Dave Ramsey is a huge influencer in the personal finance space. If you don’t know who I’m talking about yet, I will explain his program and methods along with his best tips for making over your money today.
Now, if you are familiar with Dave Ramsey, you probably know that people either love him or hate him. However, no matter how you feel about him or how he gives the advice, his tips are spot on.
Dave Ramsey’s tips are effective because they focus on changing behavior.
In order to really win with your money you will have to change what you have been doing. If you continue to do the same things over and over, you will get the same results.
Just like the old saying “the definition of insanity is doing the same thing over and over expecting different results”.
The same goes for your money. If you want to change your finances, you have to change how you are doing things.
These tips do not focus on math. Why?
Because, for MOST people (not all) their problem is behavior NOT math.
I am going to focus on his best tips and advice for changing your money habits for good, so you can start making over your money today!
You can get his book, The Total Money Makeover, that will explain his tips and advice.
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20 of the Best Dave Ramsey Tips
I found Dave Ramsey in March of 2015 after searching for debt pay off plans. That year we ended up owing several thousand dollars to the IRS and put it on a zero-percent credit card for 18 months. I quickly realized that I didn’t have any idea how I would pay it off in 18 months.
Little did I know that I would end up paying off all my debt except the mortgage in 17 months!
I was able to do that because of these tips!
These are the best Dave Ramsey tips and they will help you stick to your budget, save money, and pay off your debt for good.
In case you aren’t familiar with his plan, it is broken down into baby steps.
Dave Ramsey Baby Steps:
- Save $1000
- Pay off all consumer debt
- Save 3-6 months of expenses
- Invest 15% in retirement
- Save for kids college
- Pay off mortgage early
- Give generously
These baby steps are what his tips and plan are based around. The baby steps 1-3 are done one at a time and steps 4-6 are done together if you can. Then once you are to baby step 7, you are able to give generously!
1. Making a written zero-based budget
This is the first and most important step to ANY financial plan.
A written budget is the foundation for everything that you do with your money.
A budget will tell you what you and can’t afford. It will tell you exactly where and how to spend your money.
Now, when I am talking about a budget, I mean a zero-based budget.
This is slightly different than just writing down your income and expenses and spending what is leftover.
A zero-based budget means budgeting every single dollar. It takes a little more time but it is worth the effort.
2. Use Cash
Using cash saves you on average 15-20% just at the store. Studies have shown that we spend cash differently than swiping a card. We question the purchase differently and spend less when using cash.
Cash envelopes are a convenient way to organize your cash for each category and stick to your budget. Using cash helps you stick to your plan and stop overspending.
It is not necessary to use cash for every single bill. You would use cash for shopping and categories that you have a tendency to overspend.
Once you are out of cash in that category, stop spending for that category.
Some cash categories include:
- miscellaneous expenses
- kids expenses
- eating out
- fun money
You can also get a discount at a lot of places for using cash. Especially on someone providing a service and even medical bills. All you have to do it ask, the worst they can do is say no.
I saved several hundred dollars on replacing my HVAC system by asking for a cash discount.
A lot of hospitals and doctors offices will also take a cash discount if you pay it in full, even if you have insurance.
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3. Take care of the “four walls” first
When you are making your budget, you want to prioritize your spending. The “four walls” are the most important things that we need to survive and get to work. These things come before anything else.
The four walls include:
- shelter (rent/mortgage, utilities, taxes)
If you are behind on your bills, you catch up these things first. These items come before any debt payments.
So, make your budget then catch up on your four walls before moving onto the baby steps.
4. Live like no one else, so later you can live like no one else
This is one of the most known Dave Ramsey tips. Basically it means that you sacrifice and pay off debt now, so later you can enjoy your money like no one else.
Following his plan is not “normal” by today’s standards so, you live like no one else now so later you can live the life you want.
Basically, he is talking about sacrificing what you want now so you can have it later, without all the debt and stress!
5. You don’t need a credit score
Dave says you don’t need a credit score or as he calls it a “I love debt score”.
Now this tip is in general good but it is quickly getting outdated. I do agree with not focusing on your credit score and going into debt in order to keep it high.
The key with your score is that it has to be good or zero, not somewhere in between. One big objection to this is “what about a getting a mortgage?”.
You can get a mortgage without a credit score. It just can’t be a bad credit score.
There are instances where you need a good score for jobs or insurance. So, it’s important to know how a zero score will affect you. Most jobs that look at scores, just don’t want a bad one.
So, generally speaking, this tip is still valid.
