In the realm of personal finance, Dave Ramsey seems to have a huge influence on people, and for good reasons.
While there are many other personal finance experts who would claim that his approach towards personal finance has outdated when it comes to what works on today’s age, but a lot of his advice and tips do remain evergreen and relevant for years to come.
And in this article those core money tips have been mentioned (along with some outdated ones), which just might help achieving the financial freedom that we all crave.
Who is Dave Ramsey?
He is a well-known financial guru who has quite He is a personal money management expert and a very popular national radio host.
He has published over seven best-selling personal finance books: Total money makeover, Dave Ramsey’s Complete Guide to Money, More Than enough, to name a few which have sold over 11 million copies in total.
His famous financial baby steps have been proven to be helpful in ways to saving for emergencies, paying off all your debt for good, and building wealth.
What are the 7 baby steps?
- Save at least $1000
- Pay off all consumer debt
- Save up to 3-6 months of expenses
- Invest 15% in retirement
- Save money for kids college
- Pay off mortgage early
- Give generously
Here’s a video of Dave Ramsey, picked directly from his channel to give you a taste of the financial expertise he provides on YouTube. Have a watch…
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Given below are a few tips that Dave recommends you to introduce in your lifestyle for a better financial outcome:
1. Create a Zero Budget with the Envelope System
Aah! The sweet ol’ Budgeting!
While having to budget every time you get a paycheck doesn’t sound an interesting task to do, but it sure helps you to get control of your finances.
You don’t want to borrow money friends every-time you overspend now, do you?
Which is why, repeat after me, “Budgeting is essential”.
All major and minor corporations have a budget, and if they are doing it, surely that is something to consider doing if you haven’t already.
Dave’s approach to budgeting does revolve around idea of zero budget with the envelope method.
So…What the heck is a zero budget with the envelope method?
The main idea is, if you stick to your budget and paid your bills entirely on cash, you’d set aside the money for each category of your budget in its very own envelope such as rent, bills, groceries, etc.
As a zero budget, every dollar has a job assigned, which is to belong to a particular category (budget envelope), you’d have every dollar of expected income each month assigned to an envelope in your system.
When you only have a fixed amount of money per category (envelope), you’re way less likely to overspend on any other budget item.
This method isn’t just reserved for cash-only payments, any other cashless alternative works just fine, just be a little disciplined while assigning money to various categories.
Advantages of using Dave’s envelope method:
- You spend comparatively less
- It holds you accountable
- Builds discipline and keeps you in check
2. Use Cash as Much as Possible
According to Dave, when you pay cold, hard cash, you actually realize the money that has been taken away from you, this way you become more aware of how much you spend on useless stuff.
Moreover, every time you pay through a non-cash method, you pay an extra interest (processing fee, service fee, etc) to make that transaction and that extra money can add up to a lot over long periods of time.
But in an ever-changing world where transactions are more convenient digitally, the concept of “always paying with cash” seems a tad … well, troublesome.
Yes, you may have to pay a few cents on interests for another form of transaction but in this case, the convenience overpowers the benefits.
For example, why would you carry stacks of cash with you for a big purchase if your phone can do it for you, and it’s with you all the time. Convenience!
3. Have an Emergency Fund Stacked Up (Begin with $1000)
This one obviously is a no brainer.
The idea of having at least a $1000 aside for emergencies acts as a safety net when you’re in desperate need of quick cash.
Whenever there is a big inflow of money in your bank account, it is always a wise decision to put some aside that your future self would be thankful for.
And that $1000 is just a starting line, as you’ll make it through Dave’s baby steps, you’ll be able to save upto 3-6 month’s worth expenses.
This will help you to support you and your family in case of a serious stroke of bad luck, such as loss of your 9 to 5 job, medical emergencies, etc.
4. You Don’t Really Need a Credit Score
According to Dave, you don’t really need a credit score to keep your personal finance in good health.
And you can still get a mortgage without any credit score, just not with a bad one.
But in all honesty, I (and quite a few credible money experts) don’t really agree with him on this one. His advice on not needing a good credit score falls low in recent times.
It might seem like avoiding any debt (whether being credit card debt or any other debt) is the way to go, but credit score goes far beyond loans.
A good credit score significantly reduces insurance costs and also helps in the rental acquisition, which ultimately, can save you a significant amount of money.
Most rentals apartment owners nowadays favor tenants with a good credit score than the ones with a bad score or without one.
A lot of jobs too lookout for credit score nowadays, so you don’t know when you’ll be needing a good score in life, so you have to plan your financial moves accordingly
But being a responsible borrower is the key here, you don’t want to go above and beyond in spending just because you have a card in your hand. Also, try not to get into huge debts in order to keep your credit score high.
5. Sacrifice and Live Below your Means
The stuff that we usually see on social media about having a fancy, rich, branded apparel lifestyle is mostly a scam.
It’s just not that, a lot of “influencers” often show off their materialistic lifestyle that often leads to unhappiness to the audience who cannot afford their lifestyle.
If you just look at the high-profile billionaire personalities such as Mark Zuckerberg and Bill gates, you’ll notice that no Gucci or LV or other brands will be on sight.
A lot of people often go broke trying to get the taste of a luxurious lifestyle. But they fail to understand that,
The goal is always to be rich, not look rich!
6. Avoid Buying New Cars
His notion is: Every new car depreciates its value of about 18% within the first year alone. Which is why it makes more sense to buy a used (say, 1 or 2 year) car that does not have a high price tag to it, and still has a bit of newness to it.
And if you can manage to get by without a car, don’t buy a car at all, new or used.
