Dave Ramsey has gone from riches to rags and back again, and through it all he’s developed a method of using common sense to manage money responsibly. He’s shared these steps to financial health through books like his bestselling “The Total Money Makeover” and on his nationally syndicated radio program, “The Dave Ramsey Show.” Ramsey has helped millions of people regain control over their money and create greater financial success and peace.
With his proven money advice, Ramsey is a finalist in the 2015 “Best Money Expert” competition, presented by GOBankingRates in collaboration with Ally Bank. He told GOBankingRates that his top money tip for 2016 is:
“Tell your money what to do instead of wondering where it went. People know what they need to do with their money, but they just don’t do it. Be proactive with your money — do a budget, get rid of debt and save.”
This advice echoes much of what Dave Ramsey has taught throughout the years. These highlights of Ramsey’s best money tips are a great way to get you motivated to improve your personal finances this month and through 2016.
1. Make a Money Plan
“The trick in most people’s lives is that they don’t even identify where they want to go,” Ramsey said on his website. “They don’t even know if they’re getting there. Down South, we call that ditty-bopping along — ditty-bopping through life.” Getting through life without a care in the world and expecting others to care for you is no good feat. He added:
“That’s called being a child. Adults devise a plan and follow it. Children do what feels good.”
Being proactive with your money takes work, but it’s what you should expect out of yourself. Start by making a financial plan. Figure out what you want for your finances and make the changes that will get you and your money on the right track.
2. Find the Courage to Change
Once you define what you want and have an idea of how to get there, it’s time to start making changes. But change can be painful, said Ramsey, and that pain deters many people from ever tackling their finances before things get out of control. For most people, he said:
“Not until the pain of the same is greater than the pain of change will you embrace change.”
You have to start doing differently if you want a different result, Ramsey said. “Twelve-steppers say if you continue to do the same thing over and over again and expect a different result, that’s the definition of insanity. You have to change the path.”
3. Manage Your Money
Once you have a plan, you can put it into action. As you take control of your money, you’ll make sure it’s going where it needs to. On this, Ramsey said:
“You must gain control over your money or the lack of it will forever control you.”
He suggested a few tools that can make managing your money easier, like the cash-envelope budgeting system and his budget-tracking software EveryDollar. Try some new money management systems and find something that works for you.
4. Give Every Dollar a Name
A huge part of effectively managing money is, as Ramsey put it, giving every dollar a name. When you create a budget, “Every dollar has an assignment,” whether it’s feeding or housing your family, paying off debt or protecting you from life’s unknowns.
“You’re making every dollar behave. Giving every dollar a name before the month begins.”
On his site, Dave Ramsey breaks down a budgeting process that helps you assign a purpose to every dollar:
- Find your total income.
- List all expenses, from regular bills to incidentals.
- Adjust expenses until they are equal to or below your income.
- Track your expenses throughout the month and adjust behavior accordingly.
5. Act Your Wage
An important part of sticking to a budget is keeping your lifestyle in check, or as Ramsey put it on Twitter:
Key to winning with money. Live on less than you make! Act your wage. Quit spending like you are in Congress.
— Dave Ramsey (@DaveRamsey) March 31, 2015
In a consumer-driven society, it can be too tempting to look at what everyone has and think you should be spending more so you can have it too — even if you can’t truly afford it. “‘Stuff’ is fine,” Ramsey said. “Get some, but if the getting of ‘stuff’ is your whole goal you will never be really happy.” Instead of trying to catch up to your spending, keep your spending within your income and only buy what you can afford.
6. Frugal Today, Wealthy Tomorrow
“We’ve lost our minds in this culture, we really have,” Ramsey said on his radio show. “And all of it is because people have been sold stuff, and sold stuff, and sold stuff, and they’ve got this entitlement thing” that makes them spend on items they can’t afford. Ramsey teaches his followers to resist the urge to spend. Making frugal choices is what will create true wealth that lasts:
“If you will live like no one else, later you can live and give like no one else.”
7. Work Hard to Get Free of Debt
There’s a myth that only the rich are debt free, said Ramsey. But the truth is:
“Anyone can become debt free. True debt reduction is plain common sense and hard work.”
Debt has become a given for many Americans, but it can cause some of the worst financial stress. “We all make mistakes, but the question is whether you are willing to take responsibility for your mistakes,” he added.
To get out of debt, Ramsey suggested his “debt snowball” method: Make only the minimum payments on all debts, then put extra money toward the debt with the smallest balance. “When you pay off that smallest debt, it gives you a success, and you think you can make it,” Ramsey said. “Then, when you pay off the next debt, you realize this is going to work, and you pay off the next debt.”
8. Don’t Borrow or Charge
Ramsey suggested that you stop borrowing money or charging purchases to a credit card. It makes it too easy to overspend beyond what you can afford. He even regularly suggests measures like cutting up credit cards. On living beyond your means, he said:
“When people try to borrow their way into a position in life or an ownership of stuff in life that they really can’t afford, then they struggle the rest of their lives paying payments on stuff.”
Dave Ramsey’s measure for whether you can afford something is simple: If you can say, “‘I wrote a check and paid for it,” then you can afford it. “That’s the definition,” Ramsey said. “If you can’t pay for it in cash, in total, on the spot, cash on the barrel head, you can’t afford it — whatever it is, your car, your clothes, your groceries.”
9. Save for the Unexpected
When you don’t have money in the bank, you’re exposed to the worst of financial mishaps and hardships. Even minor expenses can become big setbacks and lead to issues like debt:
“Ever notice when you are broke everything is an emergency?”
The way to face these risks is to build security with an emergency fund. Ramsey recommended saving an emergency fund in two different stages of his 7 Baby Steps. First is to get a buffer saved of $1,000, which can help cover the everyday unexpected expenses that come with life. Later (after paying off debt), Ramsey recommends saving an emergency fund that’s equal to several months’ worth of expenses to help cover more serious emergencies like a job loss.
“Weirdest thing happened when I got an emergency fund of three to six months of expenses: I quit having as many emergencies,” Ramsey said on Twitter.
10. Invest in the Future
Investing is an important part of a successful money plan, and it’s an essential ingredient to financial security. Ramsey suggested dealing with financial basics like budgeting and debt payoff before investing, but all that is so you can build wealth without anything holding you back. Investing is how you can use your money to create more wealth and prosperity, and plan for the future:
“When you are investing, you are living your life more in the future and in the present.”
Ramsey gives some practical steps for those starting to invest. First, you want to start contributing to a pre-tax savings plan and a tax-free savings plan. He also suggested putting some investments in “mutual funds that have a winning track record.” Ramsey said hiring a financial advisor can also help you fully understand your options, but make sure you’re still taking responsibility of your choices. “Don’t invest in anything unless you can easily explain how the investment works to someone else,” he said.