Dave Ramsey, the man behind The Total Money Makeover and The Financial Peace University, is a Financial Guru.
Now I don’t know that he is fluent in all things financial, but what I do know is that his approach for people to beat debt and build wealth are easy to understand and speak to the masses.
The Seven Baby Steps (by Dave Ramsey) to get your personal finances in order are:
(Links lead to DaveRamsey.com and fellow PF blogger posts)
- $1000 to start an Emergency Fund
An emergency fund is for those unexpected events in life that you can’t plan for: the loss of a job, an unexpected pregnancy, a faulty car transmission, and the list goes on and on. It’s not a matter of if these events will happen; it’s simply a matter of when they will happen.
- Pay off all debt using the Debt Snowball
List your debts, excluding the house, in order. The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first.
- 3 to 6 months of expenses in savings
Once you complete the first two baby steps, you will have built serious momentum. But don’t start throwing all your â€œextraâ€ money into investments quite yet. It’s time to build your full emergency fund.
- Invest 15% of household income into Roth IRAs and pre-tax retirement
When you reach this step, you’ll have no paymentsâ€”except the houseâ€”and a fully funded emergency fund. Now it’s time to get serious about building wealth.
- College funding for children
By this point, you should have already started Baby Step 4â€”investing 15% of your incomeâ€”before saving for college. Whether you are saving for you or your child to go to college, you need to start now.
- Pay off home early
Now it’s time to begin chunking all of your extra money toward the mortgage. You are getting closer to realizing the dream of a life with no house payments.
- Build wealth and give!
It’s time to build wealth and give like never before. Leave an inheritance for future generations, and bless others now with your excess. It’s really the only way to live!
Good Read: Accelerating our Mortgage Payments to Save Money
I know many of us have implemented the steps in various ways or have taken a different approach to snowball our debt. But if you are just starting on your debt free journey or are in need of a refresher, Dave Ramsey’s 7 Baby Steps is a good place to start (as many of you already know).
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What step are you on?
And if you’re out of debt – how long did Step 2 take you to reach all debt PIF’d (Paid In Full)?
Awesome way to tie in the Baby Steps with posts from around the blogging world. I can’t wait to get out of step number 2. Great post
I can’t believe the awesome drive and job you’ve done getting to where you are now! I really don’t know how you keep it going all the time. I am sure I would run out of steam.
And you know you have tons of support around the blog-o-sphere!
I guess I’m all over the place with those steps. I’m doing well and have a big investment portfolio, but I don’t own my own home, for example.
And I’m still single, which either means I’ve ticked the college funding box the sly way, or it’s a big expense still to come! 😉
Sweet. You can share the wealth, if you’d like. 😉
I don’t own my own home, but am hoping to one day. I’d be happy with a cottage surrounded by lots of flowers, herbs and vegetables. Something reminiscing Cape Cod. 😉
I have one starting college soon… at least, I think he is. But I am definitely not prepared. *sigh*
Jeff is the man!
Here’s one way to stay motivated! 😀
Debt Snowball â€“ Staying Motivated While Paying Off Your Larger Debts
Ooops, this reply was supposed to be for Jeff’s comment. Sorry.
Dave is good, kinda like Suze is good. They talk about the basics that it seems our general population seem to have missed (ie don’t buy consumer items with debt)
The area IMHO Dave gets dicey with his advice is recommending investment advisers. You are usually best to invest yourself by do some research on proper asset allocation. I have mentioned a few on my blog of recommended reading.
Bad Money Advice has some very good points about what’s bad about Dave Ramsey
Right, there is something to pick to your liking from each. Its whatever speaks your tune.
And I agree with you on the investment part. Its just one needs to take the time to invest into researching those wise choices.
Bad about Dave Ramsey… will go check out. I like seeing both sides of the coin. 😉
People only consider it bad advice because Dave doesn’t make it complicated. Investing in Growth Stock Mutual Funds is not bad advice, it’s just simple. People think you need to get into risky single stocks to build a portfolio but it’s not true.
