A fight for the ages. Watch these two personal finance experts duke it out. Okay, just kidding, although that would be a match worth watching.
Since we are unlikely to ever get these two together to prove their worth in a ring, octagon, or any other fighting arena, we’ll have to settle for letting their advice and personal finance plans duke it out instead.
But comparing the two personal finance gurus isn’t exactly an apples-to-apples kind of comparison. They have very different backgrounds, personalities, and views on money and finance.
So instead of trying to compare apples to oranges, let’s take a look at their most often recurring advice as well as the potential pitfalls of their guidance.
Who is Dave Ramsey? (Including His Net Worth, and How He Made His Money)
Dave Ramsey is a finance expert who helps people navigate a debt-free life, but he wasn’t always a successful personal finance guru.
He started out his young life as an avid entrepreneur, even managing to graduate college with zero dollars in debt thanks to selling real estate full-time while attending college.
With his degree in finance and real estate, he set out to tackle the real estate investing world, and thanks to a few helpful family contacts, by the age of 26 he had $4 million in real estate investments.
And then the banks called in all of the debt and sent him into bankruptcy. He fought his way back to solvency via selling real estate as a broker and other financial strategies.
Later, when a member at his church was in a tough spot financially and asked Ramsey for advice, the financial guru we know today was born.
Now worth more than $200 million, including his personal home worth nearly $5 million, Dave Ramsey has built a profitable personal finance advice business through several books he has written, his radio show, and the personal finance classes he offers.
Dave’s Advice
1. Save $1,000 for Your Starter Emergency Fund
The first baby step in Dave Ramsey’s financial solution is to start an emergency fund.
The goal he prescribes for this initial emergency fund is $1,000. This fund is designed to be used only in emergencies, i.e., vehicle repairs, medical bills, etc.
To get started with an emergency fund, you’ll need to first create a budget so that you know how fast you can get to this $1000 mark without compromising your overall financial well-being. And if you need help creating a budget, Dave Ramsey offers solutions for that.
But why only $1000 for an emergency fund when common advice states you need to save up to 3-6 months’ worth of expenses? Because Dave would like you to first focus on debt repayment.
2. Pay Off All Debt (Except the House) Using the Debt Snowball
Step 2 of Dave’s plan is to work on paying off debt. FYI, Dave abhors debt.
Traditionally the advice for tackling debt is to start with either the highest balances or highest interest rates, and then cascade these payments into your lower balance/interest rate debts.
But Dave’s advice is the opposite.
Instead of cascading payments, Dave suggests snowballing payments. This is done by starting with paying off the smallest debt balance first and snowballing the payments to the next lowest, and then the next.
This part of his advice is the most controversial as it can set up some individuals to pay more interest than they otherwise would have by using a different debt-repayment method.
And skip paying off the mortgage, that comes later.
3. Save 3–6 Months of Expenses in a Fully Funded Emergency Fund
Once you have your debt paid off, then Dave wants you to return to building that emergency fund.
Looking through your budget, he wants you to come up with a number that amounts to at least three months’ worth of your living expenses. And then make this your emergency savings goal.
For example, if you lost your job tomorrow you could still pay your bills for a time without going into debt.
If you think it might be difficult for you to find a comparable job that might take more than 3 months to get, then you should save more in your emergency fund. Probably closer to 6 months’ worth.
Related article: Dave Ramsey vs. Robert Kiyosaki: Who Should You Listen To?
4. Invest 15% of Household Income into Roth IRA’s and Pre-Tax Retirement Plans
Once you have your emergency fund fully established, then it is time to move on to your retirement planning.
Here Dave recommends that you put aside 15% of your gross income (that’s pre-tax) into a pre-tax retirement plan, i.e., a 401k or Roth IRA. So, if you make $1000 each week before taxes (or anything else) are taken out, then you’ll need to set aside $150 each week.
It is also important to note that you need to do this for your whole household (i.e., spouse). Otherwise, you could find yourself stuck with increased expenses in retirement.
