Dave Ramsey is a polarizing figure.
Some people love him and swear by his advice. After reading his books and listening to him on the radio, many have changed their lives. It's quite amazing.
But others disagree with his approach. Some think he's just a savvy businessman. Some point to his anti-debt stance and how it would be impossible to live that way. They point to his house and say he's putting up a facade.
Which one is he?
It doesn't matter.
In this world, you're responsible for you, your family, and your financial situation. If the advice Ramsey provides works, that's all that matters. There are thousands of people who are out of debt because of Dave Ramsey. You can't argue with those results.
Do What Works
The reality about money is that there isn't a single answer for everyone. With billions of people on the planet, each with their own set of unique circumstances, to believe there is one right way is foolish.
The problem with personal finance is that there are multiple solutions to any one problem. If you think it's only about math, you're wrong. Someone in credit card debt understands that when you use your credit card and don't pay your entire bill, you'll go into debt. They aren't stupid, they know how interest works, but there is a non-math reason why they're in debt.
Maybe they had a medical problem and no insurance to cover it. Or they had bad insurance and the co-pays and co-insurance were high. If you have a heart attack, you're not going to pull out your budget spreadsheet and find out whether you should get treatment today or next week. You get treated and deal with it.
Maybe they were just young and naive. They were having fun and spending on credit cards believing they will get caught up when they make some real money. But then it was hard to find a job, start falling behind on payments, and now they're in a bind. You can chastise them if you'd like but it's not going to help and they'll stop listening to you.
If you had to boil down the book into a single sentence, then I'd say that Dave Ramsey's Total Money Makeover is a book that gives you a good framework to get yourself out of debt and back on a solid financial footing.
Decide to Make a Change
If you read Chris Peach's story about getting out of debt, there's the mechanics of paying off debt and then there's the psychology of paying off debt.
Sometimes this means reaching a low point. Hitting rock bottom.
Sometimes it just takes a flipping a switch in your head.
Maybe you put this idea into action by cutting up your credit cards or freezing it in a block of ice. Whatever that looks like to you, make a big deal of it. Sit down with your partner or significant other and decide you want to make a change. This is one of the most powerful ideas in what Dave Ramsey teaches.
Dave Ramsey's “Baby Steps” to Financial Freedom
At the core of Dave Ramsey's advice is his “baby steps” towards financial freedom:
- Baby Step 1: $1,000 cash in a beginner emergency fund
- Baby Step 2: Use the debt snowball to pay off all your debt but the house
- Baby Step 3: A fully funded emergency fund of 3 to 6 months of expenses
- Baby Step 4: Invest 15% of your household income into retirement
- Baby Step 5: Start saving for college
- Baby Step 6: Pay off your home early
- Baby Step 7: Build wealth and give generously
If you listen to him on the radio, he'll refer to these baby steps often. It's a good framework for thinking about money management (and it is the framework used in his budgeting app Everydollar). You can argue the order of the steps or the numbers involved, but if everyone did these steps then we'd all be in a better financial situation.
Nearly 60% of Americans don't have $500 in savings… they aren't even at Baby Step 1! Arguing about the baby steps is like arguing about the water bill when your house is on fire.
Debt Snowball Strategy
Of all the steps in the “Baby Steps,” the one that gets the most attention is the debt snowball.
The debt snowball strategy has you list all of your debts and their monthly payments. If you have extra cash to put towards debt, put it towards your smallest amounts first. When that debt has been repaid, take the amount you would've sent them and add it to the payment you make to the next smallest debt. As you pay off your debts, your monthly payments to the other debts increase like a snowball.
Why does the debt snowball strategy work? Two reasons: Motivation and celebrating wins.
Mathematically, it better to put your extra cash into the highest interest rate debt. This lowers your total interest payment. But by paying off the smaller debts, you pay them off faster and celebrate wins more frequently. These celebrations motivate you to continue your payments and get out of debt.
The brilliance in this approach is that it considers human psychology. That's the non-math part of personal finance. People don't get themselves into debt because they don't understand math. No matter what you say about the inefficiencies in his strategy, it works. I'd guess thousands of people have pulled themselves out of debt with the advice he's given in just this one book.
Update the Numbers
When Dave Ramsey first started sharing his advice, and especially if you look in his books, you'll see numbers that are out of date.
For example, the beginner emergency fund is just $1,000. $1,000 in 2003, the year “The Total Money Makeover: A Proven Plan For Financial Fitness” was published, is nearly $1,400 in 2018. So I'd update that to $1,500.
He assumes 12% returns in the stock market. Today, most people would say it is a bit too optimistic. When you go through the book, recalculate those projects using 8-9%.
Don't focus too much on the numbers, adjust them to 2018 figures, because it's the process and psychology that is important.
What About His $4.9 Million House?
Around the start of 2015, if you knew about Dave Ramsey then you probably heard about how he built a house valued at nearly five million dollars in an upscale neighborhood in Tennessee. It's a beautiful home.
You can read my friend Pete's discussion and analysis of the whole situation (which is a good one) but I felt the whole uproar was unnecessary.
I look at all the good that Ramsey has done in the world and how that house, while large, can enable him to do even more good.
Good for him. Haters will hate.
The book is routinely in the top ten in Amazon's Personal Finance category, so if you're struggling with debt, I think you might want to give this book a try. The book also contains a lot of motivational stories of people who probably were in more dire straits than you and were still able to pull themselves out.
One final recommendation, if you are in debt, borrow this book from the library and put that cash towards your smallest debt. 🙂