How Much Does Dave Ramsey Say to Save?

Dave Ramsey advocates for a common-sense, debt-free approach to personal finance that prioritizes systematic saving and debt elimination. His financial philosophy centers on achieving financial peace by following a series of sequential steps. This method guides individuals from initial savings to building substantial wealth. His recommendations on how much to save are embedded within this structured framework, designed to help individuals gain control over their money and achieve long-term financial security.

Building Your Emergency Fund

A foundational element of financial stability, according to Dave Ramsey, is establishing an emergency fund. The initial step involves saving $1,000 as a starter emergency fund. This amount serves as a buffer to cover smaller, unexpected expenses, preventing individuals from incurring new debt while eliminating existing obligations. This initial fund provides a sense of security and prevents minor financial setbacks from derailing debt payoff efforts.

Once consumer debt (excluding the mortgage) is paid off, the focus shifts to fully funding the emergency reserve. This involves accumulating three to six months’ worth of essential living expenses. The specific amount within this range depends on individual circumstances, such as job stability and household needs, providing a robust safety net against larger unforeseen events. This fully funded emergency fund should be held in a liquid, easily accessible account, such as a savings or money market account, ensuring funds are readily available without being subject to market fluctuations.

Investing for Retirement

After securing a fully funded emergency reserve, Dave Ramsey advises individuals to begin investing for retirement. The recommendation is to invest 15% of one’s gross household income into tax-advantaged retirement accounts. This consistent investment percentage helps ensure substantial wealth accumulation.

Primary investment vehicles include employer-sponsored plans like 401(k)s and individual retirement accounts (IRAs), particularly Roth IRAs. Contributing at least enough to receive any employer match in a 401(k) is emphasized, as this represents “free money” that significantly boosts savings. After maximizing the employer match, fully funding a Roth IRA is recommended due to its tax-free growth and tax-free withdrawals in retirement. If the 15% goal is not met through these accounts, additional contributions to the 401(k) or similar workplace plans are advised.

Funding Your Children’s College Education

Saving for children’s college education comes next. Dave Ramsey prioritizes retirement savings before college savings, emphasizing that parents cannot borrow for retirement as they can for college through student loans, grants, and scholarships. This sequential approach ensures parents secure their own financial future first.

The recommended vehicles for college savings include tax-advantaged options such as 529 plans and Education Savings Accounts (ESAs). These plans offer tax benefits, such as tax-deferred growth and tax-free withdrawals for qualified education expenses. While specific dollar amounts for college savings are not fixed, the strategy focuses on disciplined, ongoing contributions within these specialized accounts to minimize or eliminate the need for student loans.

Saving for a Home and Eliminating Your Mortgage

Dave Ramsey’s plan addresses homeownership, with guidance on saving for a down payment and accelerating mortgage payoff. When purchasing a home, he recommends saving for a down payment of at least 20% of the home’s purchase price. This significant down payment helps buyers avoid Private Mortgage Insurance (PMI), an additional monthly cost that protects the lender, not the homeowner. Avoiding PMI can result in substantial savings over the life of the loan.

After establishing retirement and college savings, the focus shifts to paying off the mortgage early. This involves making extra principal payments whenever possible, using additional income sources like bonuses or tax refunds to accelerate the payoff process. The goal is to become completely debt-free, including the mortgage, which provides significant financial freedom.

Achieving Financial Freedom

The final stage of Dave Ramsey’s financial plan is about maximizing wealth and practicing generosity. By this point, all debts, including the mortgage, have been eliminated, and retirement savings are well-established. This stage allows individuals to fully leverage their income for continued wealth building.

The focus here is on continued investment, often beyond the 15% initially recommended for retirement, to grow a substantial asset base. This accumulated wealth provides financial security and flexibility. A core component of this stage is also generous giving, allowing individuals to contribute to causes they care about.