Dave Ramsey and his financial guru empire is responsible for an entire generation, perhaps multiple generations, becoming financially educated and responsible. His advice has been heard around the world making debt payoff, savings, and building wealth accessible to millions of people who may not have had the opportunity to understand personal finance otherwise.
For that, we tip our hats to Dave. Some of his advice is just generally amazing and works for pretty much everyone!
But some of his advice really doesn’t work for everyone and people should think twice before listening to it.
We will be going over typical Dave Ramsey “rules,” Dave Ramsey’s Baby Steps, and Dave Ramsey’s general financial advice. We’ll dissect which ones we love, which ones we hate, and which ones we think can be edited for a more modern and updated personal finance approach.
If you aren’t familiar with Dave Ramsey’s Baby Steps, here they are:
- Baby Step 1: Save $1,000 for your starter emergency fund
- Baby Step 2: Pay off all debt (except the house) using the debt snowball
- Baby Step 3: Save 3-6 months of expenses in a fully funded emergency fund
- Baby Step 4: Invest 15% of your household income in retirement
- Baby Step 5: Save for your children’s college fund
- Baby Step 6: Pay off your home early
- Baby Step 7: Build wealth and give
6 Dave Ramsey Rules We Love:
1. Get out of all non-mortgage debt ASAP
A “Dave Rule” we love and completely agree with is Baby Step 2: Pay off all debt (except the house). We especially agree with getting out of high interest debt that is costing you thousands of dollars each year. Lookin’ at you, credit card debt.
My family paid off $71,000 in 3 years on a single income because we knew this was the first step to financial peace and financial freedom. Paying off non-mortgage debt completely changed our lives, our finances and our marriage!
2. Pay off Debt Using The Debt Snowball Method
Baby Step 2 doesn’t just say pay off all debt — it specifically says to pay off all debt using the debt snowball method. We mostly agree with this. Of course, there are other ways to pay debt that are effective, such as the debt avalanche method, but the reason we were personally able to pay off so much money so quickly was because we stuck to the snowball method.
The Debt Snowball Method is simple. You begin by listing out all of your debts and ordering them by balance from smallest to largest. Make sure you include all student loans, credit cards, personal loans, medical debt, car loans, phone loans, etc. You do not need to include your mortgage in your debt snowball. After you have a clear picture of what your total debt looks like, you will begin attacking the smallest debt first. You do this by using all of your financial power on this single, smallest debt. Pouring all of your focus and income on the smallest debt and only the smallest debt.
Pay the minimum payments on all your other debts, and throw all extra income and spare money at your smallest debt. Speed up this process by budgeting your money, working side hustles to increase your income, or selling items in your home that you don’t use and putting the money toward this smallest debt. Over time, this debt will get smaller and smaller, and before you know it, it will be paid-in-full.
While we personally prefer this method, because it allows you to gain quick financial wins and put momentum into getting debt free as time goes on, you may want to switch your methods up. That’s why my Debt Snowball Calculator can easily toggle between the debt snowball method and the debt avalanche method, or even a custom payoff order.
>>CHECK OUT THE DEBT SNOWBALL CALCULATOR TODAY<<
3. Save 3-6 months of expenses in an emergency fund after debt is paid off
Having a liquid, or easily accessible, amount of money is essential for life after debt payoff. Why? Because in order to avoid debt regression, you need to have cash on hand for emergencies — and trust us, emergencies will happen. It’s life.
It’s safe to squirrel away 3-6 months of living expenses in a high yield savings account. This will come in handy if you lose a job, if you need to fund last-minute travel, or if your transmission goes out. Instead of going back into credit card debt or borrowing from the bank or a loved one, you’ll be able to cover the unexpected expense with your own assets.
As a rule of thumb, only save your monthly expenses. For example, what would you need to survive for one month? We’re talking housing, food, transportation and utilities. That’s it. Once you have that number for one month, multiply that number by 3 or 6, and that’s what you need to save!
4. Your car should be less than half of your annual income
In case you didn’t know, cars are a depreciating asset, meaning that they lose value over time. If you buy a brand new Mercedes, once you drive it off of the car lot, it drops by 30% in value. No, we aren’t kidding.
