If you’ve ever dipped your toes into the world of personal finance, chances are you’ve heard of Dave Ramsey. He’s a household name in the realm of financial advice, known for his no-nonsense approach to getting out of debt and building wealth.
One of the cornerstones of Ramsey’s philosophy is cutting expenses to the bone, often focusing on small, everyday luxuries like coffee and dining out. While slashing these expenses can certainly free up some cash in the short term, I’m here to tell you that it’s not the path to true wealth.
In this article, we’ll explore why Dave Ramsey’s approach to cutting expenses won’t make you rich and what you can do instead to achieve financial success.
What Dave Ramsey Would Have You Cut
Let’s start by looking at some of the expenses Dave Ramsey suggests cutting.
Getting coffee out is often a prime target of Ramsey’s advice, with him famously urging his followers to bid farewell to their daily Starbucks habit. Another area he emphasizes for significant cutbacks is dining out.
Moreover, take a closer look at your subscriptions—are there any you’re not utilizing? Can you negotiate a lower cable bill? For instance, after witnessing our cable/internet bill surge by over 75% in 2023, we decided to part ways with our DVR service (unused anyway, since we stream everything), saving us over $1,200 in just one year!
Every dollar you save in these areas can be redirected toward building wealth. Ramsey’s calculations suggest that these seemingly small indulgences can amass to thousands of dollars annually—funds that could be allocated more effectively elsewhere.
This is technically true. But…
Why Cutting Coffee Out Won’t Make You Rich
Now, don’t get me wrong—there’s nothing inherently wrong with cutting back on these lifestyle expenses. It’s a prudent move for many people, especially those struggling to make ends meet or pay off debt.
However, focusing solely on these minor expenditures overlooks the bigger picture when it comes to building wealth. Moreover, adopting a mindset of “deep household budget cuts” may inadvertently lead to feelings of deprivation, making this way of life difficult to sustain over the long term.
The fundamental flaw in Dave Ramsey’s approach lies in its failure to address the most impactful areas of personal finance. Sure, cutting out your daily latte might save you a couple of thousand dollars a year, but if you want to be truly wealthy, you need to also focus on where you can move the needle the most.
How to Build True Wealth
So, if cutting back on coffee and dining out isn’t the key to riches, what is? Well, it’s all about maximizing the wealth that you keep.
Here are some alternative strategies that can help you achieve financial success.
Eliminate destructive expenses
Before you can start building wealth, you need to eliminate any destructive expenses that are holding you back. This might include things like excessive credit card debt, gambling habits, or other compulsive behaviors (like shopping).
Seek help if you need it, whether from a financial advisor or a support group. Recognizing and addressing these destructive habits is a crucial first step toward financial stability and prosperity.
Optimize your productive expenses
Maximizing productive expenses can be a game changer for your financial journey, leading to substantial savings and bolstering overall financial health. By strategically managing essential costs like childcare and insurance, you can unlock significant annual savings.
Take, for instance, a simple tweak in your childcare schedule. This can translate to monthly savings of over $600 for your household.
Similarly, tapping into the perks of a Costco membership can yield remarkable benefits. With Costco, you not only enjoy lower premiums on insurance but also ensure robust coverage for unforeseen circumstances.
For instance, leveraging our Costco membership slashed $500 off our home insurance, $700 off auto insurance, and $600 off term life insurance annually. With just a nominal annual fee of $110, the savings gained far outweigh the cost of the membership, making it a savvy financial move.
By optimizing these productive expenses, you could potentially save anywhere from $1,000 to $2,000 each year, freeing up funds for other financial goals or investments down the line.
Eliminate consumer debt
Getting rid of or fine-tuning consumer debt is a pivotal move in fortifying your financial well-being and pocketing substantial savings year after year. By tactically managing debt, whether it’s tackling high-interest credit cards or refinancing loans, you can significantly slash your monthly expenses and open up cash flow for other ventures.
For example, using the Cashflow Index method outlined in my book Money For Tomorrow: How to Build and Protect Generational Wealth can help prioritize debt repayment by focusing on eliminating liabilities with the highest interest rates first. This approach prioritizes paying off debts with the highest interest rates first, translating into monthly savings of hundreds of dollars.
