How to retire rich Dave Ramsey style

how to retire rich

Eager to know how to retire rich? It might be surprising that Dave Ramsey‘s site has one of the best money hacks I've seen recently. Drive Free, Retire Rich explores the impact of carrying a car payment, and offers ideas on how your money can be used more wisely. Though the sentiment is familiar, I find Ramsey's approach novel.

You want a brand-new sports car that would normally cost you $475 a month. The car you're driving now is worth around $1,500. If you take that $475 and pay yourself instead of paying the dealer, you'll have $4,750 in just ten months. Add that to the $1,500 you can get for your current car, and you can pay cash for a used $6,250 car. That's a major upgrade in car in just 10 months — without owing the bank a dime!

But let's keep going. If you kept saving at that rate, you'd have another $4,750 in another 10 months. Chances are, less than a year later, you could sell your $6,250 car for about what you paid for it. This means that you can step up again — with cash — into an excellent $11,000 used car just twenty months from today. Not bad!

Not bad, indeed. Ramsey goes on to explain how you could actually get “free” cars by investing your $475/month and using the returns to purchase your vehicles. (The assumed 12% return is a stretch, though the overall point is valid.)

Car Values and Financial Freedom

How might I make this idea work for me?

  • Instead of buying a new car from a dealer, I could set aside the amount I'm willing to spend on a monthly payment. The presentation uses $475/month as an example. I could never pay this much for a car. I'd be willing to go as high as $250/month.
  • After a year, I'd have saved $3,000 for a car. According to kbb.com, the trade-in value on my current car is $3,700. Using these two sources, I could buy a better used car for $6,700.
  • Here's where it gets interesting. If I kept making $250 payments to myself, I'd have another $3,000 saved at the end of the second year. Let's say the $6,700 car lost another $1,000 in value and was now worth $5,700. I could trade it in and use my saved money to upgrade to an $8,700 used car.
  • I can continue this cycle until I reach the level of car with which I'm comfortable. After that, the amount I need to save each year would decline sharply. I wouldn't have to save to upgrade my car, simply to maintain the level of quality.

I'll certainly remember this for the future. As soon as I've repaid my home equity loan, I plan to begin saving for a car!

More about...Planning, Transportation

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Patrick
Patrick
13 years ago

While that’s not his voice in the presentation, I have heard him give the same exact advice on his radio show. And good advice it is.

old orange
old orange
5 years ago
Reply to  Patrick

It makes no sense to me how a car worth a meager $1500 today will still be worth $1500 ten months from now. Just sayin.

Brandon
Brandon
1 year ago
Reply to  old orange

This is all great, but it assumes very little depreciation in the car you’re driving. Reality is, cars depreciate faster than this and repairs only add to it. Not to mention buying a newer car also includes sales tax, title, and licensing. You really have to be saving more than that each month in order to see any real difference. I know, I’ve been trying this approach for the last four years.

Wozzy
Wozzy
13 years ago

In answer to your question, no, that’s not Dave’s voice. I’ve listened to some of his podcasts and seen him on Movie and a Makeover on TBS of all places. It’s definitely one of the messages he presents a lot and relates to his catchphrase, “Live like no one else so that one day you can live like no one else.”

Jon Gabriel
Jon Gabriel
13 years ago

Excellent post. After attending a 13-week Dave Ramsey course a couple years ago, we just paid off our last credit card and are now aimed at our final car payment and student loan. Good stuff. (Also per your note, that is not Ramsey’s voice in the presentation.)

YG
YG
7 years ago
Reply to  Jon Gabriel

The only thing I can’t comprehend is why does anybody need Dave Ramsey (or anyone else for that matter) to do such intuitive AND obvious thing?! Do you really need to attend 13-weeks (!) program to understand that savings is the key?! Live within your means, save – and you (as I am) will be fine

Richard
Richard
6 years ago
Reply to  YG

Clearly, you don’t need to be on this post if you’re doing so well for yourself. Dave Ramsey doesn’t hold the hand of anyone. He’s more motivational. He’s a great speaker, and an excellent author. He’s good at what he does, and he’ll always have you haters.