I don’t consider anything bad advice that has been done and proven. Dave Ramsey only invests in Mutual Funds besides his retirement investments. Disagreeing with it is no problem but to call it bad advice just because you think people should day trade is ridiculous. (That’s not directed at you Investor Junkie, just a general statement.)
I personally do not plan on buying single stocks. I plan to do just as Dave Ramsey suggests by using Mutual Funds and for the record, he does recommend that anyone making ANY financial decisions needs to know what they are getting in to. He specifically says that if you do not understand the investment, get out of it. I think that most people that have a problem with Dave Ramsey have never gone through his FPU class because his investment lesson is pretty solid, as are his other financial advice. Him and Suze Orman are completely different financial personalities. (For instance, she has been telling people to quit paying off debt to save a large emergency fund.) I don;’t agree with that advice but to each’s own or however that saying goes.
Have you done FPU yet Christine? I know for a fact that you would love it! 🙂
I’m not mocking putting it in growth mutual funds. It’s the costly advisers that I’m at odds with. I see nothing wrong with advisers per se, it’s just in Dave’s case it appears it’s just a method of profit for him. And no I have no issue with Dave making money, it’s more the fact they are cheaper ways to do it.
Here is the specific blog post to counter what you discussed by Frank of Bad Money Advice
Talk about out of context? Even Baker picked up on that and he’s not a devout Ramsey follower.
I’ve never heard Dave Ramsey say that his way is the only way. He points out that his way is his way and that it has worked for him. His advice comes from what HE would do, and has done in the same situation.
Some say you should diversify by getting risky with single stocks. While there has been lots of money made doing so, there has also been a large amount of money lost due to the high risk of those stocks. They are in ways more like going to the Casino. He believes that someone doesn’t need to take on that much risk in order to grow wealth.
For the sake of this argument let’s just say you are right about Dave Ramsey.
If Dave has been bankrupt and acquired wealth a second time doing it his way, what’s wrong with that AND more importantly how can you say it is BAD ADVICE?
IF Dave was saying his way was the only way, you might have a point, but he’s not. He has his opinions obviously about why he does not use those other ways you talk about—it’s his opinion—but he never says it’s the only way.
Lastly, if Dave Ramsey was giving advice that he didn’t himself follow, you might have a point about whether or not his advice is built around making money or helping others, but he does the plan that he teaches. I believe the guy helps millions of people and he should make money, as you noted, but he doesn’t have to recommend every possible method just because they are there and that you think he should. It’s his plan, and many people, myself included, are benefiting from his “bad” advice.
People disagree and that’s fine, just like with anything everyone has an opinion. It’s just that calling it bad advice is bad advice.
I would like to also point out that people say that the way Dave suggests to pay off debt is bad money advice too. Dave’s Debt Snowball Method isn’t mathematical perfection because getting out of debt is about more than math. It’s got some psychological aspects that math nerds can’t seem to grasp, therefore declaring his advice to be bad.
I intend to prove and show my readers how Dave’s advice works every time. If it works it’s not bad advice, it just might not be for everybody—just like the 100% cash down plan for buying a home. I plan to do that as well, even though many say it’s STUPID or impossible.
People that have gone to school and consider themselves to be experts in investing get offended by Dave’s advice because you don’t need a degree to understand how it works. it’s NOT rocket science, or at least it doesn’t have to be.
Great post Christine!! 😀
“I would like to also point out that people say that the way Dave suggests to pay off debt is bad money advice too.”
From the time’s I’ve watched his show, correct me I’m wrong but he prefers you don’t have a mortgage? Personally at the rates current mortgages are at, compared to possible future inflation rate, to the ability to invest in other assets that will yield a greater return. If mortgage rates were in the 8%+ range (think the 80’s) you would be better to pre-pay it, as it’s much harder historically to get those returns in the market.
At least in my family’s case, our after tax rate on our mortgage is 3.65%, so all I need to do find an investment to beat this. Also with inflation in the past 30 years has been at 3.50% it’s basically an interest free loan. I’m paying it in future dollars that are worth less.
With you be able to sleep better at nite with a paid off mortgage? For many sure, just don’t state you’ll yield a better return by paying off the mortgage. For at least me personally, I would rather have the cash in other investments, than just in one large one (my house). Which technically isn’t an investment anyways. If the money is in liquid assets it’s possible to pay off the house very quickly if you choose so in the future. Once money put into the mortgage, it’s much harder to take back out (though not impossible).
