Whether you are looking for ways to get out of debt fast or ways to save money when you are on a tight budget and living paycheck to paycheck, Dave Ramsey’s money tips can help you a great deal.
Dave Ramsey is one of the world’s foremost experts on personal finances and has been instrumental in helping people take back control of their finances. He hosts the popular podcast “The Dave Ramsey Show” and his book, The Total Money Makeover, is a must-read.
Over the years I have benefited immensely from the insights detailed in Dave Ramsey’s books, especially when it comes to creating a budgeting system that works!
Dave Ramsey’s Baby Steps
Before I dive into some of the best Dave Ramsey money tips, let us take a look at the core foundational strategies he has championed over the years for overhauling poor finances and building wealth. Popularly known as Dave Ramsey’s 7 “Baby Steps,” here are the steps you need to take to whip yourself into financial fitness and achieve financial freedom:
- Start with a $1,000 Emergency Fund
- Pay off all your debt using the debt snowball
- Save 3-6 months of expenses in an emergency fund
- Invest 15% of your income towards retirement
- Save towards your kid’s college education
- Pay off your home early
- Build wealth and give back
A bit of a summary on what each of these steps entails:
Start With a $1,000 Emergency Fund
When your finances are in the gutter, you need to buckle up and take fast action. Dave suggests that you save up $1,000 and keep in a checking or savings account that is designated as your emergency fund.
$1,000 appears a bit on the low end in today’s world where everything costs more; however, it is a good starting point. Surprisingly, as per a GOBankingRates study, 69% of Americans have less than $1,000 saved up! An emergency fund can help you avoid going further into debt. For instance, if your car suddenly breaks down or your home plumbing starts to leak.
Pay Off All Your Debt Using The Snowball
A debt snowball strategy is one that focuses on paying off your smallest debts first without worrying about interest rates. Rank your debt from smallest to largest. The idea here is to create an incremental incentive to pay off all your debt as you savor the joy of knocking off one debt after another.
Pay off all your consumer debts – credit card, personal and student loans, excluding your mortgage.
Save 3-6 Months of Expenses in an Emergency Fund
After you have cleaned up your debts, it is now time to beef up your emergency savings. An adequate emergency fund should cover all your monthly expenses for 3-6 months. This is so that if you suffer any disasters such as lose your job or break an arm, you don’t end up breaking the bank and rack up debt again.
Your emergency fund should be put in a safe account (plain-vanilla savings account) that won’t tank or lose value if the financial markets decide to blow up.
Invest 15% of your Income Towards Retirement
This is similar to the “Pay Yourself First” principle. The time to start investing for your retirement was yesterday. Start by investing in your 401(k) and max out any employer contribution match available. Next, invest in a Roth IRA and in other investment accounts.
Start investing early so you can take advantage of compounding interest over time.
Save Towards Your Kids College Education
With your retirement savings ongoing, consider setting aside funds for your kid’s future college tuition. 529 accounts are a great place to start. If your kids eventually seek post-secondary education, you will be able to help them start off on a right footing and with little or no debt burden.
Pay Off Your Home Early
A mortgage is often the biggest debt that the average American will carry in their lifetime. After paying off your debt and while saving for retirement, you should also consider tackling your mortgage so you can become totally debt-free.
More on Dave’s recommended strategy for paying off your mortgage fast later in this post.
Build Wealth and Give Back
When you have freed yourself from the shackles of debt, it is time to consider helping others in ways you have never done before. Continue to grow your investments and give generously to help others.
16 Best Dave Ramsey Money Tips
Dave Ramsey’s Baby Steps provide a picture of what you want to achieve as you start on the journey to turning your finances around for the better. He also has several specific tips on budgeting, saving money, paying off debt, buying a home, paying off your mortgage, purchasing a car, and more, that will help you reach your goals.
Here are 16 of the best Dave Ramsey money tips you need to know today!