6. Save $1000 before paying off debt
Saving $1000 is the first baby step in Dave Ramsey’s plan. Making your zero-based budget and catching up on your four walls are groundwork for the baby steps.
Saving a $1000 starter emergency fund will help you avoid adding new debt while you are working on baby step 2. This won’t solve all your problems, but it will be a buffer while you work on other things.
It will help you cover minor things that will pop up while you are paying on your debt.
If your income is below the poverty line, you can save $500 for this step instead of $1000. However, keep in mind that you won’t be able to cover as much if something comes up.
7. Pay off debt as fast as you can using the debt snowball
Paying off debt is baby step #2 in his plan. This step is meant to be completed as fast as you possibly can. The time it takes will depend on the amount of debt you have and your income.
It is crucial for you to stop using debt while you are paying off so you can actually finish this step.
The most effective debt pay off method for changing your behavior is the debt snowball.
The debt snowball is paying off debts starting with the smallest balance NOT the highest interest rate.
This is effective because you get the small wins and can see your debt disappearing.
If you are intense about paying off your debt as fast as you can, generally speaking, the interest rate won’t matter. Most people using the debt snowball pay off their debts in 18-24 months.
There are instances where the interest rate may matter and most of the time that is with student loans. There are occasions that refinancing your student loans may make a difference. Especially if it will take you years to pay it off and have a high interest rate.
Be sure to use a debt snowball calculator to see how fast you can actually pay it all off. It is probably faster than you think. The calculators are also an easy way for you to make adjusts and see how much faster you can do it.
8. Use sinking funds
Sinking funds are just saving for certain known expenses that don’t come up every single month.
Examples of sinking funds include:
- Vehicle maintenance
- Property taxes
- Medical expenses
- Kid activities
These are things you should plan for and put in a separate account or cash envelope so that it doesn’t accidentally disappear.
Saving for these things in a sinking fund are so important because if you don’t it will make it harder to stick to your budget and avoid debt.
The more you can plan for the less of an emergency it because when it comes up.
There are a couple of ways that you can save for sinking funds. If you know what you want to spend on Christmas for example, you can divide it by 12 and save that much each month.
Or you can fill the fund as you get extra money in your budget.
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9. Save 3-6 months of expenses
Saving for emergencies is critical for long-term success with your money. Dave Ramsey recommends saving 3-6 months of expenses as your emergency fund after your debt is paid off. This is baby step #3 in his plan.
The amount depends on your job security and risk tolerance. As you save in sinking funds and pay off debt, you expenses will decrease.
You will want to save for any expenses that will come up if you were to lose your job, so don’t forget about health insurance.
This will be your buffer if case you lose your job or have a major illness or emergency. Especially if you don’t have your major sinking funds fully funded.
This will keep you from going back into debt for an emergency.
10. Act your wage
Dave often says to “act your wage and to stop spending like you are in Congress.” What he means by this is to live in your means.
Stop trying to keep up with the “Jones” and be content with what you have.
You only have so much money coming in every month. You can’t live like you can afford Rolexes, BMWs, and Starbucks everyday on minimum wage.
You have to manage the money you have well now so you can build long-term wealth and retire comfortably.
11. Stop using debt
For Dave Ramsey’s baby steps to work, you have to stop using debt. This means you are not using your credit card for purchases. Even if you get rewards.
You have to stop using debt and pay it off. No one got rich with credit card rewards.
There is a reason credit card companies give you rewards, they know marketing and they know you will spend more.
When you are sticking to cash and your budget, you won’t need debt anyway.
12. Do not buy new cars
Buying a new car is great way to waste a lot of money as soon as you drive it off the lot.
The average new car loses 20% in value in the first 12 months. Most millionaires buy 2-3 year old vehicles.
A used car is not dangerous just because it’s used. A car only 2-3 years old is still safe and a much better value than a brand new car.
13. Save 15% at least for retirement
Once you are debt-free except the mortgage and have your emergency fund fully funded, then you get to start investing.
Dave Ramsey recommends saving 15% of your gross income in retirement accounts.
He recommends investing in your company’s 401k up to the match and then the rest in a Roth IRA.
Depending on your income, you may need to invest more in your 401k or a Traditional IRA depending on your situation.
Saving 15% of your income will help set you up for retirement and be able to live comfortably in the future.
Once you are completely debt-free, you will be able to invest even more and be able to save for your dreams.
14. Only take out a 15 year mortgage
As you can tell, Dave does not like debt. So, naturally, he doesn’t want you to have a mortgage forever.
He recommends a 15 year mortgage that is not more than 25% than your take home pay with 20% down.
