There are two power players when it comes to personal finance, Dave Ramsey & Suze Orman. Dave says to have a $1,000 emergency fund immediately. Suze says to save a little bits at a time. Each one has their different ways of doing personal finance. Below, you could find one who works best for you, or even just find advice from both that can help you in your daily life.
Dave Ramsey Financial Plan
The financial plan that Dave Ramsey created is commonly referred to as Dave’s Baby Steps. Many people find it a good way to manage personal finances and reduce debt. The great thing about this plan is that you don’t need to be a financial genius to understand and implement it. You get a step-by-step guide to paying off debt and increasing the amount of savings that you have.
Step 1 – Save $1,000 for Emergencies
This plan is all about staying out of debt so you need to make sure that you have enough money to cater for any emergency expenses that happen. This is why the first step in this plan is to save $1,000 for emergencies as quickly as possible. The money should be placed in a separate checking account so you’re not tempted to spend it when there isn’t an emergency.
Step 2 – Get rid of debt (except the mortgage)
Dave Ramsey proposes using the snowball method to reduce debt. This means you have to list all of your debts with the smallest first. You then need to concentrate on paying off the first debt on your list as quickly as possible, while still paying the minimum amount for all of the other debts.
Throw as much money at the debt as you can. Once the first debt is paid off, it’s time to start giving the same treatment to the second debt on the list. The idea of paying off the smallest debt first is that you get quick wins that are motivating.
Step 3 – Invest 15% of available income into your retirement provision
Investment may be boring to most people but it’s essential if you want to have a decent retirement. This is why step 3 of the plan is to invest 15% of your gross household income in your retirement provision.
First you need to ensure that you invest enough to get the full employer match on your company’s 401(k) plan (if there is a plan available), then you need to invest in a Roth IRA for yourself, and your partner if you have one.
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Step 4 – Grow your emergency fund once fordebt is paid off
Once debt is paid off, Dave Ramsey’s assertion is that you should not just start spending that extra cash each month. The money that you were throwing at your debt should now be used to grow your emergency fund. You should aim to save enough money to cover 3 to 6 months of expenses should you suffer an unexpected emergency such as losing your job.
Step 5 – Set up a college fund for your kids
After paying off debt and starting to grow your emergency fund, the next step of Ramsey’s financial plan is to set up a college fund for your kids. You can choose to use a 529 college savings plan or an ESA (Education Savings Account) to do this. In the plan, Dave Ramsey suggests that you should do your research to figure out which is the best choice for you.
Step 6 – Keep building your wealth and give when you want
Once you have got to this stage of the Dave Ramsey plan, you should be at the point where you can simply continue building on your wealth. Max out your 401(k) and Roth IRA provisions to make sure this happens. You can also start to give money to others in ways such as leaving an inheritance for your family.
Step 7 – Pay off your home loan
At this point in your financial journey, Dave Ramsey suggests that you should be in a position to pay off your home loan early. According to this part of the plan, putting as much money as possible towards your mortgage can save you hundreds, or even thousands, of dollars in interest payments.
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Suze Orman financial plan
Suze Orman has a different approach than Dave Ramsey when it comes to getting rid of debt and building wealth. For instance, there is more emphasis on managing debt and less on getting rid of it all together. Let’s take a look at this plan in more detail.
Step 1 – Save for emergencies a little at a time
According to Suze Orman’s plan, the best way to save for emergencies is by putting away a little money at a time. If you have small amounts of spare cash to save they can quickly add up.
Step 2 – Have discipline when it comes to spending
In her plan, Suze Orman suggests that self-discipline is extremely important when it comes to reducing spending. She suggests that you should look through all of your bank statements and credit card statements and eliminate any expenses that are not necessary.
Step 3 – Automate savings and investment
The third step of the plan is intended to make saving and investment easier. You should make sure that all of the amounts which are to be dedicated to your emergency fund and retirement savings each month are automatically transferred into a separate account.
Step 4 – Ensure that you max out the company’s 401(k) match
In this step, Suze Orman is in agreement with Dave Ramsey. Again, you are encouraged to make sure that you are investing enough to ensure that you max out the companies 401(k) match contribution.
Step 5 – Choose a Roth IRA to invest in
Again in agreement with Dave Ramsey, Suze Orman suggests that investment in a Roth IRA is a good idea. It’s a way of securing a good income for your retirement.
Step 6 – Invest a percentage of your income in stocks
In this step of the plan you are encouraged to invest a percentage of your income in stocks such as those from Motley Fool Stock Advisor. The percentage should equate to the sum of 100 – your current age. According to the plan, 70% of the stocks should be US based while 30% should be international funds.
Step 7 – Spend $50 each month on life insurance
Peace of mind is important and Suze Orman suggests you can get this by spending $50 each month on life insurance. This should mean that you can buy a decent term life insurance policy.
Step 8 – Draw up important documents
At this stage of the plan, it’s time to draw up some of the most important documents of your life. These documents are a revocable living trust, a will, a power of attorney for finances and a power of attorney for healthcare matters.
Step 9 – Pay more off the mortgage
At this point, the plan again mirrors the Ramsey plan by suggesting that more should be paid off any mortgage that’s outstanding. Suze Orman suggests that one extra payment should be made each year.
Now you’ve seen the financial plans of both Dave Ramsey and Suze Orman. In parts they are very different. The Ramsey Plan is very much no nonsense while the Orman plan deals with emotional and psychological obstacles to attaining financial security.
Also, as mentioned earlier, Dave Ramsey favors getting rid of debt completely while Suze Orman is more concerned with making sure that debt is well-managed.
However, there are areas where they agree. They both recognize the value of investing for retirement and maxing out a company’s 401(k) match investment. They also both recognize the value of paying more than required off a mortgage. You can choose to adopt one plan or the other, or you can simply choose to take some advice from each and use it in your own situation.
Take a look at this healthful infographic which encapsulates the main details for each plan. They should be useful in helping you decide which advice is best suited to you.