When it comes to personal finance, money expert Dave Ramsey is known for having your financial health in mind.
Whether you’re buying your first car or want to start saving for retirement, following Ramsey’s strategic tips can empower you to kick bad money habits to the curb and develop the necessary skills to comfortably reach your goals.
1. Gain Control of Your Money
If you’re unsure how to start fixing your financial situation, Ramsey recommends taking control of your money.
Gaining control of your money starts by making a financial plan. Ask yourself what you want for your finances and how your money can take you where you need to go.
2. Set a Budget and Give Every Dollar a Name
A big part of gaining control over your money is creating and sticking to a budget, which Ramsey highly recommends. Those who have a monthly budget can control their money and reach their financial goals, whether that means paying off debt, buying a home or investing for retirement.
Before each month begins, Ramsey said you need to give every dollar a name. These names may include buying groceries, making a mortgage or rent payment or contributing to your emergency fund, just to name a few. Every dollar in your budget should have an assignment as this is a big part of effectively managing your money.
3. Save $1,000 in a Starter Emergency Fund
The first of Ramsey’s 7 Baby Steps is to save $1,000 for your starter emergency fund.
Typically, emergency funds are advised to have between three to six months’ worth of expenses. However, Ramsey recommends getting started with this smaller buffer fund to help cover any unforeseen expenses that may come with everyday life.
Having a starter emergency fund gives you peace of mind in knowing you have enough money to pay for these emergencies and will not need to resort to going into debt to cover costs.
4. Use the Debt Snowball Method To Pay Off Debt
Step two in Ramsey’s 7 Baby Steps is to pay off all of your debt. You can get a jump on eliminating debt using Ramsey’s debt snowball method.
How the debt snowball works is you start by paying off debt with the smallest balance. Once this piece of debt has been repaid, you work your way up, or snowball, to repay debt with the biggest balances. Debt snowball comes with plenty of psychological wins, like gaining confidence that your quick wins will allow you to confront your worst debts and pay them off in full.
5. Work a Side Hustle
Even if you carefully budget and work a good full-time job, you might find you need a way to earn extra money to reach your financial goals.
Ramsey recommends working a side gig to earn extra cash and fulfill goals like paying off debt or building your starter emergency fund. You might decide to drive rideshares, sell gently used items on platforms like Facebook Marketplace, or offer tutoring services.
6. Do Not Invest Until Your Debt Is Paid Off
This tip is often considered a bit controversial, but it is one that Ramsey firmly stands by.
Before you start investing, whether this is in stocks you’d like to buy or your retirement, Ramsey recommends eliminating all debt. According to Ramsey, your primary wealth-building tool is your income. If your income is being put primarily toward credit card bills or student loan statements every month, you’re not in a position to build wealth.
7. Stop Using Credit Cards
Ramsey recommends stopping the usage of credit cards altogether, even if you argue many of these cards come with rewards and perks. Many credit cards have high interest rates and if a cardholder misses one payment, it’s a slippery slope to ending up in debt.
Instead of charging purchases to credit cards, he recommends using cash (or your debit card) to buy the things you need.
8. Save Three To Six Months’ Worth of Expenses
Once you’ve saved a starter emergency fund and paid off all of your debt, you can move on to Ramsey’s third Baby Steps item: saving three to six months’ worth of expenses in a fully funded emergency fund.
If the starter emergency fund is considered a financial buffer, this emergency fund will be able to act as a safety net if you lose your job or face another unforeseen circumstance.
9. Cut Back on Discretionary Spending
Look at your budget each month and ask yourself which aspects of your discretionary spending can be cut back.
You might find it’s time to unsubscribe from streaming services you don’t use or that you can eat out fewer times each week. As a helpful rule of thumb, Ramsey recommends reviewing any non-essentials and determining which ones you can eliminate.
10. Shop for Groceries With a List
Heading to the grocery store? Ramsey recommends arming yourself with a shopping list before you go.
When possible, shop only for ingredients that you need in a predetermined meal plan. This keeps you from adding impulse items to your shopping cart.
11. Buy Generic Over Brand Names
One helpful way to cut back on grocery costs is to buy generic brands over brand names. Ramsey said you can do this on everything from trash bags to cleaning supplies.
Essentially, these are all the same items only there are much bigger savings for your wallet when you choose to shop generic.
12. Meal Plan and Brew Your Own Coffee
Instead of eating out for lunch and buying lattes every day, Ramsey recommends taking the time to meal plan and brew your coffee at home.
Generally, this is considered one of the fastest ways to save money — and you’ll probably enjoy it more that way.
