more complex than following six simple steps.
So, just like any financial advice, it’s important to:
- Understand what works for you
- Understand why that advice works
- Discard what doesn’t work
It does take time to deepen your understanding of money management to get to that point, but it’s time well spent.
Has Dave Ramsey impacted your financial life? If so, let me know in the comments.
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