1. Decide To Change
When you are in over your head in debt, the first step is for you to realize that debt is bad. In Dave’s words, you need to become “sick and tired of being sick and tired.” When you finally understand that you are the problem (and the solution to your problem) and that you need to change your ways and make sacrifices to get ahead…when you change your behavior towards debt, your journey towards financial freedom can finally begin.
A major barrier to winning is our view of debt. — Dave Ramsey
2. Start With a Zero-Based Budget
List your expenses and income and create a monthly budget that achieves your money goals. Dave advocates using a zero-based budget that involves allocating every dollar of your income beforehand such that your income minus expenses equal zero.
This budgeting system forces you to see where all your money goes. Every dollar must have a name and task it accomplishes. Designate your paycheck dollars to food, shelter, transportation, utilities, debt repayment, etc. until there’s nothing left.
After budgeting every dollar, if you still have expenses unaccounted for, this is a sign that you need to further cut your expenses. Here are 115 easy ways to save money and cut your expenses.
3. Focus Your Efforts When Paying Off Debt
Start with taking baby steps. This is where the debt snowball vs debt avalanche debate comes up.
Debt snowball requires you make the minimum payments on your non-mortgage debts and then focus on any remaining funds on paying off the smallest balance as quickly as possible irrespective of the interest rate. The debt avalanche strategy, on the other hand, focuses on paying off the debt with the highest interest rate.
I prefer the debt avalanche repayment strategy because it saves you more money overall. However, debt snowball allows for quick wins which make it easier for you to remain motivated since you can easily see the progress you are making with your finances – one debt getting paid after the other.
4. Build an Emergency Fund
It is a smart move to save and be prepared for the unexpected. Start with $1,000 in cold hard cash in your savings account (i.e. baby steps) and after paying off your debts, continue to build it up until you have enough money to cover 6 months of expenses.
Sh*t happens! And, when you have no funds available to spend, you can go right back into credit card debt. Your emergency fund should only pay for real emergencies and not be converted into a piggy bank you use to pay for stuff.
Note that your emergency fund should be in highly liquid assets (savings account) and be easy to access when required.
5. Use Cash (Cash Envelope System)
It is a well-known fact that people tend to spend less money when they are paying with cash. If you are trying to pay off credit cards that can have interest rates as high as 30%, it makes sense to start spending cash only.
The Envelope Budgeting System can work well with the zero-based budget. Simply take the money allocated to each category of spending and organize them into envelopes. Spend only cash and once you are out of cash for a category, pause spending until the next month when the process starts all over.
As per Dave Ramsey,
You are being robbed every day by not using the power of cash.
6. Act Your Wage
Live within your means and do not spend more than you earn. Actually, you need to spend much less than you make if you are ever going to become debt-free. In the Total Money Makeover, Dave talks about keeping up with the Joneses. Don’t let the pressure to conform with the consumeristic norms set by your peers, neighbors, friends, or media drive you into debt.
Want to drive the best car? Live in the biggest house? Send your kids to the most expensive schools? If you live your life only to impress, you better have deep pockets. To quote Dave Ramsey:
Don’t even consider keeping up with the Joneses. They’re broke!
7. Don’t Buy a New Car
The cost of an average new vehicle is through the roof and Americans are now paying $551 per month in car payments. Even worse is the fact that car loan terms are longer at an average of 72 months.
A car is a fast depreciating asset and a new car loses more than 60% of its value in the first 4 years. Instead, buy a used pre-owned vehicle that is certified and save thousands of dollars in interest payments. Pay for a car you can afford in cash and maintain it well. If you can avoid buying a car (by walking, biking or taking public transport), even better.
8. Cut Up Your Credit Cards
This goes back to point #5 and using cash. While a lot of people have subscribed to the myth that you need a credit score in order to conduct most financial transactions e.g. book a flight or hotel accommodation, rent a car, and obtain a mortgage, this is just not true. You can live your life debt-free, with zero credit cards, and without a credit score.
