Here’s Everything a Financial Guru Can Tell You.
Do you have a favorite finance guru? Are you a Dave Ramsey devotee or a Susie Orman enthusiast? Are you more likely to recommend your money, your life, or your neighbor’s millionaire ?
Money.com posted a longread yesterday about Dave Ramsey’s method asking if his advice was correct :
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 biggest. It’s controversial (paying off debt at the highest interest rate rather than the lowest dollar amount is usually the quicker approach recommended by the experts), but judging by his loyal, growing fan base, his methods work for a lot of people. …
I would say Ramsey’s advice is absolutely correct. It’s the same with Seuss Orman and Warren Buffett and Gene Chatsky and the rest.
If you have read as many financial guides as I have (and now I feel like I have read almost all of them ), you will quickly realize that they all say the same thing. Catchy phrases and psychological tricks may differ – Dave Ramsey has Debt Snowball , Vicki Robin has her Glazingus pins – but in essence the advice is almost identical.
With that in mind, here’s everything you’ll learn from almost every financial guru:
Spend less than you earn
This is what can be called the basic tenet of personal finance. Unless you consistently spend less than you earn, barring occasional attempts to accumulate debt, such as buying a house, funding college, or (as I did) funding short periods of unemployment or part-time employment, you will be in financial trouble.
Yes, I’ll go ahead and link this sketch live Saturday night about “a unique new program for managing your debt called Don’t Buy Things You Can’t Afford “, as I know half of you are already thinking about it:
If you cannot consistently spend less than you earn, either cut costs or increase your earnings.
This is where we get into “easier said than done” territory, and after going through several periods of temporary hiatus in my life, I understand. Sometimes there are no additional costs to cut, and there are no immediate paths to more earnings.
But life is a long game, so play it this way. Tools like YNAB (You Need a Budget) will help you balance your income and expenses in the long run, even if those expenses temporarily exceed your income. Likewise, you may not be able to make more money this month, but you can develop a skill or bond that will help you make more money this year.
If you consistently spend less than you earn, use the extra money to pay off debt and / or accumulate savings.
This is where the tips start to differ. Dave Ramsey suggests attacking your smallest debt first, regardless of interest charges, so that you get the psychological boost by paying off your only debt in full. Other financial advisors suggest paying off the debt at the highest interest rates first so that you don’t pay more than you need to.
You will also face a lot 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 your savings at the same time.
However, even with a variation of the method, financial gurus still agree: you need to pay off your debts and start saving for the future. As long as you spend less than you earn, you end up saving enough money to accomplish both goals.
Moving from savings to investing
Once you are in a position of financial stability – you spend less than you earn, you have little or no debt, and you save for the future – it’s time to turn some of that savings into an investment.
This type of investment is different from retirement investment, which is usually combined in the previous step. (Every finance guru here mentions that employer 401 (k) match is “free money.”)
At this point, you are already contributing to your 401 (k), IRA, HSA, or all of the above. It’s time to open a brokerage account and start investing for yourself, which means it’s time to start getting a higher return on your income than you would with a traditional savings account.
How to invest this money? If you’ve read any financial advice book written in the last ten years, you already know the answer: index funds . Yes, there are specialized books of financial advice for those of us looking to gamble in the market, earn high dividends, or find hot new companies that might have good investment prospects, but for most of us, index funds are often the best bet. (A quick reminder that I am not a qualified investment advisor – I am simply repeating other people’s advice.)
At this point, you just … keep doing what you are doing. If you want to further increase your net worth without limiting your savings and investments, you can always look for additional ways to generate income – which is why these books usually end with a chapter on real estate – but if you get to the point where you are financially stable, debt free, with fully funded retirement accounts and a growing investment portfolio, you are fine . Really.
Ask any financial guru you like and he will probably say the same.