I’ve never heard Dave say you get a better rate of return on a mortgage, it’s just a much better place to be when we have a crappy economy that’s getting worse, to have a paid for home. You got to let the math go sometimes dude. Emotionally, you can’t say that you wouldn’t be in a better position if you didn’t have a mortgage. That’s the other side of the story you seem to be missing. I’ll get my returns from investing in Mutual Funds, my house is my home.
Frankly, you put me to sleep with all those numbers. Not a slam on you, I’m just saying. Those numbers mean absolutely nothing to me.
With a paid off house: No worries of getting foreclosed on falling behind on payments—you will always have a place to call home.
Economy sucks = No worries.
Job loss = No worries.
Health Issues = No worries
A home happens to be an investment because you usually make money on it in the end, but for me a home has a much larger role in my financial plan. IT IS MY HOME. Now that’s not to say I want to get a lousy home with no potential for growth, but my home is my home.
Then when it is time to get a new home, guess what? With a paid off mortgage, you sell your home without having to worry about paying off a stupid mortgage. It’s all yours. 100% cash down again which in my world can get you A MUCH BETTER deal than when you take out a mortgage. If I have cash, I’m getting a better deal than you with a mortgage.
I understand where you’re coming from dude, but the average person doesn’t want to crunch all those numbers when it is possible to keep it simple. You also make the mistake of disconnecting from the other benefits that have nothing to do with math.
Nice conversation, thanks!
At least for me, I use math to help back up or downplay my emotions. Are my fears and concerns rational? What’s the likely situation to occur?
With investing in general we as humans are typically very bad at it. Using the same emotions to invest in the stock market will yield bad returns. You’ll sell when the market is low and buy when the market is high. I’m not knocking you just following your logic (or er emotions 🙂 )
Which is fine not everyone is apt to invest, my point is it’s not a better ROI (return of investment), it just makes you feel warm and fuzzy.
Regarding owning a home outright, unfortunately you still have taxes and insurance to pay. At least here in NY is a BIG amount of money. That won’t disappear once you own your house. Unfortunately a house isn’t an investment, it’s a place you live in. A rental property (that makes money) is an investment. You are net cash flow positive.
Here is a site that will give you the true rate of your loan after taxes.
Though as the loan matures, you do have more incentive to pre-pay as you are paying more and more towards the principle and then hence getting less of a tax deduction.
I have to say that I agree with Investor Junkie on this one. If I have a solid investment vehicle that will give basically give me ‘an interest free loan’ than I am all for it. It seems the wiser choice. I add this in addition to that the fact that a person is living in a home they CAN afford. My husband and I only pay 10% of our
netgross income to the mortgage (14% net income).
And I enjoyed the latter part, “a house isn’t an investment, it’s a place you live in. A rental property (that makes money) is an investment. You are net cash flow positive.” Nice.
Like I said in my post, we all have our way. But for one starting or refocusing on their financial journey, Dave offers easy to follow steps to implement.
Lucky you with 10%! You must live in a cheap area of the US.
Ya, it is very hard to find an affordable place to live in California no less! But my husband made sure to buy only what he could afford. It’s not a large house, but serves our needs. Our friends are amazed at what we pay for mortgage.
Like our friend down the street… They are paying 3 1/2 times what we pay but make way less than us. They also did a loan modification. I don’t know the stats, but I know the life of the loan will equal over $1mil (and the house is probably only worth $250K). Sad.
CA no less eh? Congrats! Either you make $$$ or you have a cheap house in no mans land. Either way it’s not easy to do in that state. You are much safer if it falls into the Pacific (at least financially)
It’s all good Christine! If I remember correctly the last time I had a long back and forth on your blog it was about credit cards with J Money, and you were on J’s side of that argument I believe. (you eventually came around from the dark side) Maybe you will come around on this one too. LOL Either way, you are still doing a great job! Keep doing your thing.
