Dave Ramsey: “The Money Man”
I first discovered the work of Dave Ramsey last year. I watched some of the videos on his YouTube channel to learn more about personal finance. Dave’s YouTube channel includes short video clips of his nationally syndicated radio show.
Personally, I honestly believe that Dave Ramsey is one the best personal financial experts out there. His practical advice about budgeting, real estate, and saving money has taught me about what it means to become a faithful steward of my finances. On top of that, Dave’s blunt guidance, Christian principles, and anti-debt attitude has helped millions of Americans to get out of debt and take control of their finances.
A few weeks ago, I picked up Dave Ramsey’s book Complete Guide to Money to further grow my understanding of personal finance.
I am so glad that I read this book, and I highly recommend that you read it too! In this post, I decided to share my 5 takeaways from this book.
5 Important Takeaways
1. Dave Ramsey’s 7 Baby Steps: An effective map to build wealth
In this book, Dave includes his 7 steps to achieve financial freedom. You’ll see how much Dave is not a big fan of debt (and for good reason). The first part of
Here is Ramsey’s 7 Baby Steps list:
-Baby Step 1: Put $1,000 in a beginner emergency fund
-Baby Step 2: Pay off all debt using the “debt snowball” (The debt snowball is a method to pay off one’s debts. You start by paying off the smallest debt principle amount first, then 2nd smallest, then the 3rd smallest, all the way until you pay off your largest debt principle amount).
-Baby Step 3: Put 3-6 months of expense into savings as a full emergency fund
-Baby Step 4: Invest 15% of your household income into Roth IRAs and pretax retirement plans
-Baby Step 5: Begin College Funding of your kids
-Baby Step 6: Pay off your home early
-Baby Step 7: Build Wealth and Give
2. Budgeting is Key
Dave Ramsey heavily stresses the need to create a monthly budget.
At the beginning of each month, Dave recommends allocating 100% of your income into whatever ways you see fit to use your money. It’s okay that your budgets will be pretty off for the first several times that you try it. Still, budgeting keeps you disciplined and is one of the first steps in taking control of your money. Creating a budget forces you to become an active manager of your finances. Never again will you wonder how you’re broke at the end of each month once you start making a monthly budget.
3. Insurance is a must-have
According to Dave’s book, the following types of insurance are a must-have for everyone: Homeowner’s, renter’s, auto, health, disability, term life insurance, identity theft protection, disability, and long-term care (the last type is only for 60 year olds & up).
Side note, Insurance is not an investment. It is a way to hedge against risk. Don’t treat insurance like an investment, That means you should not buy whole life insurance. It’s not a good deal for you–no matter what the whole life insurance salesman is telling you.
4. Don’t let Homeownership become a nightmare
Homeownership should definitely be a part of one’s long-term financial plan. Homes a forced savings plan and typically appreciate in value. Undoubtedly, buying a home is a better long-term investment strategy than renting. Nevertheless, Dave does warn people about the dangers of a large mortgage. Homeownership can become a nightmare if you are not financially ready for it.
First off, only buy a house using a 15 year-fixed rate mortgage. 30 year mortgages, reverse mortgages, and adjustable rate mortgages are really, really, really bad ideas.
Secondly, your monthly mortgage payment should take up no more than 25% of your monthly income. Any amount larger than that and you’re at risk of becoming “house poor”.
Thirdly, have no less than 10% down payment when you’re buying a house. 20% is a better target to shoot for because any number less than that percentage can lead to higher monthly mortgage payments—due to a bank requirement called a “private mortgage insurance”.
5. Start Saving for Retirement Early
As 21 year-old guy, it’s never too early to start saving for retirement. Just putting a small amount of money into a retirement account (e.g. Roth IRA) is a worthwhile enterprise. Dave gave a solid example concerning this topic in the book. I’ll
When you’re in your twenties, you have your life ahead of you. “Compounding” allows you investment portfolio to grow at a much faster rate over a long period of time.
Let’s say Martin is twenty years old. He decides to contribute $150/month to his investment portfolio for the next 45 years. If Martin’s portfolio grows at 10% annual rate (i.e. near the average return of the S&P 500 index), then his retirement portfolio will stand at nearly $1.3 million!
In that 45 year span, Martin only contributed $81,000. So, that $81,000 grew into $1.3 million just by the power of “compounding”!
Pretty cool, right? Let’s imagine a different scenario. Brian doesn’t start saving for retirement until 35. However, he contributes $300/month (double Martin’s monthly contribution). If Brian contributes that amount until he’s 65, then a 10% rate of return will leave him with a retirement portfolio of about $600,000.
Brian invested $108,000 into his retirement account. Yet, Brian finished with a portfolio that’s half the size of Martin’s portfolio. Brian invested more money and ended up with much less money at retirement.
That’s the power of compounding! Your money can grow at much faster rate if you give it a longer time frame to compound.
Overall, I definitely recommend Dave Ramsey’s book. It’s a solid primer for anyone interested in learning more about the art of personal finance.