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Tuesday, August 3, 2021
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Dave Ramsey Says

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Save up to get out of the rust bucket

Dear Dave,

I let my fiancée use my car to get back and forth to work, and it has a lot of miles on it and a few mechanical issues. The money we’ve put into the car to fix the issues is about the same or more than the car is actually worth. We just started your plan a couple of months ago, and we’ve almost got a beginner emergency fund saved up. We also have very little consumer debt to pay off. I’m afraid, though, if we get into a second $1,000 to $2,000 car, we’ll just experience the same kinds of issues and it will turn into another money pit. I bring home about $5,000 a month, and she works part-time and goes to school. How do you think we should handle things? 

Thaddeus

Dear Thaddeus,

Well, if you’re serious about following the plan, you don’t really have a choice right now. But you’re bringing home a nice paycheck, man. You ought to be able to buy a better $1,500 to $2,000 car with cash in a month or so, just to give you some relief. Then, stick some money aside each month until spring and get something that’s a big step up in the $5,000 to $6,000 range.

Listen, I don’t want anyone driving around in a rust bucket longer than they have to. And it sounds like you really need to get up out of the junk. But if you do some research and buy wisely, you can get a good year or two out of a $1,500 car. The car may not look like much, but you’re not trying to catch a girl’s eye. You’ve already got a fiancée. If you find an old Honda or Toyota that’s still mechanically sound—and yes, they’re out there—it’ll get you by while you save up for something a lot better.

But remember, you and your fiancée don’t need to own anything together until you’re married. The kind of arrangement you have now can cause real problems. If you guys get married and combine your resources and dreams, it’ll be better for everyone relationally and financially. You’re playing house already, so you might as well go ahead and get married and combine your lives on every level.

It’s time to paint or get off the ladder, dude!

Dave Ramsey Says

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Refinance in Baby Step 2?

Dear Dave,

My husband and I are on Baby Step 2, and we’ve paid off about $30,000 in consumer debt since March. We were wondering if we should refinance our mortgage. Our current rate is 4.875%, with 28 years remaining on the loan. We found a 15-year refinance at 2.5%, which would raise our monthly payments about $200, but we can handle that. We have $150,000 in equity in our home and about $207,000 left on the loan. What do you think we should do?    

Raye

Dear Raye,

You two have done a great job this year! I’m so proud of what you’ve accomplished and that you’re looking to the future.

Baby Step 2 wouldn’t be affected, except that your monthly mortgage payment will go up a little. I wouldn’t pay the refinance costs out of pocket, though. I’d roll them into the loan. You’d be saving more than 2% by locking in this crazy-low interest rate, and you’re knocking the whole thing down to a 15-year loan. I love all that. It’s definitely worth the extra $200 a month to make it happen.

Think about it this way. You’re going to be saving more than $4,000 a year with the interest rate reduction. You’re not going to see it in cash flow because of the $200 increase in monthly payments, but over the scope of the loan, you’re going to be charged between $4,000 and $4,500 less per year for interest. All that money is going toward paying back the closing costs and reducing the principal built into the move from 28 years to 15 years.

Yes, you should do this!  

—Dave

Which comes first?

Dear Dave,

I just saved up my $1,000 beginner emergency fund, and I’m looking at paying off my car and credit card debt—a total of $3,400—by the end of January. Before I started your plan, I took out a $7,500 student loan to pay for my fall and spring semesters. I still have a year of school left, which will cost about $10,000. Should I save up the money for my final year before attacking my student loan debt, so I don’t have to take out another one, or go ahead and begin paying it off?  

Emma

Dear Emma,

Well, it doesn’t make much sense to pay off the current student loan, then turn around and take out another one. Your first goal—after you get the credit cards and car paid off—should be saving cash to finish school. Once you’ve done that, start paying off the student loan.

Long story short, you’ve got to stop borrowing money. The idea of saving up to pay for things should be the default setting in your brain, Emma. Otherwise, you’re going to spend the rest of your life with car payments and other debt hanging around your neck. That’s not being responsible with your money, and it will keep you from saving for stuff that matters and becoming wealthy.

Stop. Borrowing. Money. I hope I haven’t been unclear.

—Dave   

* Dave Ramsey is a seven-time #1 national best-selling author, personal finance expert, and host of The Dave Ramsey Show, heard by more than 16 million listeners each week. Hehas appeared on Good Morning America, CBS This Morning, Today Show, Fox News, CNN, Fox Business, and many more. Since 1992, Dave has helped people regain control of their money, build wealth and enhance their lives. He also serves as CEO for Ramsey Solutions.