I will say though, that is 10% you don’t have to invest, save, or give. I’ll leave it at that. 🙂
Thanks for the great conversation Investor Junkie. It’s always a pleasure man!
Correction made: 14% net, 10% gross. Bring home good pay, but all tied up in debt. *sigh* dreams of what I could do differently with that money if not tied up in debt
I’ll side with you Brad. You aren’t alone. While I have been able to get better returns, the market as a whole has basically been 0 returns for the last decade. The vast majority did not make any money, and many lost a lot. So the 3.65% paying off the mortgage does beat it. That isn’t really the point though. 100% of foreclosures happen to houses with mortgages. If you pay it off it is yours.
Also, even at low rates, you are still basically borrowing money to invest. I don’t know very many people who advocate investing on margin, yet this is pretty much what you are doing when you invest the extra money instead of putting it towards the mortgage. Even if it is a better rate than any brokerage company will give you.
Finally, many people simply hate debt and/or believe it is wrong. Proverbs tells us that the borrower is slave to the lender. This is a great reason to pay off the mortgage.
Just thought of another good reason. If you hope to retire or maybe want to try starting a new business or something, have less money you need to pay each month is a pretty great thing. Not to mention losing a job or something of that nature. I was going over my budget the other day, and without our mortgage we could live comfortably on 20-25k a year. That would be great, I could start a business without any debt and live easily on my wife’s teaching salary. Couldn’t do that with a mortgage.
@Derek: The one size does not fit all regarding PF/investment advice. This is an issue with any “guru”. They give blanket statements. Age, NW, career path, ability to handle risk, are some of the many factors to consider what to do. Things like paying off the mortgage is an individual issue. There are many pros/cons to do or not do it.
Regarding stocks with 0% return the past 10 years, you are correct if you bought only in say 1999. Though most have proper asset allocation, saving monthly, your return would be approx 4-5%.
That was the past though. The better question is what is a better place to put your money in the future. Purely looking backwards leads to false assumptions.
The issue comes down to is your house or stocks a better deal, right now. It can be argued that stocks are a better deal. A house typically only increases either at or slightly higher than inflation (we won’t be seeing 20% yearly gains anytime soon). The Case-Schiller index shows we are not done with the housing downturn.
At best we’ll have a flatline increase in housing prices.
No matter what assets you have, having too much in one asset is never a good idea. Unless you want to “bet the farm”. For most people (especially if you follow Dave’s advice) their home is their biggest asset. Do you feel lucky enough to ensure you’ll do well with it in the future?
The only statement I have an issue with is:
“100% of foreclosures happen to houses with mortgages. If you pay it off it is yours.”
? Ever heard of tax liens? Regardless if your house is paid off or not, you don’t pay the property taxes your house will be taken from you. People go bankrupt because of lack of liquid cash flow, not because of net worth. If you have all of your money into your house and don’t have a job, it will be very hard to take it out with a line of credit.
Ok, you could get a tax lien, but you still wouldn’t be foreclosed. If you owe 0, you can always sell the house. The foreclosures happen when hard times hit and you don’t have enough equity to be able to sell quickly. I also am not saying don’t have an emergency fund, that comes before paying off the house.
I’d like to know where the 4-5% returns are from, the market has only been lower than it currently is for 2 years in the last 11 years. obviously there are stocks you can do well in, but the market as a whole hasn’t been good.
As for which are a better deal, I completely agree with you that stocks a better deal right now. That doesn’t mean it isn’t riskier. Also, you never commented on the margin issue. Do you invest on margin other than keeping the mortgage?
“4-5% return” Money mag Jan/Feb issue had great details about this. Page 82-83.
60/40 mix (stocks/bonds) for the 10 years.
Lump sum: 3.6%
Lump sum + $1000 monthly: 3.9%
Lump sum + $1000 monthly + rebalanced annually: 4.3%
“Also, you never commented on the margin issue. Do you invest on margin other than keeping the mortgage?”
Do I use margin? No because the rate can change, it’s usually high, and if you lose too much get a margin call. I would only use margin for extreme emergencies if I didn’t have the cash somewhere else. My accounts are setup on margin but I don’t use the margin.
I’m the type that believes the debt should be tied to the asset.