5. Set Up A College Fund For Your Kids
Once you have your future planned for, it’s time to plan for your children’s futures. Well, if you have children, that is.
Unless your kids are already grown, Dave wants you to start a college fund for them. College is not cheap after all, the current cost for a 4-year education is over $100,000. And the costs will only continue to rise.
How much you’ll need to save depends on where you expect them to attend school (in-state vs. out-of-state) and when (i.e., 5 years or 15 years).
To meet your savings goals, Dave Ramsey recommends using a 529 Plan, but there are other options out there.
6. Pay Off Your Home Loan
Earlier, during the paying off your debt step, Dave asks you to ignore the home loan, but once you have a college fund set up and are actively contributing to it, Dave wants you to take a look at that home loan once again.
Since Dave abhors debt of all kinds, he encourages you to get that monkey of a mortgage off your back by paying off your home loan early. He makes the argument that paying it off early can save you thousands in interest.
Related Post: Why Buying a House is a Bad Investment
7. Live Debt-Free, Build a Fortune, and Give to Society
The final step in Dave Ramsey’s plan is all about leaving a legacy.
Once you have all your debt paid off and you are meeting your savings goals (retirement and college fund), it is time to take that extra money and start building multi-generational wealth.
And as you build this wealth, you can start giving back to your community and society as a whole.
This way, when your final day comes, you are debt-free, have left behind an inheritance for your children, and left a legacy with all of your charitable works.
Cons of Dave’s Advice:
1. Preaches “All Debt Is Evil.”
Dave’s viewpoint is that debt is evil, and he supports it with quotes sourced from the Bible.
Specifically, Dave says student loans are unnecessary. From his viewpoint, college is either paid for using a college fund, scholarships, or via working full time through college as he did.
But this doesn’t always work. What about doctors and lawyers who have to attend pricey secondary schooling? Even good-paying full-time jobs can’t cover medical school tuition. And most parents wouldn’t have saved enough up to cover law school tuition.
And what about medical debt. Or buying a house?
Not only is debt not evil, some debt is arguably necessary.
Related Article: Good Debt vs. Bad Debt: Know The Difference
2. Talks About Avoiding Using Credit Cards
From Dave’s viewpoint, credit cards are just another type of evil debt or temptation. Dave would prefer you use only debit cards or even cash (via the envelope system).
But only using a debit card or cash can hurt your ability to purchase the things you need.
For instance, most debit cards have a purchase limit. So, if you need to buy a new refrigerator and the cost exceeds your limit, then your card will likely be declined.
Or how about renting a car? Sure, you can do it with a debit card, but most rental agencies put a $500+ hold on your account to do so.
3. Says That People Don’t Need a Credit Score
What is a credit score beyond the construct of debt? According to Dave, you don’t even need one.
So, I’m guessing that Dave never tried to rent an apartment or office space. If you have bad credit, and unfortunately having no credit is lumped into this category, you’ll have a hard time qualifying for a rental even if you can afford large deposits.
From no-deposit rental agreements to cheaper auto insurance rates, you’ll find having a good credit score can help you in many ways throughout your life.
Besides, wouldn’t you prefer to have a good credit score and not need it, as opposed to having no credit score when you desperately need a credit line?
Who is Suze Orman? (Including Her Net Worth, and How She Made Her Money)
Unlike Dave Ramsey, Suze Orman did not start life as an entrepreneur nor was she interested in the financial field.
It wasn’t until a broker took advantage of her financial naivety, that she started studying finances. In the span of a few months, she went from a broke waitress with no financial knowledge to a successful broker at Merrill Lynch.
She even had the gumption to sue the company she now worked for, for losing her investment money (that was made up of loans from her restaurant patrons). And they settled with her, allowing her to pay back her loans.
She went on to launch her own successful finance company, write more than 10 books, and have a show on CNBC that aired for 13 years.
Through her work over the years as a financial advisor, tv personality, and financial advice writer, she has amassed a net worth of close to $75 million.
And she currently hosts a podcast aimed at helping women manage money.