According to Dave Ramsey, “The total value of all your vehicles—things with a motor in them—should not be more than half of your annual income. If you make $50,000 a year, you shouldn’t be driving a $40,000 car. That’s stupid. Why? Because they all go down in value. You’re putting money in something that goes down in value, and you need to be able to financially absorb that loss without it crippling you. Cars lose 70% of their value in the first four years. When you turn $30,000 into $11,000, you need to be able to absorb that hit. That’s about $100 a week, by the way.”
That’s why we love this piece of Dave Ramsey advice. Your cars shouldn’t be valued at more than half of your annual income, because you simply can’t afford to take that value hit.
5. Save a 10% downpayment for a house before buying
Purchasing a home is one of the most pivotal decisions in your life and affects your finances for decades. Saving more than a 0% down payment can have financial ramifications for years and save you literally thousands or even hundreds of thousands of dollars!
According to Lending Tree, there are several advantages to the 20% down payment:
- Smaller monthly payment
- No PMI
- Lower interest rate
- Reduced closing costs
While 20% is preferred, and even more than 20% if you are able, we like that Dave Ramsey doesn’t necessarily preach this as a hard and fast rule. We like that he urges future homeowners to put down more than 10%, but with the rising cost of homes, 20% isn’t always a viable option for potential homebuyers.
Saving at least 10% for a downpayment will give you some of these benefits, but not completely bankrupt you in liquid cash or take you ten years to save, whereas, if you go the 20% route, you could be looking at saving for a very long time.
6. Build wealth and give
The biggest Dave Ramsey rule we love and advocate for is Baby Step 7: Build wealth and give.
This is the entire point of getting out of debt, saving money and investing: to have an easier life, to pass down generational wealth and to change the world with giving. Since walking the path of financial freedom and independence we have found ways in our family to give to others instead of trying to make a profit or having our income be front and center at all times.
Becoming debt-free and following investment wealth-building methods has completely shifted our thoughts surrounding giving and we have Dave Ramsey to thank for that!
5 Dave Ramsey Rules We Hate:
1. Your credit score is an “I love debt” score
According to Dave Ramsey, a credit score is an “I love debt score.” Honestly, this couldn’t be further from the truth. A “good” credit score has the ability to drastically alter your financial life.
From a better interest rate on your home, to a more affordable car payment, the mobility that a good credit score gives you almost has no match. A credit score is even checked to get an apartment or even sometimes to get a job- so it definitely matters!
For many people, especially those who are low income earners, a credit score gives opportunities that would otherwise not exist.
Like most things in the personal finance world, a credit score is a tool and can be used as leverage. When used flippantly, or without knowledge, it has the potential to harm your financial life. That’s why we suggest being educated on the impacts of your credit score, how they are calculated and the benefits of credit score upkeep.
2. “If you’re working on paying off debt, the only time you should see the inside of a restaurant is if you’re working there”
Dave Ramsey missed the mark on this one. If you do not budget to enjoy yourself, even if it’s a small amount each month or pay period, you are going to burn out!
There’s a reason that many former Dave Ramsey followers fall off the debt payoff track or lose momentum in the middle of their debt-free journey: It’s because they go too hard on debt payoff, work too much, and give up.
That’s not what we want you to do! Budget for a little bit of fun! If your plan is a total drag or you’re working way too hard with no breaks, it could negatively impact your mental health.
3. Use cash envelopes only
Cash envelopes work for some people and for others, they don’t. Just like using debit cards and online trackers like Mint.com work for some people, and don’t for others. If you know cash envelopes are too convoluted for you, remove that barrier in your debt-free journey and work with what you feel comfortable with!
Your debt free journey isn’t any less valid if you don’t use cash for everything.
4. Hire ELPs for taxes
Dave Ramsey has a network of endorsed local providers (ELPs) that you have the option to use when you do your personal taxes, business taxes, or buy a home. These are CPAs or tax professionals that Dave Ramsey officially recommends on his website and in marketing materials.
Here’s the thing though: We used one and they had zero idea what the Dave Ramsey Baby Steps were. They had absolutely no idea what journey we were on. This was actually the event that made me start questioning various Dave Ramsey methods on my own personal finance path.
To say I was disappointed is an understatement. I thought these ELPs would understand our lives, know that we were 100% committed to the Dave Ramsey “way of doing things,” and be on the same page.