Most of the time people who consider buying a new car, just want it, but they don’t really need it, and as their urge to get the car increases, the line between want and need fades away.
So it is in your best interest to not fall for such pitfalls and if you really, I mean reeaaally need a car, opt for a used one.
7. Save at least 15% for Retirement
As suggested by Dave, your first step (after getting paid) is to put aside 15% of your total income just for retirement investing. Invest it in stocks, real estate, Roth IRA, etc.
But Why 15%?
Because It’s enough to allow you to reach your retirement savings goals, but not too much to keep you from enjoying your income today.
Your 15% is based on your gross income and does not include any other funds you receive through your employer’s retirement plan.
Whether you’re in your early 20s, or late 40s, it is always a good move to plan for your retirement.
Investing, if started as early as you can, can reap huge benefits in the future, the power of compounding.
For example, if you would’ve invested $5000 in Apple stocks in 2016, today it would’ve been valued almost $25,000 today (Aug 2020).
If you’re interested in investing in stocks, sign up for Webull (where you get a Stock for free for signing up and another free stock for a $100 deposit in your Webull account)
8. Increase your Income
I’ve always been a believer in the fact that in order to have more money, you actively have to find ways to make more money.
Even if you have a job where you’re making a full-time income, a little extra in the pocket is only going to benefit you. Moreover, job security is a total BS, honestly though.
This is why it is important for you to build multiple sources of income while you still can.
Not only having multiple sources increases your total income, but it also acts as a reliable plan B if your plan A (a.k.a your job) decides to fire you.
It can act as a safety net, something to fall back, and hence, it can certainly take away the constant worries about losing your only source of income.
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9. Pay Off Debt as Much Quickly as Possible
Whether it’s Dave Ramsey or someone else, paying off debt is on the priority list of every personal finance expert out there. It’s of prime importance.
Raise your hand if you’re thrilled to have any kind of debt in your life ✋?…
What? No one? That’s right!
Huge debts are often paralyzing, and the feeling that you’ll the rest of your life paying it off often eats you up from inside.
But no matter the amount, no matter how high the rate is, debts are always manageable if you have the right approach.
Dave Ramsey suggests having a strategized plan to tackle all your debts using the Snowball method. But when it comes to paying off multiple debts you have two effective methods to do so:
- The snowball method, and
- The Avalanche Method
The Snowball method :
In this method, you pay the minimum amount to each debt you have every month except the one with the smallest debt amount.
In the one with the smallest debt amount, you pay the debt with the smallest amount first, clearing a particular debt one at a time.
This method lets you make incremental growth and you can see yourself knocking debt after debt after debt.
The Avalanche Method
In the debt avalanche method, you pay your debts from highest interest rate to lowest interest rate, regardless of their balance.
In this way, you knock off the debts with the highest rates first, which ends up saving you more money on the interest.
And saving money on interest means you will pay your debts off more quickly.
Mathematically, the Avalanche method makes more sense.
If you’re able to get rid of the high-rate debts first, it saves you a ton of money over a long period of time.
10. Avoid High-Priced Branded Items
Can you really differentiate between two different fabrics brands without seeing their logo printed on it? Probably not.
This infers that expensive and branded things are just the trendier versions of their generic alternatives. Other than that, high priced items do not provide much of significant value.
So it is essential to put the “brand name” aside before weighing all the factors during a purchase.
11. Use sinking funds
What exactly is a sinking fund?
The phrase “sinking fund” is just a decorative economics term for saving up for an upcoming expense. That’s it.
Have you ever saved up to buy something? Then you’ve created a sinking fund without even knowing it.
It’s like putting money on a cookie jar to save just enough money to but something.
Sinking funds are one of DaveRamsey’s preferred ways of planning your budget for the long term. They are great for expenses that are predictable but don’t come up every month.
A good example would be annual membership dues that you pay only once a year such as water bill that comes once every third month. Things like that are perfect for sinking funds.
12. Opt for a 15-year mortgage
According to Dave, while getting a mortgage, it is always a wise choice to choose a (15 or less)-year mortgage because the “norm” of the 30-year mortgage can create a constant state of bondage for the middle class.
30 years is obviously a very long period to get debt-free. The concept of the 30-year mortgage can cause people to lose hope of ever being debt-free including their home.
And when you’re in the 15-year term, you’ll be paying a bit more per month that what you’ll be paying on a 30-year term, but it’s never too high of an amount, it usually rises on the 20% to 25% range, not an abrupt double amount! Which is manageable!
And in the long run the extra interest gets reduced along with the in-debt period when 15-year mortgage is chosen over a 30-year one.
13. Save as much as you can
What good does it do if the money you make doesn’t stay in your account for long? They just come and go instantly.
The ability to save a major portion of your income provides you with the freedom to steer your life according to your own terms.
Even if people start to make more money over time, they end up have no money to save.
This happens due to Lifestyle Inflation.
It refers to the gradual increase in expenses and spending as income grows which brings you back to square one and prevents you from growing your net worth.
And once you get used to this money-saving / frugal mentality, from that point on your saving tactics will run on autopilot. You would no longer have to spend hours contemplating every money spending situation.
Wrapping up, these are the few major money tips Dave put emphasis upon, the beneficial and a few outdated ones.
But no matter what other financial gurus claim, some strategies such as making more money, saving, thinking long term, investing, etc are some of the advice that remains the same for everyone.
Try to follow them and build lasting habits out of these advices.
Developing new money friendly habits that can be difficult for a while and can disrupt your sanity at times.
But let the words “money friendly habits” sink in, they’re beneficial for you, stick to these habits and soon enough you’ll witness pretty significant results.
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