By | John Preston
Dave Ramsey is a well-known financial guru who has spent decades helping people manage their finances and invest for retirement. In this guide, we’ll look at Dave Ramsey’s top 10 investing tips on how you can manage your money and invest for the future. Let us begin!
Dave Ramsey’s investment history
Dave Ramsey’s investment career began in the early 1980s, when he amassed property as a real estate developer and built a portfolio of stocks. However, in 1988, Ramsey filed for bankruptcy when banks withdrew more than $1 million in loans he had taken out to finance real estate developments.
That same year, Ramsey founded the Lampo Group, a financial advisory firm that changed its name to Ramsey Solutions in 2014 and began rebuilding its own finances. In 1992, he published Financial Peace, a book about his journey out of bankruptcy. He also began hosting a radio show, which eventually became a 3-hour segment called The Dave Ramsey Show that was broadcast on radio stations across the United States.
Ramsey continues to produce his radio show and is the author of five books on personal finance. He also frequently appears on Fox Business, where he hosted a show from 2007 to 2010.
Investing advice from Dave Ramsey
Dave Ramsey’s investment advice focuses on personal finance and retirement investing. He’s been criticized for his one-size-fits-all approach to finance and for setting unrealistic expectations when it comes to market returns, so take his advice with a grain of salt.
With that in mind, let’s take a look at 10 tips Ramsey has to offer investors.
1. Avoid debt as much as possible
If there’s one thing Dave Ramsey hates, it’s debt. Much of his financial advice is based on the premise that debt is bad and must be resolved as quickly as possible. According to Ramsey, “Debt is not a tool; it is a method to enrich the banks, not you. The borrower is truly a slave to the lender.”
Therefore, avoid debt whenever possible. That means limiting credit card use and minimizing car loan and mortgage payments.
2. If you have debts, prioritize paying them off
If you have debt, Ramsey advises putting all your effort into paying it off as quickly as possible. In fact, he suggests that people refrain from saving money for retirement, or spending money on non-essentials, until all their debts have been paid off.
Ramsey recommends the “snowball method,” whereby you pay off your smallest debts first. “Eliminate small debt first for a quick win,” says Ramsey. “Momentum is key.”
3. Make a budget and stick to it
Another thing Ramsey encourages all investors to do is make a budget and stick to it. “A budget tells your money where it needs to go instead of wondering where it went,” says Ramsey.
He suggests allocating money to essentials first, then paying off debt, then investing for retirement. Only after those three categories have been resolved should you consider spending money on other things. Ramsey places a lot of emphasis on the importance of budgeting, noting that sticking to it is crucial to making your budget more than a theoretical ideal. You can make your own budget using pencil and paper or a program like Excel. However, if you’re looking for help making and sticking to your budget, a budgeting app like YNAB or Every Dollar could help simplify the process and keep you focused on your goals.
4. Act on your salary
Ramsey advises investors to “act on your salary,” shorthand for living within your means. That includes being realistic about what you earn and how much you need to save for the future, and building a lifestyle that fits within those limitations. As Ramsey says, “Don’t buy things you can’t afford, with money you don’t have, to impress people you don’t like.”
5. Long-term plan
Ramsey emphasizes long-term planning in both his personal financial decisions and his investments. Ramsey’s advice is to think not only about your own future, but about your children’s financial future as well. “A good man leaves an inheritance to his children’s children,” according to Ramsey.
6. Start investing early
The sooner you start investing for retirement, the better, according to Ramsey. He points out that thanks to compound interest, a dollar you invest when you’re 18 is worth more when you retire than a dollar you invest when you’re 30. If you haven’t started investing yet, Ramsey suggests the best time to start is right now.
7. Invest in mutual funds
Ramsey encourages people to invest in mutual funds rather than individual stocks, bonds, or even ETFs. His insistence on mutual funds has been criticized for their relatively high fees, but Ramsey defends them as a reliable money-making investment.
“If you invest $464 in a good mutual fund every month from age 30 to age 70,” says Ramsey, “you’ll end up with more than $5 million.” Note that Ramsey assumes a 12% annual return, which is much higher than the market average of 7% per year.
8. Dedicate 15% of your income to retirement
Ramsey offers an exact number for how much to save for retirement: 15% of your income. That number is based on how much Ramsey thinks the average person should set aside in their budget, and assumes they’re saving consistently throughout their working lives. It does not provide a more detailed guide for people who need to make catch-up contributions.
In particular, Ramsey recommends putting this money away in a Roth IRA or Roth 401(k). If you have both a Roth IRA and a traditional 401(k), he suggests first maxing out your employer’s 401(k) matching contribution and then maxing out your Roth IRA contributions.
9. Keep a rainy day fund
Many investors, like Shark Tank investor Mark Cuban, will make this suggestion. While it’s easy to believe that an expensive emergency won’t happen to you, Ramsey recommends preparing for the worst rather than hoping for the best. “It’s going to rain, and you’re no exception,” says Ramsey.
He suggests keeping at least 3-6 months of essential expenses on hand in an emergency fund. That way, if an emergency occurs, you won’t have to go into debt to cope with the situation.
10. Against conventional wisdom
Ramsey believes that successful investing is not difficult, but it does take discipline and diligence to manage your money. To that end, he suggests challenging conventional wisdom and committing to financial independence for the long haul. “The goal is not to be normal,” says Ramsey, “because, as my radio listeners know, normal is ruined.”