Suze’s Advice
1. Spending Within Your Means
This is logical advice that nearly any financial advisor would be quick to give. The best way to balance your finances is to not spend more money than you have.
Yes, a budget is critical to this success, but Suze Orman also wants you to take a very close look at your credit card statements. Are there purchases there that you made that you don’t need?
To help keep your budget on track, Suze not only suggests keeping an eagle-eye on your credit card spending, but she also advises you to lower your utility bills and hold onto your vehicle longer. Or better yet, buy used.
2. Urges People to Avoid Credit Card Debt
Unlike her counterpart, Dave Ramsey, Suze Orman doesn’t see all debt as evil. That said, she does see high-interest credit card debt as bad.
She encourages people to pay off their credit card debt by starting with the highest APR and moving on from there. She even suggests a unique way of paying off the debt, by opening a new credit card or at least finding a 0% APR balance transfer offer.
That way you can pay off your debt without accruing additional interest.
3. Talks a Lot about Our Psychological Relationship with Money
Suze Orman, more so than Ramsey, recognizes that finances are not black and white and that our relationship and past experiences with money help shape our financial well-being.
She encourages people to dig deep when evaluating their spending habits. And she suggests you learn to love the things you have without worrying too much about the financial value, i.e., old car, small home, etc.
In an article she wrote for Oprah, her very first piece of financial advice is to forgive yourself for your past financial blunders. She cautions that approaching financial building or rebuilding with negative emotions like regret or blame could prevent you from achieving a fresh start.
4. Protect Your Nest Egg With Life Insurance
Suze is a big proponent of life insurance. She wants you to protect your existing nest egg and your family’s future with life insurance.
But not just any life insurance, term life insurance. She suggests getting term insurance over permanent life insurance with the understanding that by the end of the term, you have all of your debts paid off, have other assets to fall back on, and have fewer people depend on you.
The only time she advises permanent insurance is for those with special needs children who will be dependent on them for life.
Cons of Suze’s Advice
1. Unrealistic Retirement Goal of $5 Million
How much do you need to save for retirement? According to Suze Orman, the number you should be aiming for is $5 million or even $6 million.
For most people, especially those living in lower-cost areas and even those early retirees who are well-versed in managing their finances, $5 million is clearly an unrealistic and unnecessary goal.
But it is important to note that she issued this advice in response to the FIRE movement. The savings goal she proposes is more geared to those wanting to retire early, i.e., in their 30s or 40s.
2. Talks About an Unrealistic Retirement Age (70 Years)
When do you want to retire? And no, tomorrow is not an acceptable answer (unless you are at retirement age). Now that you have that number in your head, let’s consider, when should you retire?
Suze Orman’s advice is to wait a while, or at least until you can fully qualify for your social security benefits. The number she applies to this is 70.
Unfortunately, 70 isn’t always feasible. Declining health is one of the most common reasons that people retire early.
Dave vs Suze: Our Verdict
Is one really better than the other? Are your chances of finding financial peace greater with one or the other?
Undoubtedly yes, but which one will depend on your financial goals.
If you are sick of always being in debt, maybe Dave Ramsey holds the key to your financial freedom.
If you are a woman concerned about a future of financial dependence on your spouse, Suze Orman and her financial planning strategy might be the better choice.
So, what is our verdict, which expert is best?
Neither.
They each have good strategies, but there are also many pitfalls to their advice and often their advice is too narrowly focused on specific financial situations (i.e., having children/dependents).
Instead of following their advice to the T, our recommendation is to figure out what is best for your financial situation and plans for the future.
This article originally appeared on DigitalHoney.Money and was syndicated by MediaFeed.org.
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How to determine your retirement goals
The median retirement account balance for all working Americans is $0, and half of those households are over age 55 (not a typo). But it’s not just a problem for the Boomers. Research has also uncovered that 95% of Millennials are not saving enough for retirement. (Also not a typo.)
It’s a bleak picture, to be sure. But when reality hits hard, motivation can follow. And no one wants retirement to just become one of those things that our parents and grandparents used to enjoy, back in the day.