Larry
Larry
5 years ago
Reply to  YG

@YG — You may have the self-discipline to do the wise thing with your income, and that’s great, but most people don’t. Many people know they need to do something different and want to do the wise thing, but need some kind of encouragement and a plan to get started and keep going toward the goal. That’s where Dave Ramsey comes in. Yes it is $100 or so to take the 13-week class, but how much more than that would people spend on interest if they just keep paying their credit card minimum payments for the rest of their lives?… Read more »

JuryDuty
JuryDuty
13 years ago

Great post! I find stuff like this fascinating.

To address your question about it being his voice: I’m a professional freelance writer who has done a lot of ghostwriting. I’ve also taken Ramsey’s course. Ramsey’s a very busy guy and I’d highly doubt he sat down and wrote that himself. That said, usually clients like this give you stacks of CDs and transcripts and you write their material in their “voice.” So, I’d say that it’s definitely Ramsey’s idea and execution, but probably written by a freelance writer. 🙂

Ben Clark
Ben Clark
13 years ago

It seems that Dave Ramsey assumes these cars won’t have any mechanical problems crop up — always a risk with any car, increasing in probability with age. One major mechanical problem would throw this plan out of whack, because you’d be forced to use the savings to pay for the repairs. And if you’re really unlucky, like I was a few years ago, you could end up with a $1500 car that needs about $3000 worth of repairs in the first year!

Scarfish
Scarfish
13 years ago

Ben, this is only a small part of Dave Ramsey’s overall plan. You would not even BEGIN to save to upgrade in car until after you’ve saved a $1,000 emergency fund, paid off all consumer debt except the mortgage, and then saved 3-6 months of an emergency fund. You would also have working “sinking funds” for car repairs and maintenance (as well as other recurring expenses). Dave also outlines ways to find great deals on low-mileage cars while you’re trading up and how to make sure you don’t get a lemon.

Brian J. Geiger
Brian J. Geiger
13 years ago

Yeah, after I paid off my last car, I wanted to do something similar, though maybe not to that extreme. So, 8 hours after I received my title in the mail, a deer runs into my car and totals it. After that, I have to buy a used car. Sigh.

rebecca
rebecca
13 years ago

If you live someplace where you can commute by train or bus (and look, first, don’t just assume – I’m always visiting friends who were shocked to discover their city has a perfectly good bus system), it’s worth at least running the numbers to see whether you would come out ahead ditching the car entirely, saving your insurance money, and just taking taxi’s / renting cars when you need them. As extravegant as taxi’s and renting sound, it can be shocking how often you can use them and still come out way ahead…. (plus, of course, on the bus you… Read more »

Aaron
Aaron
13 years ago

I have a friend who came to this country with very little. He bought a super crappy Honda and changed cars every six months using this strategy. In five years’ time he had a new BMW 3-series. No payments.

Debbie
Debbie
13 years ago

Try living without your car for a while before selling it for good. When I went without a car I rarely took a taxi but I did rent a car a couple of weekends a year for 200-mile trips and for buying large things. Now I do a compromise between Rebecca’s no-car approach and Ramsey’s good-car approach. I like to buy ten-year-old cars in reliable models and drive them for ten years. This gives me a lot of time to save, so I only save $50 per month toward my next car. The first car I bought using this approach… Read more »

Jag Nogg
Jag Nogg
13 years ago

Go to daveramsey.com and use the “Find a Station” or subscribe to his podcast now. He could change your life. Personal finance is 90% behavior, and that is exactly what he helps you change. A while back, I was about to drop 32k on a brand new car, but I decided to keep my Corolla and drive it into the ground instead. That saved me about $500 per month for 4+ years (and counting). My Corolla has 193,000 miles on it and it’s still going. I used to hate this car, but now I love it because it has helped… Read more »

Aaron
Aaron
13 years ago

Rebecca, You make an excellent point. It seems to be human nature to accept a fixed monthly cost which is way above actual usage instead of incremental costs which end up being much less. You can see this same behavior when people purchase a gadget based on ‘features’ they will never use instead of focusing on its performance on the task it will actually do 99% of the time. I use a pre-paid cell phone because I use very few minutes. This makes most people nuts. I hear “But costs $0.10 a minute!” and “Don’t those minutes expire?”. They can’t… Read more »

Seth
Seth
13 years ago

I don’t know about you guys but I live in a relatively small city (Kalamazoo, MI) there’s an adequate mass transit system, and the cabs are costly, but there are several very, very good bicycle paths.

