Back in July, I made a video titled “5 Simple Steps to Financial Freedom.” Shortly after that video was published, my Chief of Staff, Amanda Stolba, sent me a video from Dave Ramsey titled “5 Things That Will Make You Wealthy.” As perhaps the most well-known voice in personal finance in the country, I thought it would be worthwhile to see how our advice stacks up.
Below are the five points Dave made in his video and my thoughts on the advice being offered. Where do we agree and where do we differ?
#1: You need a budget.
Well, the stats are in, and people don’t stick to a budget!
Do you want to know why budgeting sucks? Here’s why…
82% of Americans say they keep a budget.¹
Yet a recent survey² shows that 78% of American workers live paycheck to paycheck.
60% of Americans would have trouble coming up with $500 from their budget for an unexpected bill.
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73% are in debt… with 56% of those people believing they will never escape it.
If these studies are saying anything, it’s that budgeting isn’t helping these people at all.
And research has shown that budgeting actually backfires.
One recent university study³ showed that when you go to the store with a budget in mind… you actually spend more money!
Dave makes the case that budgeting is biblical by quoting Luke 14:28-30, where Jesus talks about the importance of estimating the cost of building a tower so you don’t run out of money halfway through, opening yourself up to ridicule for not finishing what you started.
I believe in mindful cash management, knowing where your money is going, paying yourself first, automatically saving, and not spending more than what’s left over, but I do not think budgeting is the answer.
Budgeting is all about reducing, restraining, and restricting. When that is your focus,it minimizes the real road to wealth, which is value creation. Not to mention: budgeting is exhausting.
It’s a limited, finite game that doesn’t lead to your ultimate destination: wealth.
#2: You must get out of debt.
At one point, Dave says, “When you spend your whole freaking life giving your money to banks who fill up the skyline and have furniture nicer than yours, that makes you stupid.”
While I wouldn’t use the word “stupid,” he does have a point. Banks usually are the biggest buildings in town and we’re willingly giving them free interest. Sure, they offer us 1% on our money, but then they turn around and sell that money to other people for 4% interest.
But let’s be clear about what debt is. Take out a sheet of paper and draw a line down the middle. On the left side, list your assets. On the right side, list your liabilities. When you have more assets than liabilities, that’s called equity. More liabilities than assets equals debt.
Yes, it’s wise to stay out of debt, but there are times when you use other people’s money to acquire assets like real estate or a business. The problem is that when people do this without knowing how to be productive, or they get over-leveraged, then they get destroyed.
So, to add to Dave’s point: let’s not borrow just to consume. But don’t focus on paying off any and all of your loans at the expense of investing in yourself. If you’re in debt now, it’s smart to reduce your expenses while also increasing your income. How do you do that? By focusing on serving others and solving problems.
#3: Live on less than you make.
Again, Dave isn’t wrong here, but I’d add to his point. You can live on less than you make by reducing your expenses, but there are two other ways to achieve that aim. First, you can be more efficient by saving on tax, interest, and non performing investment fees. Get rid of duplicate insurance costs.
Second, you can live within your means by expanding your means! This is the key part of the discussion that I don’t want to gloss over. Money is a byproduct of the value you add to the world, so look to serve more people, solve more problems, and deliver more value.
#4: Save money.
Dave says in the video, “Do you know how rich people get rich? They save money!”
I want to be very clear about this: rich people didn’t just get rich by saving money. Some of them did. You can save your way to wealth, like the millionaire next door. I just read an article about a person who died with $2.7 million in the bank and nobody in their life. They only talked to their broker. They didn’t have a bed because they could save that money. Who wants that?
Many people got rich by offering the world a product or service that was so insanely valuable people paid them a lot of money for it. Other people married into wealth, were born with a trust fund, and some even won the lottery. These people didn’t get rich by saving money.
Bottom line: savings doesn’t equal wealth. It equals stewardship.
It’s what we do with our savings that creates wealth. It comes back to: Who are you? What value can you create? What problems are you uniquely gifted to solve?
This is an expansion game of production, not a reduction game of budgeting.
At another point, Dave says, “100% of the people that built wealth saved money, on purpose, a lot. Some people do it poorly in a stupid money market account and make no money on their money. Others do it wisely in mutual funds that outperform the S&P 500.”
I have to point out here: that’s not saving. That’s investing. Let’s not collapse those terms because they’re different. Also, his use of “wisely” makes me laugh. Mutual funds are a big part of the reason 64% of Americans will retire with less than $10,000 in savings. You don’t build wealth through mutual funds. Selling them, maybe, or advertising them on your show.
Dave didn’t get rich through investing in mutual funds. He got rich because he’s an entrepreneur who knows how to package and sell his ideas. He offered value to the world and the world repaid him with money that he’s used to go out and make more money.
#5: After steps 1-4, you can be lavishly generous.
You don’t need money to be generous. You can be in debt but be generous with your time or your talents. Don’t wait until you’re wealthy to be generous. Start that habit now.
In this video, Dave was generous with the words “stupid” and “wrong.” I bring this up to make a final point: if you’ve gotten yourself into a financial situation that isn’t great, you should not feel unworthy or believe that you’re stupid. Money doesn’t come with a manual.
So start by paying off those things that are haunting you and destroying your wealth. Then, I want you to look to expand your means by answering these two questions:
- What are my abilities, values, and passions?
- How do those combine into a vision for my life?
The “win” isn’t having a certain amount of money in the bank. It’s having a vision so compelling that it delivers value to the world. The world’s problems can be solved by the people who are already here, but unfortunately, those people are confused about money.
They’re too busy, scrimping, sacrificing, saving, delaying, and feeling wrong or stupid because someone yelled at them. You’re not stupid. I know you have plenty to offer the world. I want to help you figure out this money game together—and I promise I’ll never call you “dumb.”
