Dave Ramsey is one of the absolute biggest American names in personal finance. His method is loved and hated and is the basis of many discussions among money geeks.
In the late 1980s, a young Dave Ramsey went bankrupt with his portfolio of investment properties financed with loans. In the years that followed, he and his family fought hard to get out of debt and rebuild a financially tolerable existence.
This led to a money philosophy, which he spread to the outside world with great success.
Today, Dave Ramsey has written several books and held and organized countless courses. But he is probably best known for The Dave Ramsey Show, which (among many other places) can be seen on YouTube.
The Dave Ramsey Show
Ramsey answers listeners’ calls on his radio show and talks about personal finance with guests and business partners.
He also likes to invite dollar millionaires into the studio to discuss how they got this far.
A classic for The Dave Ramsey Show is The Debt Free Scream. It gets over the top at times, but undoubtedly inspiring for many who struggle with debt.
You can learn much from The Dave Ramsey Show, regardless of background. However, the target group is Americans, which means that there are also topics that are only relevant to a limited extent or must be adapted to conditions.
However, most topics are universally applicable and relevant to all of us.
Ramsey’s tone is relatively blunt, and always speaks straight out of the box. Among other things. he often uses the word ‘ stupid ‘ about suboptimal personal financial decisions – including his own.
But always with a well-intentioned undertone that he wants to help people.
Ramsey is a devout Christian, and many of his values are based on Christianity.
He often uses religious terms and metaphors and appeals mainly to listeners from the American bible belt.
However, this does not make his advice any less valid.
Whether it is because God is a skilled financial advisor or because Christian scriptures are grounded in a financially sensible culture, I will not comment on here.
The heart before the spreadsheet
Dave Ramsey gets a lot of criticism for giving advice that is not mathematically optimal.
For example, he is a big supporter of the snowball method for debt settlement. In short, the snowball method means you always pay off the smallest loans first, regardless of the interest rate on larger debt items.
If, for example, you owe USD2,000 at 1% interest and USD20,000 at 30%, you must first settle the USD2,000.
Mathematically speaking, it makes better sense to pay off high-interest debt first because you thereby minimize interest expenses more quickly.
Processing according to the snowball method is, therefore, more expensive, but it has a very effective psychological effect: you see faster results, which increases motivation, making you less likely to give up halfway through.
Ramsey is also fundamentally opposed to all forms of debt.
Even interest-free loans and credit cards with cashback. Mathematically speaking, you can benefit from debt with low (or no) interest, and Dave Ramsey knows this well.
But spreadsheet optimization is not Ramsey’s goal. He intends to give advice that works in practice. And it works, too, because he has helped many, many thousands fight their way out of debt and build a fortune.
Dave Ramsey’s 7 Baby Steps
At the core of Dave Ramsey’s method are his seven baby steps: a metaphorical personal finance staircase designed to help people prioritize and target their personal finance efforts.
In addition to being based on principles of what often works best in practice (rather than what looks best on paper), the purpose of the seven baby steps is to create security and to target one’s efforts.
The fortune must grow, but not at the expense of excessive risk. Murphy’s law is one of the cornerstones of Ramsey’s method, primarily about guarding against unforeseen expenses.
The seven baby steps are the following:
- Save $1,000 for emergency savings.
- Pay off all debt using the snowball method
- 3 – 6 months of living expenses saved for an emergency
- Invest 15% of your income in pension savings
- Save for your children’s university education
- Pay off your home early
- Build wealth and give
Below I have tried to describe the seven steps and put them in a Danish context.
Baby step 1: Save $1,000 for emergency savings
An essential principle in Dave Ramsey’s method is to prepare for the knocks that life inevitably throws.
The first priority is, therefore, to have emergency savings that you can draw on the next time it happens.
By having a small savings of USD5 – 10,000, you guard against having to take on debt the next time the washing machine breaks down, or you have a large dental bill.
Baby step 2: Pay off your debt using the snowball method
When all debts other than the mortgage are settled, you get greater financial flexibility.
