With his podcast, television show, books, and website, Dave Ramsey is a leading voice in the world of personal finance.
But he didn’t always have his finances in order. Ramsey had a net worth of more than $1 million by the time he turned 26, but his habit of taking on debt caused him to lose everything.
Filing for bankruptcy was a wake-up call for Ramsey, who committed himself to learning how to manage money more effectively. After rebuilding his business, he went on to build a multimedia empire and share his financial know-how with a national audience.
I reached out to Ramsey to learn more about the money lessons that changed his life — and could change yours too.
1. Adopt a zero-based budget
When Ramsey ran into financial hardship, it was because he was borrowing more money than he could pay back. That’s why he encourages people to adopt a “zero-based budget.”
“Tell every dollar where to go,” said Ramsey. “Income minus the outgo equals zero.” In other words, you should allocate every dollar in your weekly or monthly budget for a specific purpose.
Let’s say you bring in $3,000 per month. You might spend $1,000 on rent and utilities, $1,000 on other living expenses, and $500 on paying off debt. The remaining $500 goes into your emergency fund.
In the end, your income minus your output, which includes both expenses and savings, equals zero. By assigning a purpose to every dollar in your budget, you’ll have a clear sense of where your money is going every month. Perhaps even more importantly, it will be impossible for you to spend more than you earn.
Ramsey said this approach to budgeting has other positive side effects. “Our studies show that people who do a zero-based budget (versus those who don’t) pay off 19% more debt and save 18% more money,” he said.
So, not only will a zero-based budget help you avoid debt, but it also could help you pay off loans and boost your savings.
2. Eliminate your debt ASAP
People often wonder if they should pay off debt quickly or invest their money. Although some financial experts encourage investing if you have low-interest debt, Ramsey takes a more psychological approach.
In his eyes, you should pay off debt as quickly as possible so it stops hanging over your head. He encourages people to approach debt payoff with “gazelle intensity.”
“The way you get out of debt is you run like you are a gazelle with a cheetah chasing you,” he said. “You go crazy. I mean crazy. Run!”
As for how to do that, Ramsey is a proponent of the debt snowball method.
“List debts smallest to largest, pay minimum payments on everything but the smallest one, and attack that little one with a vengeance,” he advised. “Squeeze every dime out of the budget and throw it at that debt. Then move on to the next one.”
Some might argue that the debt avalanche method, which has you pay off debt with the highest interest first, makes more financial sense than the debt snowball method. But Ramsey prefers the psychological boost you get from closing out a debt.
“This builds momentum,” he said. “People start believing they can win, and they do!”
If you’re not sure which approach will work best for you, plug the numbers for your debt into our student loan payment calculator and choose accordingly.
3. Guide your kids toward affordable colleges
With 44 million student loan borrowers owing $1.48 trillion, there’s no denying the student loan debt crisis is real. In Ramsey’s view, parents should guide their kids away from colleges with sky-high tuition.
“A dad called my show one day distraught because his 17-year-old son selected a college that was very expensive, and the dad couldn’t figure how to pay for it,” Ramsey said. “He asked me, ‘What am I going to do?’ Whoa! Who’s running this household here?”
Ramsey advised this father to guide his son away from the expensive college toward more affordable options.
“Don’t abandon children to their best efforts just because the federal government guarantees their debt,” he said. “You must lovingly guide your teen in his or her college of choice and field of study.”
Although high school students are often advised to find their “dream school,” a conversation about costs could help them avoid a lifetime of student debt.
4. If you’re in college, do what you can to minimize debt
Ramsey not only encourage parents to talk about paying for college with their kids; he also urges students to minimize the amount they take out in student loans.
Income from a part-time job during college can go a long way, he said. Plus, working actually might boost your college performance rather than hinder it.
“Studies show that students who work 10 to 19 hours a week have higher GPAs than those who don’t hold jobs while in school,” he said.
Ramsey also said hunting for scholarships should be its own part-time job.
“The best, most cost-effective way to pay for school is through scholarships,” he said. “It’s free money. Several little scholarships lumped together add up to some serious cash.”
Finally, he said college students should expect to rough it for a few years.
“Some kids are shocked that their college experience doesn’t live up to the lifestyle level they expected,” said Ramsey. “Some even use student loan money to supplement their lifestyle. That’s a huge mistake.”
Spending student loan money on nonessentials might feel good in the moment, but it will come back to haunt you after graduation.
5. Build wealth with these tried-and-true steps
Once you’ve mastered the basics of budgeting, you might start to think about the long term. How can you allocate your money in the best way to pay off debt and meet your savings goals?
Ramsey recommended the following seven-step plan:
- Save $1,000 as a starter emergency fund.
- Pay off your debt (except your home mortgage) using the snowball method.
- Put three to six months of expenses into a savings account as a full emergency fund.
- Invest 15% of your household income into Roth IRAs and pretax retirement plans.
- Start college funding for your kids.
- Pay off your home early.
- Build wealth and give.
According to Ramsey, these steps are a “time-tested way” to get out of debt and build wealth. By following these steps in the right order, you can make your money work for you.
6. Don’t be afraid to go after your big goals
Besides providing a wealth of financial knowledge, Ramsey also delivers words of motivation.
“You’re not stuck where you are right now,” he said. “People do amazing things when they believe they can.”
One of his callers, for example, turned her New York City dog-walking side hustle into a six-figure job. Another woman went from cleaning houses to running a successful business.
“Dream big,” said Ramsey. “Have a plan and write down attainable goals.” Even if you’re not in an ideal situation now, you always have the power to make changes.
“The great thing is that life is never a snapshot,” he said. “It’s a filmstrip. What that means is it’s ever-changing. You’re not stuck where you are right now. People do amazing things when they believe they can.”
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