Turns out, ELPs just pay a fee to be recommended by Dave Ramsey. They tend to charge higher rates than other tax pros and realtors and are really no better.
So instead, when shopping for tax pros, realtors, and other financial pros, get recommendations from friends and find what works with your budget. Don’t be set on a Dave Ramsey ELP.
5. Ditch credit cards completely
According to Dave Ramsey, credit cards are not to be used. He finds that if you give yourself an inch, you’ll go a mile or more. While, I think that’s the case for some people, I believe if you use credit cards responsibly they aren’t evil and can actually improve your life.
No, you can’t eat off of credit card rewards points, but the cash back offers, travel perks and more have the ability to really give you benefits you wouldn’t have if you didn’t use credit cards.
There are people who go on full-blown vacations for free and use their cash rewards for savings, investing or paying down debt.
I’m not saying to go swipe your heart out and carry a credit card balance forever — I’m saying, if you have self control, credit cards can help rather than hinder.
4 Dave Ramsey Rules we Think are OK, but They Need Some Modification:
1. $1,000 starter emergency fund
When you’re first starting to pay off debt, you typically want to go “all in”. Meaning, some people forgo an emergency fund altogether. Please don’t do this — Dave Ramsey recommends saving a $1,000 starter emergency fund, and while we argue that it should be more, it is way better than nothing!
If you’re new to paying off debt or budgeting, start with the goal of $1k, but don’t stop there. We recommend savings 1-2 months worth of expenses while you’re paying off debt.
It’s better to be safe than sorry!
2. Keep housing costs to 25% or under of take-home pay
While in a perfect world, we all should be following this advice, the truth of the matter is that housing costs, both renting and owning are going up. Renters in high cost of living areas don’t have the option of using under a third of their take home pay towards housing — instead, they are subject to the ebb and flow of the rental market.
That’s why we have marked this advice as “needs modification.” While if you purchase a home, this is fairly easy to do, renting is just one of those things where you could be able to follow this advice, but likely, you just have to pay what your area demands.
3. Pay off the home mortgage
Once you get out of debt, have a 3-6 month emergency fund and you are actively investing a percentage of your income for retirement, the next Dave Ramsey goal is to pay off the mortgage.
This lofty goal is admirable, but also just isn’t on some peoples’ to-do list. Instead of using your income to pay off the mortgage, you could invest that money and build more wealth. It also depends on if you want the peace of mind that comes with a paid-for home.
It’s basically all up to you — it’s not bad to pay off your house, but you have other options besides that.
>>If you are looking to pay off your home early, check out our Mortgage Payoff Calculator<<
4. Invest 15% of your income into retirement accounts
Again, investing 15% of your income into retirement is not a bad thing — but when you consider inflation, the average return of the stock market, the lack of future social security and the possibility of retiring early, you may want to bump up this number.
Investing is where you build the most wealth, so while you are able to, invest more than 15% into your 401k, Roth IRA, HSA, or whatever investing account vehicles you have chosen!
Dave Ramsey has changed the personal finance world. Even with his large influence, it’s okay to be critical and to think outside the Dave Ramsey box if it works better in the long run for you and your family.
We appreciate the light Dave Ramsey has shone on being financially responsible, and we have used his teachings as a starting point for our own financial plan!
Do you follow Dave Ramsey 100%, or have you mixed it up? Let me know in the comments!
I agree with your thoughts! We started the baby steps in 2016 and have gone back and forth on finding what works for us. We still follow the baby steps and love his advice but we have gone through a combination of different budgeting tools and styles over the years. We were definitely the ones that went all in at first and burnt out QUICK. After that we started doing a budget that works for us instead of “bare bones.” We are so grateful to him and to you and all of the other financial educators out that that have helped us along the way!
Love this! After learning and reading and taking in lots of “expert” opinions, you kind of become your own expert! You can make good decisions from taking a little bit of the advice, and a little bit of that advice, and mixing it with your own preferences and lifestyle and it works great. So happy you’ve found what works for you!
Love this article. I, too, believe that each person or family must find what works for them. I got my debt under control and racked it up again. I am bought your spreadsheet and am going to start next week!!! I am in school so I’m just waiting for this spring class to be over to get my budget in order.
Amazing! I’m glad you enjoyed, Jami.