Do you have a favorite financial guru? Are you a Dave Ramsey devotee or a Suze Orman enthusiast? Are you more likely to recommend Your Money or Your Life or The Millionaire Next Door?
Yesterday, Money.com published a longread on the Dave Ramsey method, asking whether his advice holds up:
It all revolves around what Ramsey calls the “debt snowball,” a money management plan that teaches people to attack their smallest debts first and work their way up to the largest. This is controversial (paying off your debts with the highest interest rate rather than those with the lowest dollar amounts is usually the faster, expert-advised approach), but judging by his loyal, growing fan base, his methods work for a lot of folks.
I’d argue that Ramsey’s advice absolutely holds up. So does Suze Orman’s, and Warren Buffett’s, and Jean Chatzky’s, and the rest of them.
The catchy phrases and psychological techniques might differ—Dave Ramsey has his Debt Snowball, Vicki Robin has her Gazingus Pins—but the advice, at its core, is nearly identical.
With that in mind, here’s everything you’ll learn from nearly every financial guru:
Spend less than you earn
This is what you might call the core tenet of personal finance. If you don’t consistently spend less than you earn, barring occasional debt-accruing endeavors such as buying a home, financing a college education, or (as I’ve done myself) funding a short period of unemployment or underemployment, you’re going to find yourself in financial trouble.
Yes, I’ll go ahead and link that Saturday Night Live sketch about the “unique new program for managing your debt called Don’t Buy Stuff You Cannot Afford,” since I know half of you are already thinking of it:
If you can’t consistently spend less than you earn, either cut expenses or increase your earnings
This is where we get into “easier said than done” territory, and having been through a handful of temporarily broke periods in my life, I get it. Sometimes there are no additional expenses that can be cut, and no immediate pathways towards earning more money.
But life is a long game—so play it that way. Tools like YNAB (You Need a Budget) help you balance your income and expenses over the long-term, even if those expenses are temporarily exceeding your income. Likewise, you might not be able to earn more money this month, but you could build a skill or make a connection that’ll help you earn more money this year.
Once you’re consistently spending less than you earn, use the extra money to pay down debt and/or build up savings
Here’s where the advice starts to differ. Dave Ramsey suggests attacking your smallest debt first, regardless of the interest charges, so you’ll get the psychological boost of having paid off a single debt in full. Other financial advisers suggest going after the debt with the highest interest charges first, to avoid paying more interest than you have to.
You’ll also find plenty of disagreement about whether you should pay off all of your debt before you start building your emergency fund, or whether you should pay off debt and build up savings concurrently.
However, even with the variation in method, the financial gurus are still in agreement: you need to pay off your debts, and you need to start saving for the future. As long as you’re spending less than you earn, you’ll eventually set aside enough money to achieve both goals.
Transition from saving into investing
Once you’ve found yourself in a position of financial stability—you’re spending less than you earn, you have little or no debt, and you are saving for the future—it’s time to turn some of those savings into investments.
This type of investing is different from retirement investing, which generally gets lumped into the previous step. (This is where every financial guru mentions that the employer 401(k) match is “free money.”)
At this point, you’re already contributing to your 401(k) or IRA or HSA or all of the above. It’s time to open a brokerage account and start investing for yourself—that is, it’s time to start getting better returns on your income than you ever will with a traditional savings account.
How should you invest this money? If you’ve read any financial advice book written in the past ten years, you already know the answer: index funds. Yes, there are specialized financial advice books for those of us that want to play the market or pursue high dividends or find hot new companies that might be good investment prospects, but for the majority of us, index funds are often the way to go.
At this point, you just… continue doing what you’re doing. If you want to continue to grow your net worth beyond your savings and investments, you can always look for additional ways to earn income—which is why these books tend to end with a chapter on real estate—but if you get to the point where you’re financially stable, debt-free, with fully-funded retirement accounts and a growing investment portfolio, you’re good. Really.
Ask any financial guru you like, and they’ll probably say the same thing.