How to Eliminate Debt & Build Wealth, According to Dave Ramsey

In Dave Ramsey’s book, The Total Money Makeover Workbook, he presents his straightforward plan for you to eliminate debt and build wealth. His plan is simple and practical, without smoke and mirrors. He takes the complicated subject of personal finance, and boils it down to seven baby steps that lead to financial success. This workbook is an interactive companion to Dave’s best-selling book, The Total Money Makeover. It allows you to plan and track your own financial journey.

Dave Ramsey is my favorite financial guru. I agree with his philosophies on money, including debt elimination, frugality, budgeting, investing, hard work, and taking responsibility for one’s own financial destiny. Dave’s advice has transformed my household’s financial situation in all the right ways. We’ve made great progress. We still have a long way to go, but I know we’re on the right track. I stumbled across Dave about ten years ago. Since then, I’ve read several of his books, attended his nine-week Financial Peace University class, and listened to hundreds of hours of his nationally-syndicated radio show.

Dave is probably best known for his radio show, “The Dave Ramsey Radio Show.” He broadcasts to 13 million weekly listeners for three hours every weekday. Dave’s focus on financial fitness in relevant to a wide audience, as 80% of Americans are in debt, according to the Pew Charitable Trusts.

My favorite part of Dave’s radio show, are his Debt Free Screams. Every hour, he interviews an individual or couple who has recently become debt free. They tell their financial story, with all their personal details, struggles, and successes, and they they conclude each of these segments by yelling, “We’re Debt Free!” I love hearing these stories of people winning with money.

Dave contends that it’s important to handle your money well, so you can enjoy a lifetime of financial security and provide maximum benefit to your family, community, and the world. Dave Ramsey’s financial game plan relies on his seven baby steps, which are the focus of The Total Money Makeover Workbook. The seven baby steps are summarized below; Dave goes into much greater detail in his book.

Dave Ramsey’s 7 Baby Steps

1. SAVE $1000 FAST: Walk Before You Run

In Dave’s first baby step, he recommends a $1000 emergency fund. This money is a buffer between you and disaster, debt, and overdrafts. It’s not to be spent on anything except true emergencies. If you tap into your $1000 emergency fund, your first priority is rebuild it. This $1000 emergency fund does wonders for your peace of mind.

2. THE DEBT SNOWBALL: Lose Weight Fast, Really

In the second baby step, Dave recommends eliminating ALL your debt, except your primary mortgage on your house, if you have one. List all your debts from smallest to largest. Pay minimum monthly payments on all your debts. Then put all of your extra money toward the smallest debt, until you pay it off completely. Then put all your extra money toward the next smallest debt until it’s gone. Then the next. Systematically pay off each remaining debt, smallest to largest, until you are debt-free except the house. Dave recommends using a monthly budget to plan your expenses and debt payments. He says your debt is an emergency. So when paying off debt, Dave advises you to be as intense and focused as a giselle running for its life from a cheetah. Be “giselle-intense.” Depending on how much debt you have, baby step two could take anywhere from a couple months to several years to complete. But your hard work will be worth it when you’re debt free.

3. FINISH THE EMERGENCY FUND: Kick Murphy Out

In baby step three, Dave advises you to save enough money to cover three to six months living expenses. With this full size emergency fund, you’ll have a nice cushion between you and the uncertainties of life. Dave suggests six month emergency funds for single income households, unstable employment situations, and for anyone who craves extra security. For most households, a fully funded emergency fund is at least $10,000-$20,000.

4. MAXIMIZE RETIREMENT INVESTING: Be Financially Healthy for Life

Baby steps four, five, and six are to be completed simultaneously. In Dave’s fourth baby step, he advises you to maximize your retirement investing by saving 15% of your take-home pay in a tax-sheltered retirement fund. This rule even applies to people who have employer pensions or matched retirement fund contributions. Dave says you should save an additional 15% to be safe. He also advises against relying on social security. But don’t put more than 15% toward retirement: you still need to pay off your house and help your kids pay for college.

5. COLLEGE FUNDING: Make Sure the Kids are Fit Too

In baby step five, Dave challenges you to help any young children you have get a college education. It’s time to start putting a percentage of your paychecks into a college fund. Dave says you should research college expenses, plan to pay with cash and scholarships, and avoid student loans entirely. Do the math on how much money your kids will need, decide on a percentage of your paychecks to save, and start aggressively growing the college fund.

6. PAY OFF THE HOME MORTGAGE: Be Ultrafit

Baby step six is an exciting one: Dave advises you to become totally debt free by completely paying off your house loan, if you have one. For many people, their mortgage payment is their single largest monthly expense. Dave says, “imagine what it would be like to not have that payment!” Without a house loan, you’ll have much more money to invest, give, and enjoy. To accomplish this impressive feat of paying off your mortgage, you’ll need to make extra monthly payments. Make the mortgage payments as big as possible, while also doing baby steps four and five. Keep on making these oversize payments until your house is completely paid off.

7. THE PINNACLE POINT: Live Like No One Else

By the time you reach baby step seven:

• You’ll be completely debt-free
• You’ll have a full emergency fund
• You’ll be putting 15% toward retirement
• You’ll be investing in your children’s education
• You’ll live in a fully paid-for house

Dave explains that at this point, you’ll have far more control of your biggest wealth-building asset: your income. You can now focus on investing in a big way, giving in a big way, and having fun in a big way. Dave challenges you to aim for what he calls “The Pinnacle Point”:

• The Pinnacle Point is where you’ve built enough wealth to live off investment income.

Dave suggests you can live off 8% of your investment nest egg, assuming it’s growing at an average of 12% per year. So for example, if you have a $1 million investment nest egg, you could live on $80,000 per year, and your nest egg would still grow at 4%, keeping up with inflation.

I’ve heard other financial gurus give similar advice, but with more conservative estimates of stock market growth. For example, Mr. Money Mustache suggests living off 4% of your nest egg, assuming an average growth rate of 7% per year, with an average 3% inflation rate. With a $1 million nest egg, that would give you $40,000 per year to live on.

Either way, the end goal of Dave’s Total Money Makeover is financial independence.

Planning for an Abundant Future

Overall, I love Dave Ramsey’s excellent financial advice. It makes sense to me. It helps me visualize an abundant future. The seven baby steps are sound, practical, and refreshingly simple. My husband and I often refer to the baby steps, and while we don’t follow them exactly, we find the framework extremely helpful.

You might find Dave Ramsey’s financial advice helpful too. You are obviously free to handle your money matters in any way you choose. But it never hurts to educate yourself and gather new tools and strategies.

Dave Ramsey Financial Advice Resources

I encourage you to read The Total Money Makeover Workbook, which you can find at libraries, bookstores, or online. It’s selling for about $12 on Amazon, where this workbook was reviewed by more than 5500 people, earning 4.5 stars. I don’t get paid anything to promote this book; I just like to spread the wealth when I find something of value. However, I do hope to make my blog profitable in some way in the future.

Dave Ramsey also has a variety of other resources worth checking out, many of which are free or low-cost:

• www.DaveRamsey.com
• Financial Peace University 9-week class
• The Dave Ramsey Radio Show
• About a dozen other books

Thank you so much for reading ThoughtsOnTheGoodLife.com. I wish you tremendous success and contentment in all areas of your life, financial and otherwise.

NEXT WEEK: “MY THOUGHTS ON THE GOOD LIFE – WALK YOUR WAY TO WELLNESS”