Who doesn’t know of Dave Ramsey?
Even my 10 year old kid has been taught about Dave in elementary school mathematics.
Dave Ramsey is America’s trusted voice on money and business.
Well he is popular for a solid reason. In this post, I will describe why he makes perfect sense to me.
When I immigrated to US in 2017, I did not know who he is. I was trying to quench my thirst for new personal finance books, especially on the US system. Then I stumbled upon Dave’s Total Money Makeover.
As I read the book, initially his rant against debt was a bit overwhelming to digest. However thinking deeply, I realized that coming from an Asian country, I have unconsciously followed the same principle for decades.
Why this coincidence? Because the principles are universal and extremely healthy for personal finance, no matter which economy you come from.
If you do not know yet, here is a recap link to the 7 steps from his website.
Here are few points where I found an one-one match with how traditional Asian (India) household finances worked.
Have an emergency/contingency fund (Dave’s baby steps 1 and 3)
There are many names to this – emergency fund, contingency fund, rainy day fund. In many Asian households, it goes by the simple name of savings. Savings is in-built into the culture and an emergency fund is a default choice.
In a way, if you don’t have debt instruments (HELOC, Credit card) available to you, how else will you pay up for maintenance, car breakdown, education etc.?
Answer is simple, money socked off into a separate bank account – lo and behold, by end of the year, you have an emergency fund.
Use Cash – or debit card at the most (Dave’s baby step 2)
Before moving to US, my only credit card was a HDFC Bank Premium card. I was sold this card citing lots of benefits like reward points, airline miles, premier lounge access etc.
The truth is that I used it only for big purchases like appliances, electronics or vacation. And that too, because I knew I had to pay it off at the end of the month and just deferred the money being taken out of a CD (Fixed Deposit as named in India).
If I look back, except for getting a few discounts at clothing stores, I did not reap the reward points. Never had the idle time or need to figure out how to access the premier lounge. Once I tried to book a holiday trip through the miles, I found that I could get it for lesser by buying a cheaper economy ticket. Yet I paid an annual fee (or had to spend a minimum on the card to avoid the fee) for those unseen benefits.
Credit cards may work better in the US, but it is also a double edged sword. Americans are saddled with trillion dollar credit card debt. (source: Dave Ramsey)
All my household daily expenses ran on either hard cash (lots of places in India do not accept any cards) or debit card.
Simply put, I never felt the absolute necessity to hold a credit card. Some people say its good for emergency situations, but then the previous step already solved that problem.
Oh there is one more reason – online shopping. In India, Flipkart has a C.O.D (cash on delivery) option. If that doesn’t work or not offered, you can pay using NetBanking which all online vendors provide with major banks. It is equivalent to using debit card, but without the card number. You are redirected to the bank website and you can authorize the transaction from your account, using login and password.
Retirement savings (Dave’s baby step 4)
There are government retirement plans like Provident Fund (equivalent to 401k), Public Provident Fund (equivalent to Roth IRA) and now the NPS (National Pension System).
The first two are effectively tax exempt with the Provident Fund being tax E.E.E (exempt on contribution, growth and withdrawal). The only drawback is that the investment options are traditional – debt based with an interest rate guaranteed by the Government. The option of Equities has only come up as an option in NPS.
The Provident Fund or the NPS is now mandatory in most organizations for their employees. The amount you can invest from your paycheck typically hovers around 12% (with matching grant from employer), and is close to Dave Ramsey’s recommended savings of 15%.
There are of course private options from brokerages/banks to invest in mutual funds and stocks, as also R.E.I.Ts are now coming up.
Children’s education – use cheaper (sane) options (Dave’s baby step 5)
There is hardly any concept of student loans. Education is still affordable, though it is becoming expensive each passing year.
And despite the huge competition (owing to large population), there are no Ivy League schools to lose your shirt on getting a degree. Even the premier institutes like Indian Institute of Technology, or Indian Institute of Management are well affordable with their excellent career prospects.
I don’t have all the education expenses data, but I have not heard of any student saddled by student loan debt or carrying it well into their adulthood and married life.
Moreover in recent years, the growing start-up culture in India has also made an expensive education pretty much irrelevant.
Pay off your house (Dave’s baby step 6)
In US, people hold their mortgages for 30 years, and do not need to pay back earlier.
And it is more helped by the low interest rate regime that is sweeping the news everyday.
However in India, average mortgages survive for 3-5 years, before they are completely paid off. Both my mortgages in India were paid off in less than 5 years.
What is the reason for this? There are several factors.
- Interest rates are higher – typically 8.5-10%. This causes people to take mortgages with lower than 80% Loan-to-Value, to avoid big E.M.I (equated monthly installments).
- Higher down payment earns good discount from builders. One of the main sources of home buying in India is from builders.
- Floating rate mortgages – The interest rate by default is floating. Fixed rate mortgages have a much higher interest rate, typically 1-2% higher. Carrying a floating rate mortgage is risky, hence the tendency is to pay it off as soon as possible.
- Last but not the least – its a debt-averse culture. You don’t feel good till you actually own your home, free and clear.
Buying a house in India is stressful owing to the sector’s corrupt practices, less regulation and random mismanagement of funds by builders. Hence keeping low to no debt is prudent not to add on to the crisis.
Building wealth and Giving (Dave’s baby step 7)
The last baby step in Dave Ramsey’s plan is the absolute bliss.
This is where a lot of well to do families will be. With the above steps explained and if followed properly – they will be living in paid for houses, driving paid for cars (some with chauffeurs), have a good retirement corpus that is growing, children graduating from college without student loan debt, and an emergency fund stashed out in some savings account.
Now they can buy more investment assets like real estate, stocks and entire businesses.
You start building serious wealth and enjoy true Financial Freedom.
As Dave says, “If you live like no one else, you will live like no one else”.
Now the last part is Giving. This may not be traditionally so popular in India, due to many factors. However lot of new initiatives are now trying to organize charity and reach to the real needy.
The huge wealth inequality throws up a lot of opportunities of giving. However if you are not careful and the non-profit organizations are not well researched, you will end up making some fraud people rich. I have ended up donating to NGOs (Non Government Organization), who started showing a suspicious pattern of corruption (sometimes irritating me with calls and messages for more). It becomes clear they want to milk you in the name of charity.
However with little diligence and online/offline research it is possible to select meaningful giving opportunities.
Thus Dave Ramsey’s 7 baby steps are definitely a recipe for success with personal finance. I have only drawn a comparison with what I have lived and seen in India.
Dave’s success in getting millions of Americans out of debt and living their dream life is a testimony to the sound principles that the 7 steps represent.
Live like no one else. If you are not forced by the system, be intentional about the 7 steps.
