Dave Ramsey is a well-known financial guru who has spent decades helping individuals manage their finances and invest for retirement. In this guide, we’ll look at the top 10 Dave Ramsey investment advice tips for how you can manage your money and invest for the future. Let’s get started!
Dave Ramsey’s Investment History
Dave Ramsey’s career in investing began in the early 1980s, when he began amassing property as a real estate developer as well as built a stock portfolio. However, in 1988, Ramsey declared bankruptcy when banks recalled over $1 million in loans that he had taken out to fund property developments.
That same year, Ramsey founded the Lampo Group, a financial advice firm that rebranded as Ramsey Solutions in 2014, and began rebuilding his own finances. In 1992, he published Financial Peace, a book about his journey out of bankruptcy. He also started hosting a radio show, which eventually became a 3-hour segment called The Dave Ramsey Show that was aired by radio stations across the US.
Ramsey continues to produce his radio show and has authored five books on personal finance. He also frequently appears on Fox Business, where he hosted a show from 2007-2010.
Dave Ramsey Investment Advice
Dave Ramsey’s investment advice is focused on personal finance and retirement investing. He has 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 pieces of advice Ramsey has to offer for investors.
1. Avoid Debt as Much as Possible
If there’s one thing that Dave Ramsey hates, it’s debt. Much of his financial advice is built on the premise that debt is bad, and it needs to be taken care of as quickly as possible. According to Ramsey, “Debt is not a tool; it is a method to make banks wealthy, not you. The borrower truly is slave to the lender.”
So, avoid debt whenever possible. That means limiting your use of credit cards and minimizing car loan and home mortgage payments.
2.If You Have Debt, Prioritize Paying It 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 hold off on saving money for retirement – or on spending money on anything non-essential – until they have paid off all of their debts.
Ramsey recommends the “snowball method,” by which you pay off your smallest debts first. “Knock out a small debt first so you get a quick win,” says Ramsey. “Momentum is key.”
3.Make a Budget and Stick to It
Another thing Ramsey encourages every investor to do is to make a budget and stick to it. “A budget is telling your money where to go instead of wondering where it went,” Ramsey says.
He suggests allocating money first to essentials, then to paying off debts, and then to investing for retirement. Only after those three categories are taken care of should you consider spending money on other things. Ramsey places a lot of emphasis on the importance of the budget and notes that sticking to it is crucial for making your budget more than a theoretical ideal. You can make your own budget using paper and pencil or a program like excel. If you’re looking for some assistance in making and sticking to your budget, though, a budgeting app like YNAB or Every Dollar could help simplify the process and keep you focused on your goals.
4. Act Your Wage
Ramsey advises investors to “act your wage,” a 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 constraints. 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. Plan for the Long-term
Ramsey emphasizes long-term planning both in your personal financial decisions and in your investments. Ramsey’s advice is to think not just about your own future, but 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 earlier you start investing for retirement, the better, according to Ramsey. He points out that thanks to compounding interest, a dollar you invest when you’re 18 is worth more by the time you reach retirement than a dollar you invest when you’re 30. If you haven’t started investing yet, Ramsey suggests that the best time to start is right now.
7. Invest in Mutual Funds
Ramsey encourages people to invest in mutual funds as opposed to individual stocks, bonds, or even ETFs. His insistence on mutual funds has been criticized because of their relatively high fees, but Ramsey stands by them as a reliable money-earning 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. Put 15% of Your Income Towards 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 believes the average person should set aside in their budget, and assumes that you’re saving consistently over the course of your working life. He doesn’t provide more detailed guidance for people who need to make catch-up contributions.
In particular, Ramsey recommends setting this money aside in a Roth IRA or Roth 401(k). If you have a Roth IRA and 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
A lot of investors, such as 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 is going to rain, and you aren’t the exception,” says Ramsey.
He suggests keeping at least 3-6 months’ worth of essential expenses on hand in a rainy-day fund. That way, if and when an emergency does strike, you won’t need to go into debt in order to deal with the situation.
10. Buck Conventional Wisdom
Ramsey believes that investing successfully isn’t hard, but it takes discipline and diligence to manage your money. To that end, he suggests bucking conventional wisdom and committing yourself to long-term financial independence. “The goal is not to be normal,” says Ramsey, “because as my radio listeners know, normal is broke.”
Conclusion: Dave Ramsey Investment Advice
Dave Ramsey has spent decades helping people wrangle their personal finances and invest for retirement. While some of his investment advice has been criticized for being too broad or inefficient, Ramsey’s philosophy can be extremely helpful for those who need the discipline to save and want a simple approach to investing.