Rethinking Dave Ramsey: Money Rules Are Made to Be Broken

Mark Humphrey/APDave Ramsey gives solid advice, but Johnny and Joanna have developed their own variations.
The first financial book my husband, Johnny, and I read as a couple was Dave Ramsey's "The Total Money Makeover." We had student loan debt and had never kept an itemized budget, and Ramsey's book was the detailed manual we needed to start our long journey toward financial stability and security. Some of his steps were hard to swallow at first, but we made a blood oath to keep at it -- and by blood oath, we mean we looked at each other and said, "Cool. Let's try this." And lo and behold, in less than two years, we'd paid off our $20,000 in school loans, built an emergency fund and started saving for retirement.

We will always have Ramsey to thank for getting us on the path of financial freedom. But now that we've begun to learn the financial ropes, we've decided to veer from his course on a few topics. Some of his advice that helped us in the beginning doesn't quite fit our lives anymore. Here are a few areas where we've cut loose from Ramsey.

Keeping the Credit Cards

My husband and I never cut up all of our credit cards like Ramsey recommends, but we did try to go without using them in the beginning of our debt-payoff journey. We soon realized this method wasn't for us, for a few reasons: We never carry a balance because we pay off our credit cards every month; credit cards are an easy way to build our credit score and history; and we love cashing in on credit card rewards. Currently, we have enough airline miles to last us for the the next few years. If we had a history of reckless credit-card spending, perhaps we would have cleansed our wallets and purses of credit cards for good, but for now, plastic still serves a purpose in our household.

Building a Beefier Emergency Fund

Ramsey recommends you start with a $1,000 emergency fund while you're getting out of debt, and then build up an emergency fund to cover three to six months' worth of expenses once you're out of debt. Even while we were getting out of debt, we kept at least $3,000 in an emergency fund at all times, and we added to it from month to month. Now we have six to eight months' worth of expenses saved up for a rainy day. We feel better with the larger emergency fund while we're young and our career paths and futures are still a bit unpredictable. And if we don't end up needing it for an emergency, we certainly won't complain about the extra dough in savings.

Thinking Outside the 'Envelope' System

I will say that the use of cash only and the envelope system made us very aware of our spending. And we definitely needed that in the beginning. In fact, we still recommend it to first-time budgeters. But once we'd exorcised all of our spending demons and gotten our budget down to a science, the cash/envelope system seemed needlessly inconvenient. So we switched back to using credit cards (that we pay off in full each month). And instead of envelopes, we track our expenses with a budgeting app. It's an easier way for us to stick to our budget effectively.

No Longer Itemizing Every Cent

While itemizing every expenditure is important initially when setting up your first budget, it's also quite laborious. After a couple of years of budgeting this way, Johnny and I had an aha! moment. %VIRTUAL-article-sponsoredlinks%What if we had an "everything else" category for our discretionary spending? For example, instead of having $20 allotted for dry cleaning, $30 for medical, $25 for pets, etc., we just budget $400 for all of our discretionary spending. And as long as we don't go over $400, it doesn't matter how and where we spend. Some months we spend more in entertainment or home improvement, but as long as all of our discretionary spending stays under $400, no problem. We're not sure what Ramsey would think of our method, but it works for us. It makes our budgeting less complicated, while still keeping our spending in check.

So while we've graduated from some of Ramsey's rules, we're sure glad they were there to help school us in the first place. But some rules are meant to be broken. Or at least we'd like to think so.

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Rethinking Dave Ramsey: Money Rules Are Made to Be Broken

Plenty of Americans live beyond their means but don percentt even realize it. A 2012 Country Financial survey found that more than one-half of respondents (52 percent) said their monthly spending exceeded their income at least a few months a year. Yet only 9 percent of respondents said their lifestyle was more than they could afford. Of the 52 percent who routinely overspend, 36 percent finance the shortfall by dipping into savings; 22 percent use credit cards.

Blowing your entire paycheck (and then some) each month isn percent an ingredient in the recipe for financial success. Neither is draining your savings or running up card balances. To rein in spending, start by tracking where the money goes every month. Try to zero in on nonessential areas where you can cut back. Then create a realistic budget that ensures you have enough to pay the bills as well as enough for contributions to such things as a retirement account and a rainy-day fund. Our household budget worksheet or an online budgeting site can help.

If you're like most folks, your savings habits could use some improvement. The personal savings rate in the U.S. is just 4.9 percent of disposable income, down from a high of 14.6 percent in 1975. Only about one-half of Americans (54 percent) say they have a savings plan in place to meet specific goals, according to a 2013 survey commissioned by America Saves, a group that advocates for better saving habits.

Saving needs to be a priority in order to build wealth. Begin with an emergency fund that can be tapped in the event of an illness, job loss or other unexpected calamity. A 2012 survey by the Financial Industry Regulatory Authority found that 56 percent of individuals say they have not set aside even three months' worth of income to handle financial emergencies. Once your emergency fund is well under way, you can divert small amounts toward other goals, such as buying a home or paying for college. These six strategies can help you save more, no matter your income.

Americans have $846.9 billion in credit card debt alone. That's $7,050 per household, according to, a Web site that analyzes financial products and data. If you're only making minimum monthly payments on $7,050, it'll take 28 years and cost you $10,663 in interest before you're debt-free, assuming a 15 percent interest rate. And that only holds true if you don't make any additional charges.

Some debts can lead to financial success -- a mortgage to purchase real estate, a credit line to start a business or a student loan to fund a college education -- but a high-interest credit card balance usually doesn't. Pay down credit cards with the steepest rates as quickly as possible. Putting $250 a month toward that same $7,050 debt will retire it in three years and save you about $9,000 in interest versus making minimum payments. See Escape the Debt Trap for more strategies to chip away at what you owe.