oneyearexitplan
oneyearexitplan
13 years ago

My wife and I bought two eGo electric bicycles last April and used them to buy groceries, go shopping, and go the movies. Cost $1300 each. Later in the summer, I started taking it to work and charging it back up in the office. The thing runs at 25 MPH and has a range of 25 miles. It was fun to whiz by the traffic every morning! I had computed that in bad traffic, my car was making 15 MPG and it took me 30 minutes to go to work. Using the eGo, it took me 35 minutes to go… Read more »

Rob
Rob
13 years ago

Other than the savings on interest for the loan, I don’t see how this is any different then starting out with the high-end car and making payments.

The only difference is your making the payments to yourself, and then handing the money over all at once instead of making the payments over time to someone else.

If you had a 0% car loan, it seems to me that the only difference would be if you are earning interest on the money as your saving it up.

John
John
13 years ago

You’re forgetting one thing Rob – depreciation. You lose a ton of money in the first 2-3 years of new car ownership. Some people say that if you keep your car ’till the wheels fall off then depreciation doesn’t matter – but it does. You still have asset that lost a tremendous amount of value. Doing it Dave’s way you don’t get bitten by the depreciation bug.

How many people actually qualify for 0% loans anyway?

FinanceNovice
FinanceNovice
13 years ago

This makes sense for older cars. But there are two things that may not make it a great of a payoff as you continually upgrade. First, as others have mentioned, is repairs. On newer cars the warranty covers you, but on a 10 year old car a major repair is more likely. A costly repair could set you back a year of savings easily. Second, Saying your car is worth the same after a year is not true. Sure on a car that is 10 years old this is probably viable, but as the saving and trading up progresses and… Read more »

DC Portland
DC Portland
13 years ago

As usual, Mr. Ramsey’s advice is very sound. It works. The key is knowing when to stop. If you keep using this strategy year after year and end up with a high value luxury car, you have gone too far. All a smart money person needs is a reliable, simple, economical car. Once the upgrading goes beyond that, you are starting to receive rapidly diminishing returns for your investment. The money would be better saved (spent) elsewhere.

Aimee
Aimee
13 years ago

I say invest in a really good car, and drive it until it dies. I am driving my Honda that is 10 years old, and it is a truly great car. Many makes aren’t made to last or have very costly repairs, but if you get a good make that is common (so if you need repair it won’t be costly), you should be able to drive it until it gives up. So, imagine if you were setting aside your “car payment” for 10 years or more!! I sure wish I had done that, I would have lots of money… Read more »

Wozzy
Wozzy
13 years ago

Rob, it’s not just saving interest on a loan that this method helps with. It also allows you to make some money with the interest on the money you are saving up. Maybe not a lot if you keep the money in a simple savings account. However, as a previous post on GRS pointed out, little things add up.

Debbie
Debbie
13 years ago

Rob, the difference is that if you lose your job and can’t afford your payments, your paid-for car doesn’t get repossessed the night before your next job interview. You just quit adding to your savings for a while.

Andrew
Andrew
13 years ago

DC, sometimes even though you (me/us) are a smart money person, you want a nice toy or car, because it is a hobby and even though it depreciates it is an good “investment” in ones personal life. Am i making any sense? 🙂

brad
brad
13 years ago

Only in very rare cases (e.g., collector’s cars or antiques) will you ever sell a car for more than you paid for it, so people should never consider a car an “investment.” The goal is just to limit your losses. I agree with the strategy of buying a fairly new reliable car and hanging onto it. In the 1980s I went through a string of 6 or 7 Subarus (they weren’t as well made back then as they are now), and after sinking thousands of dollars into repairs plus the cost of the cars themselves I realized that I would… Read more »

DC Portland
DC Portland
13 years ago

Andrew, I have owned 4 Lexus vehicles in my life. I thought that they were good personal “investments” because they helped me to feel good about myself. I have come to recognize that these luxuries, particularly those tied to trying to impress others, have been the greatest hinderance in my ability to achieve financial stability and overall happiness. The rush of a fancy luxury car wears off rapidly, and you are left feeling like a fool.