Over time, these incremental savings snowball into hefty annual savings of $3,600 or more. Not only does this alleviate financial strain, but it also propels you closer to achieving long-term financial milestones, such as amassing savings or delving into investments for the future.
Reduce or eliminate investment fees
Trimming or eradicating investment fees is a pivotal aspect of wealth accumulation that warrants attention. For those venturing into the stock market, it’s paramount to keep a tight lid on your overall fee load within retirement accounts. Opting for low-cost options such as Vanguard, Schwab, or Fidelity can help curb unnecessary expenses.
Moreover, contemplate adopting a fee structure based on hourly rates rather than percentage-based fiduciary fees, which can gnaw away at your returns. Over the long haul, these fees can siphon off tens or even hundreds of thousands of dollars in potential earnings and significantly hinder your velocity of money.
Alternatively, if you’re interested in diversifying into real estate or other alternative assets, a self-directed individual retirement account (SDIRA) can offer a unique opportunity. SDIRAs provide true diversification and access to the “seven pillars of wealth” that the stock market may not offer, making them worth considering for savvy investors looking to maximize their wealth-building potential.
Optimize your taxes
Hiring a tax professional is essential in navigating the complex landscape of tax laws and regulations. They can help you strategically reduce your tax liability by utilizing deductions, entities, and tax credits effectively.
It’s crucial to consult with them before locking up funds in retirement accounts, as optimizing your tax situation beforehand can lead to significant savings in the long run. This process becomes even more advantageous if you have a business or real estate investment, as you can leverage deductions, entities, and tax brackets to your advantage. Moreover, for those heavily involved in real estate or with substantial investment portfolios, exploring options like real estate professional status (REPS) with a professional can potentially eliminate your tax liability altogether, providing a powerful pathway to maximizing your wealth-building efforts.
My annual tax savings when I initially delved into real estate investing amounted to approximately $8,000 annually (not too shabby!). Now that I have a much larger role in my real estate portfolio, I’ve arranged my affairs to where my tax savings are now in the high five digits—underscoring the immense value of proactive tax planning.
Use credit wisely (and to your advantage)
Learning how to leverage credit to your advantage can lead to significant annual savings as well. By understanding how credit works, individuals can secure better terms on loans, potentially saving hundreds of dollars a month and thousands of dollars in interest payments over time. Additionally, a strong credit history can open doors to better job opportunities, further enhancing financial stability.
Furthermore, savvy credit card use, often referred to as credit card hacking, can yield substantial savings and enhance lifestyle experiences. By strategically accumulating rewards points and utilizing perks like companion passes, individuals can eliminate hefty travel, lodging, and car rental expenses.
Last year, through credit card hacking, we obtained a Southwest companion pass and booked all our hotel and rental cars with points. Our total annual savings was approximately $10,000 to $12,000 in travel costs.
While this strategy may not be suitable for everyone and requires careful management, it can be a powerful tool for living a fuller life while minimizing expenses and maximizing savings.
Final Thoughts
Dave Ramsey’s approach to slashing expenses certainly holds value, but it’s just one piece of the puzzle on the road to true wealth. While cutting back on daily indulgences like coffee and dining out can provide immediate relief to your budget, it’s crucial to understand that genuine financial success hinges on more than just tightening your belt.
To truly thrive financially, you must focus on maximizing the wealth you retain. This means not only curbing destructive expenses but also optimizing productive ones, banishing consumer debt, trimming investment fees, fine-tuning your tax strategy, and leveraging credit wisely. It’s about making strategic choices that align with your long-term goals and values rather than simply pinching pennies.
So, as you navigate your financial journey, remember to think beyond the latte and prioritize building wealth that will sustain you for years to come.
Protect your wealth legacy with an ironclad generational wealth plan
Taxes, insurance, interest, fees, bills…how can you acquire wealth, let alone pass it down, when there are major pitfalls at every turn? In Money for Tomorrow, Whitney will help you build an ironclad wealth plan so you can safeguard your hard-earned wealth and pass it on for generations to come.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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