We asked Dave Ramsey a few questions about the current state of financial literacy in the U.S., and what every one from college grads to soon-to-be retirees can do to improve their financial situation right now. Keep reading to find out what Ramsey has to say.
In your opinion, why hasn’t a greater emphasis been placed on improving financial literacy in the U.S.?
The past four years have been a wake-up call for most people. Up until the recession of 2008, a lot of people were in denial about their spending. We had broke people buying houses, racking up credit card and student loan debt, and fleecing cars when they could barely put food on the table. Now, I think financial literacy is seen as a young and hip thing to do, yet it’s the same common sense our grandparents practiced.
What do you think contributes most to today’s lack of financial literacy?
Debt. It’s become normal. It is sold so aggressively that many have come believe it’s a financial tool. It’s not. Debt is dumb. It magnifies your risk in any situation. It prevents you from building wealth.
In what area of finance are adults lacking the most knowledge?
Most people don’t lack the knowledge; they know what to do. It’s like going on a diet. We all know that we need to exercise and eat right to lose weight. It’s the behavior part that’s hard.
I say finance is 80 percent behavior and only 20 percent head knowledge. You’ve got to make the shift in attitude. You’ve got to get sick and tired of being broke in order to make the necessary behavior changes to win with money.
What is the biggest mistake people are making with their money today?
They don’t pay attention. They don’t do a written budget. A budget is nothing more than a plan for your money.
What advice would you give young adults fresh out of college to set themselves up for a successful financial future?
Pay off debt! Get rid of those student loans, or before you know it Sallie Mae will be setting up in your spare bedroom. Your income is your greatest wealth building tool. And if you have no debt payments, you’ll have plenty of money to save up and pay cash for a car or a down payment on a home.
How about those nearing retirement? How can they make the most of their golden years?
Start where you are. That’s all you can do. It’s never too late to turn things around. You need to wipe out the debt, downsize your lifestyle and perhaps even delay retirement for a year or two to get your finances in order.
What is your recommendation for a person who is so focused on paying off debt, he/she neglects building an emergency fund (or vice versa)?
We tell people to start with at least $1000 in the bank as a beginner emergency fund.
Once you have that small buffer set aside, you can attack your debt. Use the Debt Snowball method. List your debts smallest to largest according to their balances, not the interest rates. Pay all you can on the little one and once that’s paid off, roll that money over to the next largest debt. You keep doing this and by the time you get to your last debt you’ll have an avalanche of money to pay toward it every month.
If there was one thing you could go back in time and tell your 20-year-old self about finance, what would it be?
Patience. I am by nature a spender. If I had waited a little longer, and paid cash instead of building a real estate portfolio of debt, I would not have hit rock bottom.
Interview originally ran 5/12/12.