If you only have a 15 year mortgage and no consumer debt, imagine how fast you would be able to pay off the mortgage.
You can go into retirement without a mortgage.
You could even cash flow college!
Dave doesn’t want you to have a mortgage hanging over your head anymore than he wants you paying on student loans forever.
However, at least a house is an asset and not a liability.
In theory anyway, your house should be appreciating in value and not depreciating.
One of the biggest problems with other debt is that it is either on a depreciating asset, like a car or boat, or they don’t have any collateral at all, like a credit card.
At least with a mortgage, you can sell the house and hopefully make money. If you follow his tips, you will already have equity in the house when you buy it.
So, it is even more less likely that you would be underwater on your mortgage if you do need to sell in a low market.
As I mentioned above, Dave’s tips are geared toward changing your behavior.
He firmly believes that if you want to change your finances, then you need to change.
Whether that means changing your mindset, job, budget, or whatever else, you need to change it to it get ahead.
Change isn’t easy but it’s necessary if you want to like like no one else.
Big dreams take big actions.
People will think you are weird or crazy but once they see the change, they will be asking for your help.
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16. Tell your money where to go or it will leave you
You have to “tell your money where to go or it will leave you”.
What he means by that is that you must be in control of your money or it will control you.
That means doing a zero-based budget and making sure that your money is doing what you want.
Determine what your priorities are and making your money work for those priorities.
When you don’t track your spending, your money just “disappears”. You have no idea where it went and how much you spent, let alone on what.
When you work the zero-based budget, your money no longer disappears without a trace. You know where your money went.
You know when you log into your bank account thinking you should have $200 and see you have $20 left? That’s exactly what I’m talking about.
You have no idea what happen and clearly weren’t paying attention so your money left you. I’ve been there so many times that I can’t even count it.
17. Cut up your credit cards
He also recommends cutting up your credit cards. This is because it will make you stop using them. It also makes you move faster through the process because you don’t have that “backup”.
It’s easier to not be as intense on paying off debt or saving when you know if something happens, you can just put it on a card.
If you don’t have the card anymore, that’s no longer an option.
It makes you more resourceful and focused on what you need to.
18. The best place to go when you are in debt is to work
When you are working his plan, the way it was meant to be, you want to get out of debt and save as fast as possible.
In order to speed up the process, you need to get to work. This includes working extra jobs, overtime, and hustling.
You may need to pick up odd jobs, deliver pizza, drive for Uber, or whatever you need to so you can get out of debt quickly.
I realize this isn’t always possible but do what you can to speed up the process and move on to living a life you love.
It takes short-term sacrifice for long-term gain.
It won’t be like this forever. Once you get your 3-6 month emergency fund, you can relax and not be as intense.
So in the grans scheme of things, being this intense should be short lived but have a life time of reward.
I was not able to work extra jobs because of my full-time job, but my husband was able to make extra money.
He was able to work overtime and side jobs, which helped pay off our debt months sooner.
19. Sell so much stuff that the kids think they are next
This goes along with working working working. While you are saving and paying off debt, start selling so much stuff the kids think they are next.
When I was paying off debt, I sold all my living room and bedroom decor. It ended up looking like I just moved in. But you know what, it helped!
We were also able to sell a couple of big things, like trailers and four-wheelers that cut our debt pay off time by months.
American’s have so much junk, storage facilities are a billion dollar industry.
Get to work having a yard sale, decluttering, and paying off your debt.
Even if you sell items for a dollar at a yard sale, you can make several hundred dollars in a weekend.
Look through your attic, garage, and storage units and see what you have to sell. It doesn’t hurt to list it on Craigslist or Facebook and see if anyone wants to buy it.
You can make quite a bit of money decluttering and have a more peaceful house.
20. Give Generously
Dave Ramsey’s entire plan and philosophy is based on being able to give generously.
This is one of the main reasons for managing your money well.
Being able to give to others without worrying about how to pay your own bills is a very rewarding experience.
Imagine all the people you could help if you didn’t have any debt, plenty of savings and retirement funds.
Imagine all the good you could do in your community. The lives you could impact.
You could even do this throughout the year, not just at Christmas time.
Dave Ramsey’s tips and common sense advice will help you manage your money and build long-term wealth. He has helped millions of people pay off debt and live the life they want, including me!
His basic principles include:
- tell your money where to go
- live on less than you make
- save for emergencies
- invest for the future
- give generously
This is all about changing behavior, even if you are bad at math.
Even if you suck at budgeting.
Especially if you have debt.
Living within your means, avoiding debt, and investing for the future will help you build a legacy for your family and future generations.
You CAN do this!