At the end of the day, the choice is yours. If you are disciplined enough to always pay your credit card balance on time and stick to your budget, this advice may not matter to you. However, if you are always paying interest fees on your cards, go ahead and shred them!
9. Increase Your Income
There is only so much you can do to lower your monthly expenses. If your expenses exceed your income, this is the time to take up additional part-time jobs or side hustle. By increasing your income, you can pay off debt faster, save/invest for retirement, and even take a nice vacation without breaking your budget.
Some side hustles to consider for making money in your spare time are”
- Start a profitable blog: Learn about how to start your blog in 6-easy steps and earn thousands of dollars every month.
- Complete online surveys: Simply use your phone or tablet and make money when you are doing nothing.
- Teach English online: Earn up to $22 per hour when you teach English to kids from the comfort of your home.
- Work as a virtual assistant from home, or provide proofreading services in your spare time.
10. Limit Your Mortgage to a 15 Year Term
Don’t settle for the 30-year mortgage term. Choose a 15-year term and you can save well over $100,000 in mortgage interest payments. In addition, you can pay off your mortgage even faster using one or a few of these simple strategies:
- Make an extra mortgage payment each quarter
- Refinance at a lower rate when it makes sense…continue to make the higher monthly mortgage payment
- Make a bigger down payment
- Round up your monthly payments
- Do not buy more house than you can afford
11. Add a Buffer To Your Budget
Create a buffer in your budget for unexpected expenses that may come up and which do not fall in the emergency fund category. Allocate some funds to this ‘miscellaneous’ category to allow you some breathing room.
You may need to revise your budget from time to time in order to determine whether some expenses need to be included as their own category.
Sell stuff so you can pay off your debt faster. Clean out your closet, basement, garage, and turn your clutter into cash by holding a yard sale or sell in online marketplaces like Facebook, eBay, or Craigslist.
Take an inventory of your possessions and be drastic about what you need and what you don’t need. Live with intention so that you do not end up accumulating a lot of unnecessary stuff again.
13. Have Your Spouse and Kids on the Team
You and your spouse should agree to your budget and be on the same page with regards to your finances. Bring the kids in on the action as well. Discuss your financial goals at the family table and let everyone share their ideas. All and sundry should be aware and agree to the need to save, save, and keep out of debt.
If you are saving towards your kid’s college education, let them know why and encourage them to pitch in. Keep each other accountable.
14. Invest Aggressively
Invest 15% of before-tax gross income annually towards retirement. — Dave Ramsey.
Invest aggressively and early on in order to build wealth. Dave’s portfolio consists of four types of funds as follows:
- 25% Growth and Income Funds (Large Cap or Blue Chip Funds)
- 25% Growth Funds (Mid Cap or Equity Funds)
- 25% International Funds (Foreign or Overseas Funds)
- 25% Aggressive Growth Funds (Small Cap or Emerging Market Funds)
While this portfolio is definitely aggressive and not suitable for everyone, the general idea is you must understand the relationship between risk and return. The higher the risk you take, the higher your potential returns (and losses). Start investing early and let compounding interest work for you.
15. Live Like No One Else
A popular line from Dave Ramsey is “if you live like no one else, later you can live like no one else.” This means exactly what it says. You need to pay the price for whatever good thing you want in life whether it is financial freedom, wealth or good health.
The majority of millionaires in America are self-made. They were not just lucky! Forget about the cry of the maddening crowd. Choose your own life’s path and walk the walk.
16. Celebrate Your Milestones
The Total Money Makeover and other money tips by Dave Ramsey are not really about depriving yourself for life. Each step in the ‘Baby Steps’ is an accomplishment worth celebrating. Take stock of your wins regularly and give yourself a treat.
When you reach Step #7, there is nothing stopping you from living your life the way you want to as long as you can afford your lifestyle. At this stage, your money works for you and is the gift that keeps on giving. Even Dave Ramsey purchased a multi-million-dollar home.
And, while on this journey to improve your finances, don’t forget to help others out.
What other Dave Ramsey money lessons have been beneficial to you?