There are two kinds of people in this world: those who hate Dave Ramsey and those who love him. The interesting thing is that if you listen to him long enough you’re virtually guaranteed to go from the former group to the latter group. Dave claims there is even a support group on the Internet for teenagers whose parents recently bought into Dave’s ideas thus making the teenager’s lives miserable. Before we go on, who is Dave Ramsey? Dave’s entry from Wikipedia:
The Dave Ramsey Show is a three-hour, self-syndicated radio program and podcast that airs Monday through Friday from 2-5 EST. It is primarily broadcast from Brentwood, Tennessee, though often during the summer it is broadcast via remote from Ramsey’s lake house.
Ramsey takes numerous live calls on the theme of finance and, occasionally, money-related Christian philosophy as it pertains to tithing, etc. During the show, Ramsey discusses various life and money-related issues with callers. One notable difference between his and other financial shows was that Ramsey attempts to go beyond the mathematical mechanics and reach his callers through an emotional and spiritual level.
Dave is also a New York Times bestselling author and has his hand in many other financial endeavors including a 13-week course called Financial Peace University. Rather than have you listen to him for over 18 months like I have and read all of his books I will summarize each of his key points in this blog post.
- Dave is very, very averse to debt. He has become a multi-millionaire twice. He built up a portfolio of real estate in the 1980s worth several million only to be crashed and burned literally by an act of Congress. The Tax Reform Act of 1986 began to negative affect the real estate business and he had to file for bankruptcy. He then vowed never to borrow money again. He began consuming as much information on consumer finances as he could until he eventually offered to do a radio show for free in Nashville for a near-bankrupt station. Throughout the 90s his show became popular and his books sold very well. He now preaches on the many perils of borrowing small amounts of money and large amounts. He is very opinionated, but like most successful radio hosts that stubbornness has garnered him over three million listeners. Some highlights of his views on debt:
- When buying a house get a 15-year mortgage with 20% down. Few Americans do this, but as Dave likes to say “why be normal? Normal is broke! We like to be weird around here!” A basic financial calculator will tell you that regardless of how much you borrow on a 30-year loan you will pay back 150% of the borrowed amount (plus the borrowed amount) over 30 years. On a 15-year loan you will pay back 66% of the borrowed amount (plus the borrowed amount).
- Do not use credit cards. Period. I have heard just about every single excuse you could imagine from callers on his show on why they use credit cards. They build up your credit score – nonsense! Use them as an emergency fund – nonsense! – have cash saved up instead. They are safer than debit cards online – nonsense! – what bank in their right mind would let you be on the hook for a criminal cleaning out an account run by their company! More convenient than cash – nonsense! – see my experiment with cash article.
- Don’t borrow from family or friends. The fastest way to ruin a friendship or relationship with a family member is to borrow money from them. The list of reasons why not to do it endless, but let’s just say you don’t want to spoil Thanksgiving dinner for the next 20 years.
- Dave doesn’t care one iota about what you think of him. He is a guy who is comfortable in his own skin. How many times have you bought clothes, a car or any other status symbol to look “cool” for your friends? Just further re-enforce this point Dave once had a show where white-collar workers called in who took a second job as a pizza deliverer just to pay off some debt. Now, those are some folks who don’t give two hoots about what their colleagues think of them.
- Follow his “baby steps” to get your financial life in order. They are
- Build up a $1,000 emergency fund.
- Pay off your debts smallest to largest using a “debt snowball.” Throw out conventional wisdom that says to pay off the highest interest rate first. Personal finances is 80% behavior and 20% head knowledge. Having some “small wins” paying off the little debts will build up some momentum for the larger ones.
- Build up 3 – 6 months of expenses in an emergency fund. This will get you through the majority of life’s emergencies.
- Maximize your retirement savings at 15% of your pay in 401ks, retirement plans and Roth IRAs.
- Invest in a college savings plan like an Educational Savings Account (ESA) or a 529 plan.
- Pay off your home early.
- Build wealth, have fun and give some of your money away
- Pay cash for everything. This may take some convincing for many of you. As I said above, he’s heard every excuse in the book on why using credit cards is better. He de-bunks every single one of them. Dave claims (and I agree) that there is something different about the way you behave when you are debt free. When you are debt-free you make different decisions with your family, your career and your future. How many fights over money have you had with your spouse? When you pay cash, you owe no one anything. There is never a late fee, a penalty or a type on your statement when you pay with cash.
- Dave strongly encourages personal responsibility. He gets plenty of callers asking if they should file bankruptcy. I have never heard him recommend filing for bankruptcy. He is a big promoter of “cleaning up your own mess” and “acting like a grown up” at all times. If the behavior does not change, a person who files for bankruptcy will be back in the same situation within years due to not having learned anything from the last bankruptcy. Sometimes Dave gets female callers worried that the payments on their husband’s boats or motorcycles are wrecking the family budget. He’ll mention that the man should “step up and act like a man” or “quit acting like a four-year-old in the cereal aisle” having a fit over keeping the boat/motorcycle even though it’s decimating the family finances.
- No one ever got rich on “reward points” with their credit card. Occasionally Dave will get a caller who thinks he can beat the system and continue to charge thousands a month on a credit card, pay it off each month and reap the benefits of the points accrued. Dave’s answer consistently is that “if you play with snakes, eventually you will get bitten.” This means that there may come a time when you cannot pay off the monthly balance, the credit card company screws up or some other disaster occurs on your credit card. He often cites a Dun and Bradstreet study that claims people spend 12% to 18% more when using plastic.
Dave’s Famous Expressions
- The Stupid Tax – learning something after the fact on why it was a bad financial decision
- If you live like no one else eventually you’ll live like no one else – this essentially means that if you continue to live below your means for a long period of time you will financially “outlive” the Jones and their status artifacts like BMWs, Caribbean vacations and designer clothing. While you live below your means it is a test of your discipline, but after years of doing it you will reap the monetary fruits of your labor.
- Winning with money is 80% behavior and 20% head knowledge – this is arguably the most used line he says to callers who think they can beat the system by investing large sums of cash rather than paying off their mortgage debt. He’ll turn the tables to these callers and say “if your house was paid for would you borrow against it to invest in stocks? Of course not, but it’s the same thing.” He also uses this 80%-20% line on callers who think paying off their credit card debt by paying the highest interest cards first, then the lower interest ones is smart because the math works in favor of paying the higher interest cards off first. Consistently his answer to this is “if you were following math principles you wouldn’t have gotten into to this debt in the first place!”
- We act the same way your grandmother would….only we keep our teeth in! This advice refers to the fact that the Greatest Generation (those in the U.S. born between 1901 – 1924) worked long hours, never complained, paid cash for everything (including houses and cars!) and kept life simple with spending and saving.
Dave Ramsey is among the top tier of personal finance gurus and will continue to positively influence the financial lives of millions of people everyday.