Dave Says

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Use non-retirement account to pay off debt?

Dear Dave,

I have $11,000 in a mutual fund account that is not a retirement account. My wife has a retirement account through her job as a teacher, but I do not have one at all. We’re in Baby Step 2, so should we cash out the $11,000 in the investment account to help pay off debt?

Chris

Dear Chris,

If this money is designated as non-retirement funds, I’d say go ahead and cash it out. Use the money to pay down debt, and continue to stay focused working the Baby Steps. Get that debt paid off, build an emergency fund of three to six months of expenses, then it’s your turn to start investing.

The quickest way to build wealth is to get control of your largest wealth-building tool—your income. When all your money is going out the door to other people, you don’t have that tool at your disposal when it comes to important things like saving and investing. There’s some math in there, but it’s also about behavior and being intentional. Getting out of debt dramatically shortens the distance between you and wealth.

A lot of people are having some major “never again” moments right now in the wake of COVID-19 and all the other stuff 2020 has thrown at us. They’re saying things like, “Never again will I be broke, never again will I have debt, and never again will I live with no savings to help take care of me and my family.”

You can do this, Chris. Get after it! 

—Dave

Zero-based budgeting explained

Dear Dave,

What exactly is a zero-based budget?

Dean

Dear Dean,

Simply put, a zero-based budget is income minus outgo equals zero. If you earn $4,000 a month, and you’re doing a zero-based budget, every item you spend, save, give and invest should add up to $4,000. It’s a method of knowing where every single one of your dollars is going. Most people don’t live on a budget. They just cash checks, write checks, then they look up and wonder where all their money went. Not having a plan, especially for your money, is a bad plan.

List all your income from all sources for the month. Next, list every single expense you have each month. Rent, food, cable, phones, and anything else you pay for gets added to the list. Your expenses vary from one month to the next, which is why you make a new spending plan each month.

Now, here’s where it gets real. Subtract your income from your expenses. Ideally, this number will be zero. It might take some practice, so don’t be discouraged if everything doesn’t balance out perfectly the first few times. All that means is you need to find a way to bring one of the numbers up, the other one down—or both. But whatever you do, don’t spend a dime that’s not accounted for.

If you have a problem with spending more than you make, make some cuts in order to equalize your income and your outgo. Using coupons, cutting back on groceries, or carpooling to work are great ideas to reduce spending. If you want to generate more money, get a second job on weekends or sell some stuff.

You’re the boss of the budget—in the beginning. Once it’s committed to paper, in a spreadsheet, or on an app like EveryDollar, the budget is the boss!

—Dave

* Dave Ramsey is a seven-time #1 national best-selling author, personal finance expert, and host of The Dave Ramsey Show, heard by more than 16 million listeners each week. Hehas appeared on Good Morning America, CBS This Morning, Today Show, Fox News, CNN, Fox Business, and many more. Since 1992, Dave has helped people regain control of their money, build wealth and enhance their lives. He also serves as CEO for Ramsey Solutions.

Dave Says

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A very generous offer

Dear Dave,

My in-laws have very generously offered my wife and I $250,000 to help with a down payment on a home. I know the amount exceeds the IRS’s yearly gift allowance, but they want to structure it as a family loan and have already told us they don’t care if we pay it back. If we accept, we technically owe them a lot of money. If we say no, they may be offended. What do you think about this and how it might impact the relationship?    

James

Dear James,

Well, it makes sense your wife would be onboard with the whole thing. It’s her dad making the offer, so of course she would be a lot more comfortable with the idea than you are.

 This is a big deal, and it’s something you two should have a very serious conversation about. Get on the same page in every regard. Also, I’d recommend making sure you get everything in writing. See to it, as well, that it can be forgiven at the maximum allowable annual gift rate.

In addition, in the event of death make sure it’s included in the estate, it’s forgiven, and there will be zero call on the note. In effect, that would make it an advance on your inheritance instead of debt. Under no circumstances should they, or any other heirs, have grounds to call the note. 

That’s a good question, James. And a nice gift!

—Dave

Keeping the side hustle alive

Word count: 272

Dear Dave,

I have a full-time job, but I also have a side job providing firewood to help pay off debt. I make $600 to $1,000 a month with this project. My log splitter went down recently when a hydraulic line burst, and the machine caught on fire. I’m not sure how much it will cost to get it going again. Should I invest in a new one that will increase my productivity and help me pay off debt faster?