13. Don’t Enter Into Buy Now, Pay Later (BNPL) Plans
When money is tight, you may be tempted to try a buy now, pay later (BNPL) plan to make an expensive purchase. Ramsey does not recommend doing this. Even missing just one payment can result in expensive interest rates and fees.
Instead of getting hooked into BNPL, Ramsey said you can choose less expensive gifts or pay using cash.
14. Don’t Lease a Car
Leasing a car is a money trap Ramsey recommends drivers avoid.
While you may think you look cool driving an expensive car, Ramsey said you can’t build wealth if you’re going into debt to look rich.
15. Buy a Used Car
If you need to buy a car, Ramsey recommends buying a used car (with cash) instead of a new car.
Not only is this a more practical option, but Ramsey cites data from studies he has conducted with millionaires which show eight out of 10 millionaires buy used cars and do not go into debt.
16. Pay Cash for a Car
Again, paying cash for a car — especially a used car — is a win-win for drivers and comes highly recommended by Ramsey. You get a great, reliable vehicle and avoid taking out any loans or entering debt to finance it.
17. Invest 15% of Your Income for Retirement
Once you’ve fulfilled the first three Baby Steps, you can start investing 15% of your household income into retirement. If you know you need to save even more money for retirement, Ramsey said you can consider a higher contribution than 15%.
Where should this money go? Ramsey recommends automating this percentage into a tax-advantaged account, like a 401(k), a pre-tax IRA or an after-tax Roth IRA.
18. Do Not Borrow From Your 401(k)
If you’re tempted to dip into your 401(k) to pay for an upcoming vacation or even use some of the funds for an emergency expense, do not do it.
Borrowing from your 401(k), Ramsey said, puts your retirement savings at risk. As an unwanted bonus, it also means you’ll pay double taxes on the amount you borrow.
19. Invest in Real Estate
If you’re interested in investing in real estate to build wealth, you can certainly explore it. Before you get started, however, Ramsey said you need to be fully debt-free. All of your debt, including the mortgage you have on your home, should be paid off.
Additionally, he recommends paying for investment properties in full with cash. Real estate investors who do this can reduce their risk and make money faster.
20. Don’t Spend More Than 25% of Your Monthly Take-Home Pay on Housing Costs
While housing costs are admittedly not cheap right now, Ramsey does not recommend spending more than 25% of your monthly take-home pay on housing. This includes a mortgage on your home or your rent if you’re renting an apartment.
What can you do if this seems like an impossibility? For renters, he recommends looking into getting a roommate to keep rent manageable. Homeowners are recommended to get a 15-year term fixed rate mortgage and make a minimum 20% down payment on their home.
21. Put 20% Down on Your House
Why 20% as your home’s down payment? Can’t you put down a smaller percentage?
The answer is yes, but Ramsey doesn’t recommend any percentage smaller than 20% as a down payment because you will need to pay for private mortgage insurance (PMI) otherwise.
22. Buy Essential Insurance Policies
Even if you think you won’t need it, Ramsey said you need to invest in insurance policies as financial protection from various life risks.
The eight must-have insurance policies, according to Ramsey, include renters or homeowners’ coverage, liability or full coverage car insurance, long-term care insurance, health insurance, long-term disability insurance, term life insurance, identity theft protection and umbrella coverage, the latter of which is for those with a $500,000+ net worth.
23. Act Your Wage
It may seem as though everyone online has more money than you or fewer financial issues, but your focus should not be on keeping up with the Joneses.
Instead of spending more money, Ramsey said to “act your wage.” You can do this by living on less than what you make, which ensures you’re able to keep lifestyle creep at bay.
24. Become Financially Literate
Throughout your financial journey, Ramsey said you need to gather knowledge to increase what you know about money.
Personal finance, as he once said in a 2022 episode of The Ramsey Show, is 20% knowledge and 80% behavior.
25. Create a Will
As you take the necessary steps to reach your financial goals, one aspect Ramsey said you cannot neglect is creating a will.
Those who do not take the time to draft a will, he said, run the risk of letting the government determine how their assets will be distributed. You can work alongside a financial professional to create a will and specify which of your loved ones will receive which assets or if you have plans to gift to a charity or another important organization.
26. Work With a Financial Advisor
There’s even more to do in your financial journey beyond the tips listed here and some of it may go beyond your pay grade of understanding.
Whether you need help with your financial strategy or extra guidance investing, Ramsey said it’s a good idea to work alongside a trusted professional financial advisor. They’ll be able to answer your questions and provide a valuable perspective in understanding your financial goals and unique circumstances.
