Does the Dave Ramsey Budget Work?

If you're into wealth management, careful budgeting, and financial planning, you've probably heard of the name Dave Ramsey. Born in the 1960s to Tennessee-based realtors, Ramsey grew up to follow in his parent's footsteps and amassed a fortune at an early age, only to lose it all in the '80s.

He even declared bankruptcy and had to start all over. He became rich again thanks to his financial genius and could even publish his first book in his thirties.

During his struggles in financial recovery, he learned surefire ways to build wealth, and today, he and his daughter, Rachel Cruze, are some of the best-known financial advisors in the US. Here is a brief overview of what it means to follow the Dave Ramsey method:

· You'll save money as an emergency fund

· You'll focus on accelerating debt repayment right away

· You'll cut down on personal spending to save more money

· You'll change your spending habits to align them with your financial goals

So, how does this method work? What are the pros and cons of adopting the Dave Ramsey budget? Are there suitable alternatives to this method? We'll explore it all in this blog. So, stay tuned!

You can also consider KOHO's simple 5-Step budgeting guide to try a more straightforward approach to wealth management and financial well-being.

How to Get Financially Stable the Dave Ramsey Way?

Let's see how Dave Ramsey wants you to build wealth and get closer to financial freedom. But first, we'll have to discuss two key terms here.

· Zero-Based Budget: The term "zero-based budget" means every dollar you're earning must have a purpose. Its formula states: Your monthly income minus fixed expenses equals zero. So, if you are making $3,000 a month, save and spend it all. This is what zero-based budgeting is all about.

· Envelope Budgeting System: The envelope budgeting system is simple: Store your cash in labelled envelopes and track spending more efficiently. Look inside these envelopes to see how much money you've left for that particular spending category.

Now, let's check out the "baby steps" Ramsey recommends. These easy steps will help you take care of your financial situation. So, here's what you should do:

Save $1,000 for Emergency

Dave Ramsey and Rachel Cruze agree that the first step toward financial stability is to have cash tucked away for emergencies. How much cash, you may ask? Ramsey has a fixed amount in mind, $1,000.

He believes you should only start working toward financial stability with a thousand bucks at hand. So, in case something goes awry, you'll have money to fall back on and face that crisis face to face. It also prevents you from borrowing money from someone if you need urgent cash.

Pay off Your Debts from Small to Big

Now, it's time to set financial goals for your future. The first goal should be to pay off all debts. You can do that by using the debt snowball method, and it goes something like this:

· You take inventory of all your debts

· You pay off the smallest debt first

· You tackle the largest debt in the end

One day, you'll be living debt-free and won't owe a single dollar to anyone. As per Ramsey's philosophy, you should start knocking off easier debts first to get hyped. Only once you amp up on motivation juices will you have the energy to tackle the most enormous debt in the warehouse.

Invest 15% of Income in Retirement.

Once you've paid off all debts, you can start investing your extra money. Ensure your golden years are comfortable. But he also has a harsh take here. He doesn't want parents to go below the 15% threshold to save money for a child's college degree. He believes that parents should throw away 15% of their net income into retirement accounts no matter what.

He also believes that parents should try to help their kids graduate without student loans. Ramsey warns parents to avoid using insurance, savings bonds, or prepaid tuition. A student-debt-free degree is the first step toward financial solvency in this day and age.

Pay off Your Home

Now, you'll work toward dumping the mortgage. Pay off your home early.

Housing costs are over the moon, so the faster you get rid of the mortgage, the better. Now, you are moving closer to realizing your savings goals.

Build Wealth and Give Away

Finally, you're debt-free and live the life you always wanted. You can now spend money how you see fit, keep building your wealth, and even give away your money to verified charities.

7 Things that Dave Ramsey Gets Right

Let's discuss some pros and cons of the Dave Ramsey budgeting method. These tips by the New York Times bestselling author will work every single time and put you on the path to financial freedom:

· Creating a realistic budget is important for people who want to be financially self-reliant one day. But you don't necessarily have to follow Ramsey's budgeting method. Just plan your monthly expenses and save money for the future.

· If you have considerable debt, don't worry about retirement or college savings for now. Pay off your debts, and once you're debt-free, you can start putting away 15% of your total income for retirement. That's a pretty reasonable way to get your finances in control.

· Building wealth is actually a behavioural change problem. So, change your spending behaviour. Don't waste your money on frivolous things; overcome bad financial habits. No more buying costly toys, action figures, anime figurines, or memorabilia items (unless for investment)!

· Give money to charities if they align with your belief system. Save at least 15% of your income as retirement money. Never try to live beyond your means, or you'll accumulate unnecessary debt. Start by paying off student loans and other expensive debts.

· If you have trouble deciding how much money goes to specific spending categories, Ramsey will give you fixed income percentages. Here's what he recommends: 5-10% for utilities, the same for health, 10-15% for food, and the same for transportation expenses.

· Use visual reminders to keep track of your financial goals. Want to pay off that nice car? Stick its picture on the fridge to always remember you're living a frugal life to afford this luxury. It keeps reminding you that your sacrifices will pay off one day if you stick to your goals.

· Use a reward system to stay motivated and celebrate even the smallest success. Have you paid off that small debt? It's time to celebrate it. Treat yourself to a budget-friendly reward. It'll keep your hopes up and give you a taste of what it's like to be wealthy and live the life.

Next, we'll explore some reasons why this budget method might not be suitable for you. After all, Dave's tips are primarily for people with a certain income level. Then, you'll learn some more tips on how building savings works on a tight budget. So, carry on reading, and find the key to financial health!

