Dave Ramsey’s Financial Rules of Thumb

Dave Ramsey’s Financial Rules of Thumb

# 1 – How much house can I afford?

Financial Rule of Thumb: Limit your mortgage payment (including insurance, HOA fees and taxes) to 25% or less of your monthly take-home pay on a 15-year fixed-rate loan.
Analysis: Sound advice here. If you can afford to save 20% down and take out a 15-year mortgage, you’re doing a lot of things right.

# 2 – How much should I spend on a car?

Financial Rule of Thumb: The total value of all of your vehicles should not be more than half of your annual income.
Analysis: This seems high. The issue for me is that it doesn’t take other debt into consideration. For example, a couple earning $100,000 a year combined, yet still has student loans shouldn’t have $50,000 worth of vehicles.
There are also many quality, fuel-efficient used cars in the $8,000 to $12,000 range one can buy.
My rule here would be until you have your non-mortgage debt paid off and are saving 25%+ of your income, stick with a vehicle in the $8K to $12K range.

# 3 – How should I invest?

Financial Rule of Thumb: Dave recommends you invest in 25% of your total portfolio in a growth mutual fund, 25% in aggressive growth mutual fund, 25% in an international fund and 25% in growth and income.
Analysis: Dave Ramsey is often criticized for his investment advice. In my opinion, it’s for good reason.
Not only is this portfolio very complicated for even intermediate investors, it’s far from optimized.
Even Time Magazine has said,
“…if you’ve gotten through the baby steps of conquering debt and starting to save, you’d be wise to graduate to better advice on investing.”

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