Chris

Dear Chris,

If I’m in your shoes, I’m going to fix the old one. Even it means duct tape and glue, I’m going to try to find a way to repair it instead of spending a bunch of money or going deeper into debt.

If you can’t do that at a reasonable price out of pocket, I’d be in the market for a decent, used log splitter. And pay cash! I get your line of thinking when it comes to increasing productivity. Splitting wood is real work. But don’t try to justify buying an expensive, new piece of equipment when it’s just not necessary.

If you’re making that much with a side hustle, you can make your money back on a used splitter in a month or two—three at the most. Be smart about it, Chris!  

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money MakeoverThe Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Ramsey Says

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Evaluating insurance needs

Dear Dave,

Last year I got a divorce. I’m 32, a teacher and a single mom. I’m on Baby Step 2 right now, and I was wondering about life insurance. My son is only two, and if something happened to me, he would go to his father. His dad is in good shape financially and responsible with money, so how much life insurance should I have?

Christian

Dear Christian,

Well, you probably don’t need the full 10 to 12 times your income like I recommend for most people. The only dependent you have is also dependent upon his dad. And from what you said, his father seems perfectly able to take care of him.

I’d get a good term life policy equal to the amount that you’d like to supplement your son’s care. The good news is you can get a couple hundred thousand in life insurance at your age for practically nothing.

If you get life insurance, make sure his dad—your ex—is not the beneficiary. The beneficiary should be a family trust, formed upon your death, and the money would go into that trust for the benefit of your child. You set the terms of the trust. It should not be controlled by your ex. In a divorce situation, I would never name someone I’m not willing to be married to the trustee of my money on behalf of my child. 

I’m so glad you’re thinking about these things, Christian. It shows you’re an intentional lady, a fine mom, and a good planner. Those traits will serve you and your son well!  

—Dave

Are utilities included?

Dear Dave,

I just received a formal job offer in law enforcement. I’m debt-free, single, and I’d like to move out of a roommate situation and into my own apartment. I’ll be starting out at $34,000 a year, then moving up to $38,000 after my probationary period. You have a rule that says to make sure rent or house payments are 25% or less of your take home pay. If I can find a place where utilities are included, do they figure into that amount? 

Josh

Dear Josh,

It’s really more of a guideline than a rule. The point of not letting your housing cost eat up more than 25% of your take home pay is to make sure you have money left over for other important things. It’s hard to save and invest for the future when a huge chunk of your money is eaten up by rent or a mortgage payment each month. But no, utilities are not part of the one-fourth of your take home pay guideline.

At this point, it doesn’t sound like you need anything fancy. Try to find a safe, quiet place to call home—somewhere you can relax and decompress when you’re off duty. And thanks for entering law enforcement. A lot of folks are leaving your line of work, and we need good men and women in that profession right now.

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money MakeoverThe Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Says April 8, 2020

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Responsibilities come first

Dear Dave,

My husband runs a small business that has never done very well. We have three kids, and I make $55,000 annually in my job. Part of what I make has been going into the business for over a year to help keep it afloat, and we don’t have a lot of money in savings. What do you think we should do?

Stephanie

Dear Stephanie,

If you’re putting other money into a business account, that’s a pretty good sign you’re not making money in the business. You and your husband need to sit down together, and do a household budget and a profit and loss statement on the business. You’ve got to get on the same page financially.

Put all his business expenses on the profit and loss statement in detail, and write out what it would take for him to break even each month.  But honestly, with everything that’s been going on with your finances, if he’s not at least breaking even at this point, then it’s time for him to do something else for a living full-time.

I’m an entrepreneur and business owner. Trust me, I totally understand the allure and excitement that goes with running your own business. But your own household and its immediate financial responsibilities come first. The only money that should go into the business account is income the business creates.

—Dave

No free passes

Dear Dave,

I own a small business, and recently a relative asked for a job with the company. I hate to say this, but I’ve got reservations about hiring her. She’s basically a good kid, but not the most reliable person in the world. Do you have any advice on how to handle a situation like this?

Bill

Dear Bill,

As an entrepreneur, you have the right and responsibility to do what’s best for your company. That means you shouldn’t hire anyone who isn’t a good fit—even a relative.

If a relative is qualified, and the kind of person who understands they’ll have to bring it every single day, performing at a level equal to or above your other team members, that can be a special and rewarding thing. But if that relative is the kind of person who expects special treatment or is a problem child, that kind of situation can be a nightmare for you, your company, and the whole family.

Would you hire this person because they’d make a good team member? Would you hire this person if they weren’t part of the family? If the answer to either of these questions is no, don’t hire them. It’s as simple as that.