Sorry I forgot to mention it assumes you started with $100k.
Let me add the complete list:
100% S&P 500:
Lump sum: -1.1% $89,200
Lump sum + $1000 monthly: -0.3% $214,000
80% stock/20% bond
Lump sum: 2.9% $132,500
Lump sum + $1000 monthly: 3.7% $286,000
Lump sum + $1000 monthly + rebalanced annually: 3.8% $290,000
60% stock/40% bond
Lump sum: 3.6% $141,600
Lump sum + $1000 monthly: 3.9% $292,000
Lump sum + $1000 monthly: 4.3% $300,500
ah that looks closer to what I would have expected. Bonds did much better than stocks over that period.
Again, I agree that stocks are probably the better investment. I’m also confident in my ability to beat that 3-4% after tax that my mortgage is. However, I will still be throwing my extra money after the emergency fund and 15% retirement towards the mortgage and not more investments. Debt is still bondage, even at low interest rates, and I can’t wait to have that extra money freed up each month. The key to retirement isn’t having enough investments to cover my huge expenses each month, it is getting rid of as many expenses as I can.
Nice reminder! And thanks for the link 🙂
You’re welcome, Lakita. Nice to see you’re part of the Yakezie Clan. 😉
Brilliant minds in there!
I’m all over the place with Dave’s steps; I always have been but they are a fantastic guideline for people wanting to get their financial house in order.
Hope you have a might fine time in Pareeeeeee (with the rolling R).
Ya, I think we all have our variations. But yet we utilize in one fashion or another. And if you’re just starting that financial journey, those first two steps are awesome to begin with.
just what I needed sunshine, a quick kick in the butt reminder…. haha… now I just really need to get back to it… I just get bored! isn’t that horrible… I want it gone now & when it doesn’t go anywhere, I get tired of it & seem to stray…. blah
LOL. I know, it really is hard to keep the momentum. It is pretty much on autopilot for me. Especially since I automated everything. Once a month I log into my bank account, set up my bills, and that’s that. I almost feel that my money doesn’t need me anymore. Hahaha!
Stay on course, JpKittie! We can do it!
Here’s my breakdown Christine!
Baby Step 1 – $2,000/ 2 months
Baby Step 2 – $26,076.75/ 18 months
Baby Step 3 – GOAL $15,000 (Currently have $7,000)
Baby Step 4 – Can’t wait to start maxing out our retirement.
Awesome job, Brad! You are a great example of Dave Ramsey’s Beat Debt & Build Wealth. And there is no stopping you! Your momentum is fierce and an inspiration to many.
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I’m reading so much about Dave Ramsey that I am going to have to read it :)… I like the way you linked out to the other posts so will have to give them a read.
One thing that is stopping me from reading Dave is the fact that he clearly thinks he is a bit of a ladies man on his book covers…. for some reason that really annoys me :).
Congrats on the Netbook prize, will be awesome for blogging.
Hahaha! I can see that Forest. He does kind of look like he thinks he is the man. I assure you though he is not that shallow. LOL It is pretty funny though.
I would say this to you Forest. You will certainly not lose anything by reading his book. I have given that book to so many people, Christians and non-Christians alike, and they all say the same thing; it changed the way they looked at managing money. The non-Christians might add that it is a bit to Christian for them, but I think as long as you hear the overall message, you should be able to see past what you disagree with as far as his religious views.
I have read many PF books and this one was by far the best one out there. It was the only one that motivated me to actually do something. All the others may have been great reads but they failed to motivate me. It is inspirational! AND it is filled with common sense money principles.
Financial Peace University is a very good resource for acting out the Total Money Makeover. You may be interested in that too.
I just found out I have won a copy of Total Money Makeover (on a winning streak recently!)… Wen it arrives here in Cairo i’ll rip the cover off to contain my annoyance(jk!!) and then try and read with an open mind.. I am sure it will be a great thing for me :).
LOL. Rip off the cover, eh?
I agree with Brad, “you will certainly not lose anything by reading his book”. Love to hear what you think about it!
I really like Dave Ramsey’s approach. It is a really easy system that anyone can follow. Anyone can understand his 7 baby steps.
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