Jag Nogg
Jag Nogg
13 years ago

Their are many other costs associate with an expensive car that you don’t have to worry about with a less expensive car (like my used Corolla). You get hit hard on all of the following: o Insurance o Registration cost (in NH it costs me $25 to register my Corolla, but my friend pays $600 for his $35k SUV). o Gas (if your car requires premium). o Tires (I paid $45 each for my replacement tires, while a friend with a Nissan Maxima paid $130 each for his) If you are trying to get ahead of the game financially, your… Read more »

Kris
Kris
13 years ago

I have always been of the same mindset as Aimee (#19 above), but this has made me reconsider. I am currently driving a ’96 Honda Civic, and since I don’t drive much, it only has 62K miles on it. A quick search on our local craigslist reveals many 1-2 year-old models of Honda Civics with typical mileage for about $4000 lower than the 2007 model, with similar features. I plan to drive my current car until the repairs start to annoy me (it has only needed 2 repairs in 10 years, both with the exhaust system), but next time I’m… Read more »

Lazy Man and Money
Lazy Man and Money
13 years ago

I wish I could access his site, but it seems to use Flash or something. Overall, this is an interesting hack, but one needs to realize it’s just that. The 12% is a huge stretch because after inflation and taxes you are doing well to get more than 4% growth. I’m still not sure how it counts as a “free” car if you are using the $475 that you would pay the dealer to someone else for a used car in a year or two years. It seems like either way you are paying someone the money. The only thing… Read more »

Savvy Steward
Savvy Steward
13 years ago

Sorry, I fail to see the novelty in this plan suggested by Dave Ramsey. The way I see it you can take two routes: 1. If you save $250 a month, you can upgrade every year to a car that is $3,000 more expensive. By year five you would be driving a car that costs more than $15,000. or 2. You can drive your beater car for 5 years and save $250 every month. At the end of the five years you will have $15,000 to spend plus your beater to trade-in. In both scenarios you end up with the… Read more »

Paul
Paul
13 years ago

Why not just buy a decent used car and invest the rest instead of trying keeping up with the cycle of buying a car. It’s not an asset.

Roger
Roger
13 years ago

New cars are for suckers, but there is a huge segment of the population who “have” to buy them. Most people who buy new cars do not “run them into the ground,” they trade them in on another new car in two to three years. Especially on luxury cars, which generally have much less frequent styling changes, you can buy a nice condition five-year-old car for a fraction of the cost of a new one, and still feel like you’re living it up. Or, buy a good used machine that’s a few years old from a make you like. One… Read more »

Single Ma
Single Ma
13 years ago

This assumes a car valued at $25k plus ($475/mon) is equally satisfying as a $6,250 used car? This assumes your original car is WORTH $1,500 and the dealer will actually give you that much as a trade in? After 10 months of saving, a $1,500 car is not even worth $1,500 anymore. If you think so, it assumes you will actually sell it for that much if you decide to do a private sell yourself? If you sell it yourself, do you SUBTRACT the expense of advertising it or fixing it up to make it presentable? I’m sure a $1,500… Read more »

Fusebox
Fusebox
13 years ago

I like point #28. Saving $50/week for 5 years means roughly $15000. Put that money into a high savings account during that time and you’ll earn decent interest too.

hmmm 2012, can’t wait to get a newer car :p

oseas
oseas
13 years ago

Though this is a very good idea, i doubt many people out there can keep the big picture in their mind for THAT long of a time; probably, they would end up using the saved money on something else, like a vacation or an over-priced, anniversary gift for their significant other.

It’s all about keeping the big picture, which I doubt many of us can accomplish.

Peter
Peter
13 years ago

I too question the logic of this method. As others have said, you simply cannot sell a car a year later for anything close to what you paid for it. Another option would be to just buy the car you want and just keep it. Sure, your payments might be high in first 3-5 years, but in years 7-10 your payments are $0. With Ramsey’s method you are making “payments” either to the bank or yourself forever. That’s’ not a whole lot different from leasing, except his payment is lower and the car is crappier. Where I live public transportation… Read more »

nemo
nemo
13 years ago

Why not save even more money and go car free or as family go to one car? Here is an interesting post on the subject.

moneymonk
moneymonk
13 years ago

IU agree with Single Ma “After 10 months of saving, a $1,500 car is not even worth $1,500 anymore”

exactly I think DR forgot to tell us that.

I also agree with Rob “Other than the savings on interest for the loan, I don’t see how this is any different then starting out with the high-end car and making payments.”

