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Dave Ramsey is an immensely popular financial guru who focuses on getting and keeping people out of debt on their path to financial freedom. His empire of books, podcasts and other financial media all focus on the same philosophy to build and maintain wealth: “The 7 Baby Steps.”
Here’s a look at what those steps are, how Ramsey invests and what strategies he offers viewers, readers and listeners regarding making money.
The 7 Baby Steps
There’s no way you can talk about Dave Ramsey’s philosophy towards wealth-building without covering his seven baby steps. Here they are, in order:
- Save $1,000 in an emergency fund.
- Use the debt snowball method to pay off your debt, except for your mortgage.
- Fully fund your emergency fund with three to six months of savings.
- Invest for retirement with 15% of your household income.
- Save for your kids’ college fund(s).
- Pay off your mortgage.
- Build wealth and give charitably.
How Does Ramsey Invest?
Ramsey is a big believer in mutual funds. This is because mutual funds are inherently diversified, offering you the ability to invest in tens or even hundreds of different securities with a single purchase. According to Ramsey, this helps you avoid the risk of putting your money into a single stock. It also prevents you from falling victim to the latest investment trend, which may promise untold riches but usually ends up with the average investor losing their money.
As to the specific kinds of mutual funds that Ramsey prefers, he recommends that investors divide their money equally among four types: growth, growth and income, aggressive growth and international. This further diversifies your portfolio and exposes you to all types of equities from across the globe.
Ramsey recommends that investors avoid all of the following types of investments:
- Bonds
- Annuities
- Individual stocks
- Cryptocurrency
- Real estate investment trusts (REITs)
- Variable annuities
- Certificates of deposit (CDs)
- Cash value of whole life insurance
What Types of Accounts Does He Use?
For Ramsey, the best choice for investors to make when it comes to their money is to put it into retirement accounts. For starters, accounts like 401(k) plans typically offer an employer match, which is just free money dumped into your account every year. This excess savings requires no additional effort on your part but can make a huge difference when it comes to the size of your account by the time you retire.
Ramsey also endorses both Roth and traditional IRAs, as they both offer tax benefits. Roth IRAs allow for tax-free withdrawals in retirement, while most contributions to traditional IRAs are tax-free.
In terms of ranking these types of accounts, Ramsey says, “Match beats Roth beats traditional,” meaning you should save in a 401(k) with an employer match first, then a Roth IRA and then a traditional IRA.
Who Might Ramsey’s Advice Work Best For?
Ramsey’s advice is particularly suited to either beginning investors or those who are in over their heads in terms of debt. His steps provide good fundamental advice in terms of saving and investing, and they are easy to follow. Ramsey is particularly good at presenting his opinions and advice without using too much financial jargon, which is one barrier that stands between the average American and some financial advisors.
What Are the Cons of Ramsey’s Approach?
Ramsey’s approach to saving and investing has generated some level of controversy among other planners.
Paying Off Debt
Probably the most-discussed of the seven steps is that you should use the “debt snowball” method to pay off debt. By Ramsey’s own admission, this is not the financially best way to pay off debt. Rather, the “debt avalanche” method — which involves paying off the highest-rate debt first — would mathematically save you the most money.
But Ramsey insists that from a behavioral finance method, paying off the smallest debts you have first, and knocking them off before you move on to the next ones, is the most likely way that you will succeed in paying off all of your debt.
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Paying Off Your Mortgage
Step six, paying off your mortgage early, also generates some controversy. While Ramsey believes that all debt is essentially bad, others feel that paying off your mortgage early isn’t the best use of your cash flow.
If you have a low-rate mortgage and are able to deduct your interest payments, you might be better off using your free cash to invest in the stock market, for example. Once you have a paid-off home, all your equity is tied up inside of it and can’t be used for any other purposes.
Investing
Lastly, some feel that Ramsey’s investment recommendations are too narrow. By eliminating common investments like CDs, bonds and individual stocks from his portfolio mix, Ramsey is suggesting too restrictive of a mix for many investors.
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