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Post a CommentIf you’re looking to get out of debt, handle your finances, and build long term wealth; you may be tempted to see what the financial gurus are saying on what to do.
One of the most popular financial gurus out now is Dave Ramsey. He has reached millions with his Total Money Makeover system, Financial Peace Univerity classes, his radio program, and TV show.
Dave Ramsey on Getting Out of Debt and Credit Cards
Dave Ramsey is aggressively focused on paying off debt. He encourages his readers and listeners to have gazelle intensity.
Dave Ramsey is against credit cards. He advocates using check cards/debit cards instead of credit cards because they take money directly out of your checking account.
He is a big believer in the psychology of personal finances and notes that the pain felt in a wallet from using your debit card has a bigger impact than just borrowing on your credit card.
Dave Ramsey and Building Wealth
Dave Ramsey has a pretty consistent message on debt reduction and wealth building. He outlines a direct and clear 7 step program that he calls ‘Baby Steps’.
1. Save up for a small emergency fund. For most people Dave mentions saving up $1,000 to cover for emergencies while you aggressively work to pay down your debt.
2. Pay off your debts with the debt snowball strategy. Dave is a big believer in paying down debts according to amounts owed rather than interest rate. It’s due to his firm belief that handling personal finance is about focusing on changing behavior.
If you’re more of a numbers person, you may not agree with Dave’s approach as it can cost more money than a pay by interest rate plan.
3. Grow your emergency fund 3 to 6 months of expenses in savings. After you paid off all of your non-mortgage debt, Dave wants you to go back and really build your emergency fund. He also suggests that the size of your emergency fund is determined by the more financially conservative spouse.
4. Save and invest 15% of your household income into Roth IRAs and pre-tax retirement. After you have paid off your debts, you should have some ‘extra’ money ready to be used to build wealth. Dave Ramsey advises directing that money to retirement investing and specifically into growth mutual funds.
5. Save for your child’s(or children’s) college fund. Some people feel they have to put their kids’ college funds ahead of their retirement invensting. Dave points out that kids can receive scholarships and financial aid if neccessary; parents have no safety net.
6. Pay off your home mortgage early. Not being a fan of debt, Dave suggests paying the mortgage as soon as you can; after taking care of earlier steps of course.
Some people disagree with this step as they think that investing would give bigger returns. Again, Dave is looking at not just the numbers, so his advice may go in a different direction than some other financial gurus.
7. Build wealth and give! This step is taking the habits you develop and using your money to reflect your values. Dave Ramsey is a huge proponent of giving to worthy causes and highlights stories on his radio show where people share their success.
What Dave Ramsey Says About Buying a Home
Dave Ramsey’s thoughts on buying a home is based on his financially conservative values. He favors a 15 year fixed mortgage with a payment no more than 25% of your monthly net pay.
He also advises for at least 10% down for your house, but if you can afford more, the better.
My Thoughts On Dave Ramsey
While I don’t agree with everything he says (no investing at all until Baby Step #4), I think Dave Ramsey’s Baby Step system is a great guide for those looking for a way to dig out of debt and build their finances.
It’s clear and the guidelines looking at the psychology behind personal finances and works.
With everything, find out if this advice is useful for you. No one is going to care about your finances like you do. Following the guidelines of a financial guru doesn’t get you off the hook for personal responsibility.
What are your Thoughts?
Do you listen to financial gurus’ money advice? If so, which one? Is there a financial guru you’d like me to review?
Four Pillars has a post out today: Is Dave Ramsey A “Financial Expert”? He shares his thoughts on Dave’s financial skills. You should check it out.
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Like you, I don’t agree with everything Dave Ramsey says. Personally, I think you can use credit cards to your advantage, if you have the discipline to only buy what you already have the money for. Rewards and cash back — as long as you aren’t paying interest by carrying a balance — can be bonuses of proper credit card use. But, overall, I think he offers doable advice for most people struggling with their finances. And he can be very inspiring.
Here’s my take on Ramsey: The poorer you are, the better his advice is.
Totally agree, TJ. His advice is multiple times more important to someone who is sitting on a mountain of debt and in bad shape financially. He has great and inspiring things to say. He definitely contributes a lot to this world by changing peoples lives. I dare anyone to read his Total Money Makeover book and not take action because of it.
You’re right TJ.
I think he has a great debt reduction plan. I think it’s worked so well because Dave know addressing the psychological barriers is better than just looking at the numbers.
I agree. The action plan in Total Money Makeover is good–up to a point. I know that we can squabble over little details (pay off the lowest balance debt first vs. the debt with the highest interest rate, etc.) but those details don’t matter much. Where I find that Ramsey goes wrong is in his approach to insurance and investments. Term insurance is a great tool to provide income protection in the years when a family is fighting the debt monster, but Dave completely belittles the value of good, permanent life insurance and it’s place in a financial plan. on investments, Dave talks about “averaging 12% per year in good quality mutual funds. This is foolish (and dangerous) for many reasons.
Meh, I think Dave Ramsey has some good advice, but I tend to be a bit leery of anyone who has hard and fast rules which never change. My biggest concern with Mr. Ramsey’s advice is rule #4, investing 15% for retirement. Besides the fact that growth funds tend to underperform value-oriented funds over the long run, there’s the little matter of the fixed 15% he recommends investing. While that amount might be adequate for someone starting to invest in their thirties or even their early forties (and is likely overkill for most twenty-somethings), for those in their late forties, fifties or even sixties who are just getting out of debt, it’s likely to be insufficient, unless the stock market yields much higher than historically average returns. An acknowledgment that people in different stages of their life will require different investment amounts would be better.
As for other gurus I’d like to see reviewed, I’m most familiar with David Bach and Suze Orman, and appreciate seeing what other pf bloggers think about them.
[...] week, we look at Dave Ramsey and some of his thoughts on personal finance. This week, we’ll look at another financial guru [...]
Thanks for the link – I added a link back to this review as well.
Mike
[...] your relationship. For many people, a fight about money isn’t really about the money. As Dave Ramsey likes the point out how personal finance is 80% personal. While we were growing up we were learning [...]
[...] Financial Guru Review: Dave Ramsey [...]
I’ve read many blogs where many people slam Dave Ramsey’s methodology on debt elimination and personal financing….and the majority of those up in arms about it seem to be insurance salesmen themselves. Here’s the bottom line: Dave Ramsey’s show largely focuses on those who are up to their eyebrows in debt. His idea behind complete elimination of credit card debt in my opinion is sound – why would I pay extra money to buy something with money that is not even mine? The reason most people are in debt now is because they have little grasp on the reality of using credit cards and the consequences of such; hence Dave’s push to eliminate credit use altogether. As far as life finance planning post-debt, that should be your call. Sure Dave can suggest term life and what-not…but you have a brain, and some common sense. You should be encouraged to use the two and some basic math to figure out what will work best for you and your family (if you have one) and go for that route.
I like Dave’s debt elimination advice, and I listen to his show regularly. Does that mean that I will follow every exact advice he renders? absolutely not. It’s like being on a highway – you take that road as far as you need to, and when you get to where you are going, there’s the off-ramp. From there…it’s up to you to get home.