Dave Ramsey’s 7 Steps for Financial Success
Written by
Marc Guberti
Edited by
Zuri Anderson
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Social media has made it easier for financial gurus to establish themselves, but few of them have a legacy that matches Dave Ramsey. The Tennessean has been helping people with their money since 1991, back when Ramsey Solutions were known as Lampo Group.
Although the world changes and people can tap into different opportunities to make and lose money, Ramsey’s financial insights continue to age well. His seven steps to financial success continue to empower generations. Here’s the framework you can use to build long-term wealth.
Save $1,000 for a Starter Emergency Fund
The first step is to save enough money to the point where you have a $1,000 emergency fund. This fund can cover surprise expenses, so you don’t have to take out a loan. You can also put this money in a high-yield savings account so you earn interest. You can get higher annual percentage yields (APYs) if you compare online banks, since they have less overhead than traditional banks.
Pay Off All Debt
After you have an emergency fund, the next step is to pay off all debt, starting from the smallest. Ramsey advocates for the debt snowball method to build momentum. Not everyone pays off their house with this strategy and may opt to make mortgage payments as they arrive. However, you must pay off loans and credit card debt.
There’s also the debt avalanche method, which prioritizes high APR debt. The debt avalanche method can save you more money in the long run, but Ramsey’s debt snowball model builds motivation and can give you a series of small wins on the way toward bigger goals.
Save Three to Six Months of Expenses in an Emergency Fund
After you have paid off your debt, you can now focus on building a full-fledged emergency fund. These funds can cover three to six months of your living expenses, so it’s important to create a budget and know how much you spend.
You can create a budget before you get to the third step. Just as before, putting this money into a high-yield savings account will allow it to grow at a faster rate than if you put it in a checking account.
Invest 15% of Your Household Income into Retirement
Now that you have a true emergency fund, the next step is to invest 15% of your household income into retirement accounts and other assets. Roth IRAs and 401(k) plans are great starting points since you get tax benefits. Once you have exhausted your annual retirement account contribution limits, you can put the rest of the investments in a brokerage account.
Not everyone can start by investing 15% of their household income right off the bat, even if they have a three- to six-month emergency fund. However, it’s a benchmark people should aim for and strive to exceed.
Save for Your Children’s College Fund
If you don’t want to homeschool, the next step is to save money for your children’s college fund. 529 plans offer plenty of tax advantages if you use them for your child’s college tuition. The great thing about investing early is that the money compounds over time, which will make college more manageable when your children graduate from high school.
You can save money if your children go to a community college or a state university. Trade schools are also a viable option if you don’t want to go the traditional route.
Pay Off Your House Early
If you have been investing in your portfolio and already have college covered, now may be a good time to look at paying off your mortgage early. This sixth step is especially valuable if you’re stuck with a high interest rate.
However, even if you have a low interest rate on your home, it may still be worth paying it off in full. There is a level of financial freedom that you get from paying a mortgage that is incomprehensible for someone who hasn’t paid off their mortgage yet.
Build Wealth and Give Generously
The final step is to continue building wealth with regular investments and good financial discipline. However, Ramsey believes that you should take care of others after you have taken care of yourself. For this final step, he suggests donating to causes and people whom you believe in.
Following these seven steps can put you on the road to financial success. It won’t happen right away, but people who commit to their financial goals for several years can see tremendous results.
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