The bottom line is you have to do what’s best for your business, your immediate family, and your team.

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money MakeoverThe Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Says February 4, 2020

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Tighten up!

Dear Dave,

I’m beginning to think we got in over our heads with our house. My wife and I make about $125,000 a year combined, but we’ve never been able to put anything aside for an emergency fund. Our mortgage payment is 35 percent of our take home pay each month. We have two young children, so we eat out a lot, but we have no debt other than our house. Do you think we should refinance our home?

Jeff

Dear Jeff,

You two are making good money, and you’re debt-free except for your home. You can’t tighten up your budget enough to save up an emergency fund? Stay out of restaurants, dude! There’s no law stating you have to eat out a lot just because there are kids in the house. I mean, you’ve got no emergency fund. That’s a pretty basic thing.

You guys need to get on a written, detailed plan, and start hitting your goals. I’m talking about a strict, monthly budget. Now, I’ll admit your mortgage payment isn’t exactly what I would’ve signed you up for. Your house payments, or rent, should be no more than 25 percent of your monthly take home pay. But your house payment isn’t what’s holding you two back. What’s holding you two back is the fact that you haven’t been willing to tighten up the finances in other areas of your life to offset biting off more than you could chew in terms of a home.

No, I wouldn’t refinance. You’re fairly close where the mortgage payments are concerned, so I think you can make it through this by looking at ways to increase your income and selling stuff you don’t need to build an emergency fund. You two have been smarter than some, but you’re really going to have to buckle down and rearrange your priorities to make this happen!

—Dave

Cash out my Roth IRA?

Dear Dave,

I have around $15,000 in a Roth IRA. I just recently started studying your advice, and I was wondering if it would be a good idea to cash it out and put the money toward debt.

Sarah

Dear Sarah,

I teach people to stop investing temporarily while they attack their debt. So, I wouldn’t add anything to it at this point, but the worst thing you could do is cash it out. If you do, taxes and penalties will steal a huge chunk of that cash. The only time I take money out of a retirement account to pay off debt is to avoid bankruptcy or foreclosure. 

Start working the Baby Steps from the beginning. Baby Step 1 is saving up $1,000 for a starter emergency fund. Baby Step 2 is paying off all debts from smallest to largest, except for your home, using the debt snowball method. This will free up a ton of money! Then you’re ready for Baby Step 3, which is increasing your beginner emergency fund to a fully-loaded emergency fund of three to six months of expenses.

Now you’re ready for Baby Step 4, which is 15 percent of your income going into retirement!

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover.The Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Starting off on the right path together

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Dear Dave,

I’m getting married next summer. My fiancé and I are in agreement about how to handle money, and we both follow your plan. Do you recommend pre-marital counseling? If so, what do you feel are some of the important areas of agreement for couples before they get married?

Allison

Dear Allison,

Congratulations! I’m glad you’re both on the same page with your finances, too.

I’ve worked with thousands of couples and numerous marriage counselors over the years. In that time, I’ve learned fights over money—and the resulting problems from those disagreements—are probably the biggest cause of divorce in America. In my opinion, in-depth pre-marital counseling is an absolute must. The idea of entering into something that’s supposed to be a lifelong commitment, without thoroughly addressing all the issues—and potential issues—is a really bad idea.

With that said, it’s been my experience that couples have a high probability of a successful marriage if they agree on four things, in detail, before the big day—kids, money, religion, and in-laws. With kids, the big question is do you want them? If so, how many and when? Are you going to let them run wild, or are you going to provide structure and make them behave?

When it comes to money, something it sounds like you two are already in agreement on, get all your cards out on the table, and construct an intelligent game plan for your finances that you both agree on. Staying away from debt, living on a written, monthly budget, and saving for the future are important parts of this. 

Also, be in agreement on religion. Statistically speaking, two people from the same faith have a better chance of making a marriage work. And finally, when it comes to your future in-laws, you need to learn who they are and what you’re getting into. What are they really like? What are the boundaries when it comes to their influence on your lives?

All these topics should be discussed at length, dealt with, and agreed upon before the rings are exchanged. God bless you two, Allison!

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money MakeoverThe Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Says December 17 2019

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Great start, but follow the steps

Dear Dave,

I’ve recently begun living on a budget, and I’ve got $1,000 saved. At the moment, I have $150 left over each month after everything is account for in my budget. I also have three debts totaling about $12,000. Should I use this extra cash to pay off debt, or would it be a better idea to start investing the money?