Late fees, banking fees, credit-card fees -- the amounts might seem insignificant when taken individually. After all, an overdue library book or Redbox DVD might only run you a dollar. But if you're regularly paying penalties and fees, these charges can quickly eat a hole in your budget. Consider this: The average bank overdraft fee is $32.20, according to, and the average charge for going outside your ATM network is $4.13. Late-payment penalties for credit cards can climb as high as $35.

So how do you avoid pesky fees? Read the fine print so you understand fee rules, and stay organized so you avoid breaching those rules. Here are 33 common fees you can avoid -- or at least reduce -- with just a bit of effort. With the extra cash, you can pay down debt or boost your savings.

Would you ignore a hundred-dollar bill on the sidewalk? Of course not. You'd bend over and pick it up. So why are you passing up other opportunities to get free money? If your employer matches employee contributions to a 401(k) but you're not participating in the retirement plan, then you're passing up free money. If you let rewards points from loyalty programs or credit cards expire, then you're passing up free money. If you claim the standard deduction on your tax return when you qualify for itemized deductions that could lower your tax bill even more, then you're passing up free money.

Believe it or not, there might even be free money out there that you forgot about -- or never knew of in the first place. There are more than $41 billion worth of unclaimed assets ranging from old tax refunds and paychecks to forgotten stocks and certificates of deposit being held by state agencies, according to the National Association of Unclaimed Property Administrators. Do a search on to find out if there are unclaimed assets that belong to you.

It's easy to focus on the present -- the bills you have to pay, the things you want to buy -- and assume you'll have time in the future to start saving for retirement. But the longer you wait, the tougher it will be to amass a sufficiently large nest egg. For example, if you wait until you are 35 to start saving for retirement, you'll have to set aside $671 a month to reach $1 million by age 65 (assuming an 8 percent annual return). But if you start at age 25, you'll need to save just $286 a month to hit $1 million by the time you're 65.

Even if you're creeping closer to retirement, it's not too late to start putting away money. In fact, Uncle Sam makes it easier for procrastinators to catch up on retirement savings. If you're 50 or over, you can contribute up to $23,000 annually to a 401(k) (versus $17,500 for those younger than 50). The contribution limit for older savers to traditional and Roth IRAs is $6,500 a year (versus $5,500 for everyone else). Use our Retirement Savings Calculator to figure out how much you need to save.

Does this sound like your investing strategy? You hear about a stock that is soaring, and you want to get in on the action, so you impulsively buy. But soon after, the stock starts tanking. You can't bear the pain of watching your shares decline further in value, so you immediately sell at a loss. As a result, you're wasting money rather than building wealth.

Unfortunately, many investors buy high and sell low because they follow the herd blindly into the latest hot stock. You can resist the urge to go with the crowd if you adhere to smart investing techniques. One such technique is dollar-cost averaging, a simple system of investing at regular intervals no matter what the market is doing. While it doesn't guarantee success, it does eliminate the likelihood that you're always buying at the top -- plus, it takes the guesswork and emotion out of investing. See the 7 Deadly Sins of Investing to learn how to overcome common missteps.

New stuff is nice, but it's often not the best investment. Take cars. Estimates vary, but some experts say a new vehicle loses 30 percent of its value within the first two years -- including an immediate drop as soon as you drive off the dealer's lot. According to Kelley Blue Book, the average vehicle is worth 44 percent less after five years.

If you're not comfortable buying something that someone else has owned, get over your hang-up because you're missing a big money-saving opportunity. Many pre-owned items can cost up to 50 percent to 75 percent less than the price you'd pay if you purchased them new. From designer jeans to college textbooks, here are 11 things that you should consider buying used because you often can find them in good or almost-new condition at a fraction of the price.

An early retirement is a dream for many, but calling it quits if you're too young has several potential drawbacks. For starters, you could incur a 10 percent early-withdrawal penalty if you tap certain retirement accounts, including 401(k)s and IRAs, before age 59½. (There are exceptions.) You can claim Social Security as early as age 62, but your benefit will be reduced by as much as 30 percent from what it would be if you wait until your full retirement age, which falls between 66 and 67 depending on your year of birth.

Health care is another big issue. You must be 65 to qualify for Medicare. In the meantime, without access to an employer-sponsored plan, you might have to pay a lot more out of pocket for individual coverage until you're eligible for Medicare.

And speaking of health, the longer you live in retirement, the more likely you are to outlive your nest egg. Let's say you make it to the age of 90. A $1 million portfolio evenly split between stocks, bonds and cash has a 92 percent likelihood of lasting until you turn 90 if you retire at 65, according to Vanguard. But retire at age 55 and the likelihood drops to 66 percent. Use our Retirement Savings Calculator to determine when you can really afford to retire.

This might be the single biggest obstacle on your path to riches. If you're not investing in continuing education, training and personal development, you're limiting your ability to make more money in the future. "Your own earning power -- rooted in your education and job skills -- is the most valuable asset you'll ever own, and it can't be wiped out in a market crash," writes Kiplinger's Personal Finance Editor in Chief Knight Kiplinger in 8 Keys to Financial Security.

Consider taking nondegree courses online to boost your knowledge of your field or enrolling in a graduate program (see 5 Advanced Degrees Still Worth the Debt). If you don't have a college degree, see our picks for best college values or check out these four alternatives to a four-year college degree. Just keep in mind that some college majors (think finance, computer science or nursing) lead to more lucrative careers than others (sorry, arts and humanities lovers).

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