Does the DR Budget Work? Not Always!

It's time to answer the million-dollar question: Does the Dave Ramsey budgeting method work? Here is the truth about Ramsey. He shares generally accepted best practices for wealth building. His method has been criticized by other financial gurus for one simple reason: His tips follow a one-size-fits-all approach that doesn't take into account the wide income disparities among people.

His advice on spending categories is fine. In general, the Dave Ramsey budget is for people with a major credit card debt problem. After all, you don't stumble into mountains of debt and need a psychological boost to overcome this addiction. So, the Dave Ramsey budget is perfect for those. But many working-class people may find his advice not unfeasible at all. His teachings have these flaws:

Saving Money for Emergency

Even though Ramsey wants you to have $1,000 in an emergency fund, it isn't just possible for laypeople. An interesting survey shows half of Canadians are forced to live paycheck to paycheck. In the US, 80% of people live in this condition.

How can these folks start the Dave Ramsey budgeting method with $1,000 at hand for emergencies?

Credit Card Debt isn't Evil

Unless credit card debt is spiralling out of control, it isn't something you should avoid 100% of the time. So, Ramsey's aggressive rallying against credit card debt can sometimes appear on the verge of crazy.

In fact, you need to improve your credit score to buy a house; working-class Canadians or Americans today simply cannot buy a house without it. So, build your credit with KOHO and get approved for bank loans.

Credit cards can unlock a room full of other exciting opportunities for growing families besides building a healthy credit score. So, there's no need to live on a cash-only basis like Ramsey recommends. After all, not everyone can afford to buy a house with cash in the 2020s.

His Plan Lacks Diversification

Obsession with stocks and hatred for bonds – that's how an investor would describe Ramsey's methods. He wants people to invest in the stock market. In reality, you should diversify your portfolio and spread it across stocks, bonds, and other assets. Just sticking to stocks won't help you build wealth.

Secondly, Ramsey believes that the stock market gives you 12% ROI annually. Nobody knows why he believes in this nonrealistic number. Data shows that you can earn 10% per year, which is getting lower and lower with inflation.

Thirdly, he argues that you shouldn't invest until you have paid off your debts. Wrong again, Dave! It's completely fine to invest and pay off your debts simultaneously.

The Debt Snowball isn't Always Suitable

Ramsey suggests you start paying off your debt from the smallest to the largest. This method helps you feel more motivated to continue with his budgeting method and celebrate your success.

But, other financial experts would argue that paying off the largest debt is often the best strategy here. It will help you reach your final payoff date much faster. Experts call this approach the debt avalanche, which is much more beneficial than the debt snowball method prescribed by Dave.

Debt is Sometimes Necessary

Ramsey's proclamation that "debt is bad" isn't realistic. For working-class families, debt is sometimes crucial for survival. Many students can't make it through college without student loans, and attending a university is a luxury for them. However, getting a degree helps students get high-paying jobs and gradually pay off these loans.

So, debt is not the problem; mishandling debt is the real issue here. Students should take a loan to get a degree in a sought-after field. Then, creating a foolproof debt repayment plan will help you move toward financial freedom one day.

As a side note, you should be careful when opening a bank account. Suppose you're opening a new bank account for your business. What kind of account would you go for? It'd be better to opt for a highly beneficial high-interest savings account so you can earn a competitive interest rate on your money.

Alternative Money Tips for Healthy Budgeting

We initially discussed that the Dave Ramsey budgeting method seeks to improve your spending behaviour. Even if you wish to avoid following his budgeting method, check out these fantastic money tips he's shared with people. These alternative wealth management tips will certainly help you grow out of debt:

The 80/20 Rule

This budgeting method simply states that knowledge is just 20% of the journey. The other 80% lies in the way you alter spending habits as per your financial situation. Switch your focus from seeking knowledge to improving your lifestyle choices.

Handle money responsibly, and don't waste your hard-earned money on things you can live without! Use a proper budget template to track spending versus total income.

The 50/30/20 Rule

Here comes the famous 50/30/20 budgeting rule, the Holy Grail of responsible finances. Here is what it states: Make three budget categories in the following way:

· Budget Category #1: Use 50% of your budget for necessary monthly expenses, such as groceries, utilities, rent/mortgage, etc.

· Budget Category #2: Use 30% of your budget for variable expenses, such as the things you may want. Dining out, watching baseball, and getting Netflix subscriptions – you get it.

· Budget Category #3: The rest 20% goes to your savings.

So, embrace a vigilant attitude when it comes to money management. Track your expenses, save every receipt, and save money for retirement. Keep track of all bank statements so you can pay the taxes on time. That's how responsible people become financially stable.

Final Thoughts

"A budget will help you make sure your money is going toward the right things, and you'll be able to find places where you can cut back. Then you can spend your money on the things you really care about." –Dave Ramsey.

Want to create a fantastic monthly budget? Then, you must follow the Dave Ramsey way to build wealth and become financially stable. It starts with saving $1,000 for emergencies, going debt-free, and allocating a certain amount to your retirement.

He has fixed percentages for everything, so his method might not suit low-income households. If the DR budget doesn't work for you, then you should check out the 80/20 or 50/30/20 budget rules, which also have Dave Ramsey's blessings.

The best way to boost your wealth is to stay clean. Keep a high credit score in case you have to approach a bank for a business loan. Lucky for you – Koho offers a free credit score check and other features, such as a virtual credit card, so that you can take control of your finances. Also, keep your personal finances intact by investing in overdraft protection coverage. These financial tools will hone your budget-making skills, putting you on the fast track of wealth accumulation the Dave Ramsey way.