On average, Americans spend 20 years in retirement. If you earn $75,000 a year when you retire and want to keep the same salary, you’ll need a total of $1.5 million squirreled away.
This is the part where many people might utter the word “impossible.” But if you start saving for retirement now, and make your retirement contributions just as mandatory as your electric bill, that number can start to look a little less intimidating.
In fact, just using a retirement calculator can put you in a better position than many Americans — fewer than half of them have done the math. And once you have your own enormous number, it can get easier to break it down into smaller, more attainable goals along the way.
To be sure, though, the road to retirement is paved with homework and sacrifice. It’s estimated people need 70% to 90% of their pre-retirement income to maintain the same standard of living after they stop working.
So perhaps more than any other financial decision you’ll make, reaching personal retirement goals takes diligence, preparation, planning for the “what if’s” and lots of willpower.
It may seem overwhelming, but it can help to start by determining your retirement objectives. Then you can find your own personal way to crush them. Everyone’s financial situation is different, and this plan is not the only solution out there, but here is one possible way you might go about determining your goals.
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One step you can take to determine your future is to get a solid picture of your present — somewhat like a personal audit. A careful inventory of your current expenses, income, taxes and savings can give you an honest picture of where you are, as well as a realistic look at where your money is going each month.
Once you’ve determined your day-to-day financial picture, you can create a list of any current retirement savings you already have, such as 401(k) accounts, IRAs, or high-yield savings accounts. Total up that number, because you’ll be able to subtract it from your goal.
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A retirement calculator can help you figure out your overall, 20-year lump sum goal by working with variables such as your current age, salary and savings, your desired retirement age and how much you save per year.
Here’s where you can change up the numbers and consider several scenarios. If you were to retire at 67, for example, how much money will you need? What would happen if you were able to up your yearly savings by just 3%? You might even calculate the amount of money you’d need to save to retire early.
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Take a deep breath. Then plan on.
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One possibly helpful way to tackle anything large is to break it down into digestible chunks. To do this, you could subtract your current age from your intended retirement age, then divide that number by the total. That’s your yearly goal. If it’s still overwhelming, you might divide that number by 12 for your monthly goal. Go as far as you need to make it palatable — those “for as little as 3 dollars a day” commercials make it sound easy, right?
For example, if your total number is $800,000 and you’re 30 years from retirement, that breaks down to around $75 a day. But that doesn’t mean you have to put that much into the bank by yourself. A next step you could take is finding the retirement savings plans that will do the most to grow your money.
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With the drastic decline in the traditional, company-provided pension and the uncertain future of Social Security, a number of different individual retirement savings plans, each with specific benefits, have stepped in to take their place.
If your employer offers a 401(k) matching plan, one of the easiest ways to grow your retirement nest egg is to contribute the max amount of money each paycheck that your employer is willing to match.
The contributions are automatically deducted from your paycheck pre-tax, and since you never see the money, it can be much easier to just pretend like it was never there to begin with.
For the self-employed, or for diversification, traditional or Roth IRAs are also specifically designed to help your savings grow.
The biggest advantages of 401(k) and IRA plans are their potential tax savings. However, they can come with yearly contribution limits that don’t mesh with your retirement objectives.
In this case, a general investment account is another possible consideration for growing your wealth. While it likely doesn’t come with tax advantages, it doesn’t come with contribution limits, either.
If investing in the market leaves you feeling wary, or you don’t like the idea of not having access to your money until you reach a certain age, another option to consider is a high-yield savings account.
It’s a cash-based account that has as much flexibility as a regular checking or savings account, but instead of the paltry 0.09% interest offered by some traditional banks, your money can potentially earn 2% or more.
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You’ve calculated your retirement goal. You’ve determined a plan to reach it. And now it’s time for arguably the hardest part — sticking to the plan.
For as many investment or retirement accounts as possible, you might consider setting up automatic contributions to withdraw every payday. The more you can automate, the less you’ll be tempted to move things around.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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