You are also less exposed in the event of job loss and the like. As mentioned, the snowball method is an excellent way to keep motivation up, as you quickly see the results of your efforts.
After baby step 2, you are far ahead of most debt-ridden people.
Baby step 3: 3 – 6 months of living expenses saved for an emergency
Once you’ve prepared for minor accidents and minimized fixed debt-related expenses, it’s time to seriously prepare for job losses and other significant incidents.
A savings corresponding to 3 – 6 months’ expenses is usually sufficient to find a new job and cover other expensive life events.
It is also a realistic saving that most people can reach relatively quickly, provided they no longer have debt settlement expenses.
Still, it’s good to have a few months’ worths of expenses secured in case of other financial surprises.
For example, I always budget a month in advance. That is that I budget for February when I receive my salary at the end of December. I used to budget three months in advance, but that felt overkill.
Baby step 4: Invest 15% of your income in retirement savings
Points 1 to 3 were about minimizing debt and preparing for short-term challenges. By the fourth baby step, you are thus debt-free (mortgage excepted) and have protected yourself against the most significant short and medium-term risks.
Now it is about securing one’s old age.
As early as 55 years old, you can start withdrawing from your 401(k), and IRA can be withdrawn when you are 60.
This means that you have a realistic probability of living long enough to withdraw benefit from his pension payments.
Baby Step 5 – Save for your children’s university education
Once you have secured yourself, it is time to take care of your children’s education.
However, there are a few exceptions, so if your son wants to be a pilot, you should consider putting a little aside.
Baby Step 6 – Pay off your home early
When the present, the future, and the children are secured, the home must be paid off.
It provides greater financial flexibility and, at the same time, contributes to securing oneself in old age.
Early settlement of the housing debt means many thousands of USD saved in interest expenses.
Admittedly, mortgage interest rates are currently low, but the effect of even a low-interest rate is still quite significant over several years:
2 million paid over 30 years with just 1.5% interest costs USD485,000 in interest expenses. If the repayment period is halved to 15 years, you save a quarter of a million in interest.
Many will object that the money gives a higher return in the stock market, which is (historically speaking) true.
But the maximum return is not the objective here. The purpose is to lay the best foundation for a financially secure life. Not a future that depends on the development of the stock or bond market.
Baby Step 7 – Build wealth and give
You invest in free funds only when you have settled all debts and saved up for future expected and unexpected expenses. This means shares, rental properties, crowdlending, etc.
You also have the energy to take care of others here. Dave Ramsey is keen on helping people in need, regardless of financial ability.
Preferably 10% of your income should go to charity. But especially when you are among the financially best off, you should use a significant part of your profits to help others.
Place yourself on the stairs.
Most people can place themselves somewhere on the seven baby steps, but many of us have skipped a few steps.
If you ask Dave Ramsey, in that case, you must make the necessary efforts to patch the holes.
If, for example, you have debt and significant savings, you must use most of the savings to pay off the debt.
Are Dave Ramsey’s baby steps for you?
Mr. Ramsey is adamant that his method should be followed slavishly, as he has developed a method that is ‘tried and tested. And to that extent, he is right. The method is undoubtedly effective.
The method is probably also the best for those who can’t or don’t want to spend time and energy fiddling with personal finance issues but want an effective way to secure themselves financially.
However, many with a great interest in personal finance have different prerequisites than most.
They can often better assess financial risks and, to a greater extent, “figure it out.”
They can still use the method but (in my opinion) allow themselves to adapt it according to their own wishes and preferences.
The most crucial point about the 7 baby steps is focus: you take one step at a time instead of wanting to do it all at once.
In step 2, for example, debt settlement is the only goal. Apart from the bare necessities, there is no need to save up for the summer holidays or invest in shares.
That kind of dedicated focus is a highly effective way to achieve your goals. And while that might be a bit of an ideal state for those of us with many irons in the fire, it’s an excellent principle to follow.