Dave Ramsey is a finance expert known for sharing valuable advice on everything from owning a home to investing. Below, we’ve narrowed down Ramsey’s top 18 tips that everyone should think about following.
Live on a Budget
Try a “zero-based” budget, where every earned dollar is allocated. This method ensures mindful spending aligned with your priorities. To start, list how much you earn and how much you spend. Then, figure out what’s left after covering essentials. Living on a budget prevents unplanned expenses, ensuring you cover your bills and save for the future.
Have an Emergency Fund
Emergencies, like job loss or unexpected expenses, are part of life. You might have to borrow or incur a substantial credit card debt if unprepared. An emergency fund is the best way to protect yourself against these hardships. Ramsey advises starting with a $1,000 mini-fund before tackling debt. Then, once you are debt-free, save 3-6 months of living expenses.
Set Aside 15% of Your Income
Dave Ramsey advises investing 15% of your total income for a secure retirement, which is more than the often recommended 10%. With future investment returns expected to be lower and people living longer, relying on a 10% savings might cause you to run out of money. Allocating 15% builds a substantial nest egg, providing financial support in case of costly health issues, early retirement, or a longer life.
Shop with a Plan
According to USDA research, an average family of four spends about $970 monthly on groceries. To cut costs:
- Avoid “budget busters,” i.e., unplanned, small purchases that add up.
- Stick to a predetermined meal plan while shopping, resist deviations, and consider ordering online to avoid temptations.
- Leave the kids at home during supermarket visits.
Don’t Compare Your Finances
Comparing your financial situation to someone else’s can make you feel mediocre, even if false. It may also lead to spending more money than necessary to impress others. Frivolous spending is the number one enemy of building wealth. Remember that every dollar you spend on non-essentials is a dollar you aren’t saving.
Take Advantage of Money-Saving Tech
Today’s gadgets and apps offer great ways to save. Use budgeting apps, such as coupon and cash-back apps, and banking apps for automated savings. Additionally, consider using smart devices at home to reduce your electricity bills. While these devices may have upfront costs, they can prove cost-effective in the long run.
Clear Your Debts Before Making an Investment
Many Americans now consider debt a common aspect of life. In 2023, the average total household debt, as reported by Experian, stood at approximately $103k. Before investing, eliminate all your debts except your mortgage. According to Ramsey, building wealth becomes challenging when dealing with monthly charges on different debts, compromising your primary tool for wealth-building—your income.
Leverage the Snowball Method
To eliminate debt, Ramsey recommends the “debt snowball” method. This approach involves tackling debts from most minor to largest, securing quick victories that close accounts and build confidence. As you face a more significant deficit, the momentum gained, and the absence of smaller debts make it easier to concentrate and overcome the more critical challenges.
Use Sinking Funds
Here’s how sinking funds work: Each month, you set aside a specific amount for a particular purpose, saving up for future needs. This way, you accumulate small amounts over time, avoiding the need to generate a large sum all at once. Sinking funds are beneficial for expenses that can’t be covered in a single month’s budget, such as vet bills, Christmas gifts, or wedding expenses.
Choose the Cheapest House in the Best Area
If you plan to buy a house, choose the least expensive one in the best neighborhood you can afford. This ensures your home’s value has room to increase over time. Don’t go for a house with upgrades that surpass the neighborhood standard. Why? Because future buyers may not be willing to pay extra for features that don’t match the area.
Never Buy a Home Without a Down Payment
Ideally, it would help if you aimed for a 20% down payment to avoid mandatory private mortgage insurance on low down payment loans. If you buy a home for the first time, go for a minimum 5% down payment. This advice is essential because lacking a substantial down payment can lead to limited lender options, a more expensive loan, and the risk of being stuck owing more than your house’s value.
Have Renters Insurance
For renters, Ramsey recommends having renters insurance to protect your belongings. It covers damages or theft of your possessions, preventing unforeseen expenses in situations like electrical issues or fires. Renters insurance also provides liability coverage, protecting them against potential loss if someone is injured on their property.
Avoid Store Credit Cards
Forbes Advisor says the average credit card interest rate is 24.25%. That’s very high, but store credit cards usually run even higher! Additionally, store cards often have low credit limits, potentially leading to a high credit utilization ratio that can harm your credit score. Not to mention, they have restricted use, rewarding loyalty but limiting you to that specific store.
Be on the Same Page with Your Partner
Being financially compatible means you and your partner agree on money matters. Aligning with your partner regarding money improves your financial situation and enhances your overall quality of life. If your partner’s views differ significantly from yours, it could lead to conflicts.
Opt for Term Life Insurance
Ramsey suggests opting for term life insurance, primarily if others rely on you, instead of whole life insurance. This is because term life provides essential protection at a lower cost. Ramsey recommends a death benefit of 10-12 times your yearly income for sufficient coverage. Getting this policy while you’re young and in good health is essential to prevent financial difficulties for your family if something unfortunate happens.
Plan for Your Future
Ramsey suggests saving about 15% of each paycheck, especially if the household income is around $70,000. This means investing $875 monthly or $10,500 annually. Over 30 years, with an average return of 11%, this approach could result in around $2.3 million. Ramsey recommends tax-advantaged accounts like a 401(k) with employer contributions or, if not possible, traditional or Roth IRAs.
Focus on a Single Goal
Concentrating on a single goal with the highest potential payoff is often best. Rather than juggling multiple financial goals simultaneously, such as saving for retirement, paying off high-interest debt, and building an emergency fund, concentrating on one will yield results sooner.
Know When It’s Time to Ask for Help
Managing various accounts and income sources can get complicated. Working with experts like financial advisors can fill in the gaps, improve your financial decisions, and steer you toward wealth. When finding the right financial planner, Ramsey emphasizes understanding your needs, exploring different types of advisors, and comparing costs and services.