Leland

Dear Leland,

Let’s put off investing for the time being. You’ve done a great job so far by getting on a budget and saving $1,000. Making mature decisions and telling your money where to go, instead of wondering where it went, is the key to gaining control of your finances.

Now, let’s take a closer look at my plan and where you stand. You’ve already set aside $1,000 for a beginner emergency fund. That’s Baby Step 1. Don’t touch that money except in the event of an actual emergency. You’re ready now for Baby Step 2, which is to pay off all debt except for your mortgage using the debt snowball system.

To do this, make a list of your debts from smallest to largest. Make minimum payments on all but the smallest debt, and attack it with a vengeance. As soon as you get that one paid off, move on to the next one and then the next one.

Once you finish the debt snowball, and you’re debt-free except for your house, you go back to your emergency fund and stash more money away until you have a fully-funded emergency fund of three to six months of expenses. This is Baby Step 3. Now you can begin concentrating on investing for retirement, which is Baby Step 4. Start with your employer’s 401(k) plan. Then, you can invest the rest into Roth IRAs—one for you, and one for your spouse—if you’re married.

Saving and investing are both very important. But it’s also important to become debt-free. That’s what makes them easy!

—Dave

Who will be liable for the debt?

Dear Dave,

My parents are getting up there in years, and they aren’t really prepared for when they pass away. They can’t afford life insurance at this point, and they also have a lot of debt. When they die, who will be liable for their debt?

Tammi

Dear Tammi,

Any outstanding debt your parents have upon passing will likely go against their estate. If they have a positive net worth—meaning they owned more than they owed—there will be money left over after the debts are paid, and this could go toward an inheritance. If they have a negative net worth, which means they owed more than they owned, everything could be sold off to cover as much of the debt as possible. Regardless, you would only be held liable for any of their debt if you were a co-signer on the loans.

I’d also suggest getting their permission to buy burial policies on them. If they won’t agree to this, you might have to save up money for their final expenses yourself. In most areas, $10,000 to $15,000 is enough to cover basic burial costs for two people.

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money MakeoverThe Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

Dave Ramsey Says October 29 2019

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Mini emergency fund?

Dear Dave,

I’m 26 and single, and I have about $35,000 in credit card and student loan debt. I’m only making $20,000 a year right now, but I expect to be making almost $30,000 soon. Under the circumstances, can I get by with $500 in my emergency fund, or do I need to have $1,000 set aside like you recommend in Baby Step 1? I’m worried about keeping up with bills while saving money for my starter emergency fund.

Thomas

Dear Thomas,

I know it will be tough, but a $1,000 emergency fund should be your first big goal. Also, if you’re not already doing a monthly budget—and spending every dollar on paper before the next month begins—start doing it now! Living on a budget will help you control your money instead of allowing a lack of money to control youThat’s how you can keep up with the bills while you save that first $1,000.

Let’s say you know you’ll be getting two $750 paychecks each month. You go ahead and plan out how to spend that money before you ever get it. Take care of necessities first. I’m talking about food, clothing, shelter, transportation and utilities. After that, make sure you’re current on your debts. Once those things are out of the way, pump every spare dollar you can into your emergency fund. And remember, limit your spending to necessities only!

Start working on that now, Thomas. It’s very important. Remember the old saying about Murphy’s Law, and how anything that can go wrong will go wrong? If you keep living without a plan and no emergency fund, Murphy will hunt you down!

—Dave

They’re just trying to help, but…

Dear Dave,

My husband and I are in our twenties, and we work for the same company. We’ve been thinking about going back to school and finishing our degrees, because our employer is willing to pay for up to 10 credit hours, plus books, per semester with no strings attached. My parents think we should get student loans instead, so we can finish faster. We both have less than two years to go to complete our degrees, so what do you think?

Janet

Dear Janet,

Wow, this is a fantastic opportunity! How many times does someone offer to pay for a college degree with no financial strings attached?

I’m sure your folks want what’s best for you, but the truth is you probably couldn’t take more than nine or 10 hours per semester, work full-time jobs, and keep your relationship and your marriage healthy. If you’ve both got less than two years of school left, it’s not going to take that long, anyway. You’re still young and have plenty of time to make this happen.

I don’t think your parents mean any harm, but they’re wrong on this one. I’ve got a feeling they’re like most people in America today. They’ve spent most of their lives swimming in debt, and they’ve reached a point where they’ve just accepted it and think there’s no other way. To me, that’s sad.

If you and your husband really want to finish your degrees, I’d say the two of you need to march into work tomorrow morning, and take advantage of that wonderful offer. Stay away from debt! 

—Dave

* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money MakeoverThe Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.