And should you be following them?
Dave Ramsey is a controversial figure with plenty of detractors. Still, his seven financial rules are often quoted when discussing personal finance, even by those who don’t particularly like him as an individual. So what are his rules, and should we all really follow them?
Spoiler alert: There are very few financial rules that apply to all of the people all of the time. So, no, we shouldn’t all be following them.
Want to read Ramsey’s Rules in full? They’re in his book The Total Money Makeover, where they’re presented as chapters, not rules as such (chapters 6 through 12 if you want to skip straight to them). In the meantime, here’s a quick breakdown, with a note about why they may or may not work for you.
Save a (starter) emergency fund
Ramsey suggests saving a $1000 emergency fund as the first step to take to get your finances on track. This may or may not work for you.
Saving a small emergency fund before doing anything else (including paying off debt) might be counterintuitive, but as I’ve pointed out before, emergencies can send you into more, and very expensive, debt very quickly if you don’t have any cash on hand.
So yes, a basic emergency fund is a good idea. The $1000 mark is completely arbitrary, though. Some people will need much more. Others less. If, for example, you’re a recent graduate living rent-free with affluent parents, a good credit score, and great health insurance, an emergency fund is less important than it is for most people.
Pay off all debt (except your mortgage)
Ramsey suggests paying off all your debt as a next priority and suggests using the snowball method, which means paying off small debts first and working your way up to the bigger debts. I’ve never agreed with this personally.
It makes more sense to use the avalanche method, which involves paying off your highest-interest debts first. It also doesn’t always make sense to pay off all debt as quickly as possible, especially if it’s low-interest debt and you need the money for other things.
Build a bigger emergency fund
Ramsey suggests that once debt is paid off, you should work on saving 3–6 months’ worth of expenses in your emergency fund. Again this is good general advice, but almost certainly needs adapting to your circumstances.
Take a look at other resources you have such as insurance, employee benefits, passive income, and other household income (such as your spouse’s salary), and tailor your emergency fund to your specific circumstances.
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Save for retirement
Ramsey suggests saving 15% of household income towards retirement, which again is not necessarily bad advice, just arbitrary. Your retirement saving will depend on a number of factors, including the type of retirement you want to have. It’s also not always necessary to eliminate all debt and build a big emergency fund before saving for retirement.
We’ve looked at how retirement savings made early in life are more valuable than those made later in life (because, essentially, compound interest). So saving for retirement at the same time as paying off low-priority debt and building a bigger emergency fund may make perfect sense, depending on your circumstances.
Save for college funds
Definitely, the least universal item on the list is to save for your children’s college funds. Obviously, this may or may not apply to you. In the 21st century, not everyone has children or intends to have children. Not every child goes to college, and not every parent intends to fund that experience if they do.
Saving for your child’s college expenses is a good idea if that’s a commitment you want and expect to have later in life, but depending on our life plans, plenty of us can skip this step entirely.
Pay off your house
Again there are some massive assumptions going on here. The main one being that everyone should be a homeowner, which is heavily disputed. Even if you are a homeowner, paying off your mortgage as early as possible, as Ramsey suggests, might not be a the best choice for you.
Your mortgage is often a very cheap kind of debt and there can even be tax advantages attached to it. Using the money you would have used to pay off your mortgage to invest can work out better in the long term, if your investments pay off. Again it’s a very generalized rule that may or may not make sense for you.
Build wealth and give
Now, finally, when you’ve paid off all your debt, including your house, you can start to build wealth and give. If this doesn’t sit quite right with you, you’re not alone. Most of us who are interested in money management (and generally decent people) get a lot of satisfaction in trying to build wealth, and in giving what we can, throughout our adult lives.
To be fair, this chapter in Ramsey’s book is actually called “Build Wealth Like Crazy” and focuses on just how much opportunity there is for wealth building once you have basically reached financial freedom. By all means focus even more on it if you’ve completed all the other steps here, but don’t be afraid to look at opportunities to build wealth, and give it away to make the world a better place, at any age or live stage.
CONTRIBUTED BY Karen Banes
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