Wednesday, May 14, 2008

Top 5 Things I've Learned from Dave Ramsey

1) Pay off your debts before you start saving/investing. You wouldn't borrow money to invest would you? (By the way, this is the main reason for the housing "crisis" right now. People borrowed money to invest in a sure thing, their house)

2) Don't spend money you do not have. Dave recommends, and I would agree, buy everything with cash, except the house.

3) Emergency funds makes real emergencies a rarity. Don't use the credit card as a back up. Keep some money easily accessible in case something breaks, because something always breaks.

4) Don't take on extra debt just to get a good credit score. I hear people say not to pay off debt too fast for this reason. A good credit score just means that you have borrowed money and paid it back. Most good lenders will use manual underwriting to take detailed look at your employment history, salary, and financial statements to get a real understanding of default risk. A person who has been financially responsible for 20 years and has not borrowed any money will have a credit score close to 0.

5) Follow Dave's 7 Steps to being "financial peace":
1. $1,000 to start an Emergency Fund
2. Pay off all debt using the Debt Snowball (smallest to largest)
3. 3 to 6 months of expenses in savings as a full Emergency Fund
4. Invest 15% of income into Roth IRAs and pre-tax retirement
5. College funding for children
6. Pay off home early
7. Build wealth and give!

I really like listening to Dave a lot. He has a lot of straight forward and common sense (his words) advice to credit hungry Americans. Spending money you don't have is not what a responsible adult does, it's what Congress does. However, I don't totally agree with his seemingly total distaste for credit. Here is an example:

"Borrowing so much hurts the economy in multiple ways. More debt means less money invested. If money isn't invested, the economy doesn't grow as well. More debt also means less money to outright buy things, which leads to more financing to buy things."

I have taken out several thousand dollars in students loans as a form of investment in my human capital. Investing in myself is the same as investing in a building or business. This isn't less money invested overall, it's just a different form of investment. Also, borrowing money is a good way to smooth your consumption over a lifetime. Borrow when you poor and pay it off when you rich. However, borrowing should only take place if you expect your future income to increase by more than the amount of the loan. If you are borrowing to keep up your living standard now and you income isn't going to increase by that much in the future, the math just doesn't work. Credit is not bad, but it can be used unwisely.

You can listen to Dave Ramsey in the Carolinas, Georgia and Tennessee at 660 AM from 2-5pm or listen online at

1 comment:

You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.