If you're looking to build wealth, it's wise to seek advice from a trusted financial professional who can help you along the way. Dave Ramsey is one such expert who has helped thousands of people pay off their debt and live a richer life. This is why he shares his best advice for building wealth.
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Here are Dave Ramsey's 10 tips for building wealth.
1. Start thinking like a rich person.
Ramsey said on the show that it's important to think like a rich person because the way you think has a huge impact on your financial situation. If you shorten your planning horizon, you may go bankrupt. If you take a long-term view, you can be proactive and become like a rich person. Rich people tend to plan for the future and make decisions based on a long-term perspective.
Ramsey gave several examples of the behavior of the rich.
- Rich people have a will and a financial plan.
- They plan ahead for their child's education.
- They plan to retire while they are still young enough.
- They have adequate insurance for their protection.
The theme here is that slow and steady wins the race. The goal is to build wealth with patience and consistency. You don't want to withdraw from your retirement accounts or try to live beyond your means. You want compound interest to work to your advantage over the long term.
2. Make a financial plan
It's hard to save money if you don't know where your money is going. If you want to build wealth, you first need to have a plan and know where you are going.
Ramsey encourages his audience to create a budget and create a written financial plan. He cited a study his team conducted that found that 93% of billionaires had created a budget that they stuck to.
3. Pay off your debts
Once you've planned your money for the long term, your next priority should be paying down your debt so you can save on interest payments over the long term. Ramsey wants his followers to get out of debt before doing anything else when it comes to building wealth.
To do this, you can follow Ramsey's debt snowball strategy and pay off your minimum balance first to build momentum toward debt-free living. No matter what strategy you choose, the goal is to be debt-free as quickly as possible.
4. Live on less than you earn
Ramsey has often asserted that rich people don't waste their money on foolish purchases. Mr. Ramsay doesn't just try to look rich, he wants his readers to become rich. You may want to live a luxurious lifestyle, but you also want to live on less than your income so that you can prioritize saving for the future.
Living on less than you earn can speed up your wealth building process by giving you more money to invest.
5. Avoid further debt
Once you have paid off your debt, you must avoid taking on more debt in order to build wealth. For example, Ramsey wants people to prioritize paying cash for their homes and is not a fan of mortgages.
However, this isn't very practical, so if you can't afford to pay for housing with cash, aim to spend no more than 25% of your gross monthly income on housing. Ramsey also recommends a 15-year, fixed-rate mortgage to avoid becoming homeless and neglecting your retirement savings.
6. Invest in things you understand.
On “The Ramsey Show,” Dave emphasized that you should avoid investing money in things you don't understand. Mr. Ramsey believes that people lose money because their friends encourage them to invest in cool or trendy things. These sophisticated investments are usually not set up as secretly lucrative opportunities.
If you invest in something you don't understand, you risk losing your hard-earned savings because you rely on speculation and hype instead of focusing on the basics. This leads to his next point…
7. Keep investing simple
Ramsey keeps it simple by investing in things he understands and not buying things he can't afford. He said his only three investments are: Businesses, wholly owned real estate, and investment trusts.
This point needs to be reiterated. Because building wealth usually isn't about finding a secret get-rich-quick investment. Building wealth is about consistency and simplicity to stay on track.
8. Always invest
When it comes to investing, the key to success is to focus on compound interest and letting your money grow without touching it. Ramsey frequently emphasizes on his show that rich people got to where they are by continuing to invest.
9. Invest in your retirement
If you want to build wealth, you need to think long-term, and that often includes planning for retirement.
Ramsey recommends investing in a tax-advantaged account, such as an employer's 401(k) or 403(b), first. The goal is to allocate about 15% of your total income to high-growth mutual funds that will help you save enough to live the lifestyle you want in retirement.
10. Donate generously
The last tip is unconventional, as Ramsey feels the point of building wealth is to give back. He encourages his listeners to work hard to build wealth to help those around them.
Once you get where you want to go, it's time to help those around you who need it.
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This article originally appeared on GOBankingRates.com: Dave Ramsey's 10 Tips for Building Wealth: “Start Thinking Like a Rich Man”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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