Either way you are putting aside the same amount of money. So where is the Drive Free, Retire Rich comes from.

Cars do not last a lifetime. You will always put money into cars whether used or new.

Rebecca
Rebecca
13 years ago

Pardon.my.lack.of.spacebar. My.other.computer.is.being.fixed. 1.Somewhere.along.the.line,I’m.getting.that.people.are.thinking.that.you.are.paying.yourself.$475.a.month.for.car.payments.forever. Not.so. After.a.certain.amount.of.time,you.will.have.enough.saved.to.draw.for.a.12000.used.car.and.even.if.you.never.make.another.payment.you.can.draw. another.12000.five.years.later.without.affecting.the.principal. Say.you.do.continue.to.make.payments.of.$475.to.yourself(while.simultaneously.upgrading.to.a.reasonable.used.car.every.five.years)for.40.years.instead.of.to.the.car.companies. You.will.have.over.5.million. 2.Even.if.you.got.a.zero.rate.of.return.instead.of.the.12%(the.stock.market.average.over.the.last.75.years…but.I.think.6.or.7.percent.is.more.reasonable)used.in.the.illustration,there.are.benefits.to.buying.in.cash. For.instance,if.you.total.the.car, you.may.actually.owe.more.than.the.car.is.worth. Leaving.you.with.remaining.car.payments(unless.you.carry.gap.insurance).and.no.down.payment.and.no.car. How.much.better.to.save,pay.cash,continue.saving,and.at.least.if.something.happens,you.can.afford.SOMETHING.to.drive. 3.Repairs.on.older.cars,even.in.worst-case.scenarios,don’t.equal.large.car.payments. We’ve.”sunk”.two.tranmissions.and.a.refurb.engine.into.my.husband’s.pickup.over.the.last.three.years. Pretty.unlucky,don’tcha.think? Total.for.all.three.MAJOR.repairs? 2800.over.36.months. Less.than.100.a.month, leaving.us.plenty.to.save.toward.a.better.car in.the.future. Just.my.two.cents (and.a.whole.lot.of.periods!)

Scott
Scott
13 years ago

Five years ago I bought a repossed, 6 year old Olds with 45,000 mi. from a finance company for $3,000. My wife has put 100,000 miles on it commuting to work. I’ve spent maybe $300 on repairs – Exhaust, brakes, water pump (preventative). People should learn to do some things for themselves to really save money. I could sell the car today for $1,000. 100,000 miles for $2,300! Buy a new car and it costs you that much to drive it off the lot. I’m watching now for that 5-6 year old car with similar low miles so we can… Read more »

Paul
Paul
13 years ago

The one thing that is wrong in this article is the words “trade in”. Dave NEVER says to trade in. You always SELL your old vehicle to maximize the $$ you get out of it. Case in point, I traded a paid-for 97 Jeep wrangler in on a 6 year old BMW 3 series. Private party value on the Jeep was $7700, the dealer gave me $6000, and then they put it out on the lot for $10900. $1700, heck even $1000 more would have helped, but I did that because I can’t sell a thing to anyone, and I… Read more »

Tia
Tia
13 years ago

Paul, regarding the “selling” comment you made. This is not an issue with selling your car outright. I am not a seller by any stretch of the imagination. Two years ago I sold my 2004 Camry to get rid of the payment. I wrote up an honest description of the car with a couple of pictures, set the price according to Kelly Blue Book private party sale (kbb.com) and listed it on craigslist.org (free advertising site). I told friends and family, and parked the car with the for sale sign prominently displayed when I had a garage sale. It didn’t… Read more »

Dari
Dari
13 years ago

You speak up what people needs to hear, although I try they don’t listen. I have saved thousands since listening to you. I have become a published author: Free Of Me
Self-marketing is the only bad thing. So please I need all the help I can get to get my book out there. Thanks and keep the great work up.

Dari Carroll

Kev
Kev
12 years ago

This is not the Dave Ramsey Plan. Go to his web site to see his actual plan. The author took a couple ideas that he liked and changed it a bit.

Before putting it down, go to the source. everyone who put it down sounds like idiots.

Jake in IL
Jake in IL
12 years ago

There is another problem with this plan and it is common to all those who jump on the (older) used car bandwagon. The problem is risk. As a vehicle gets older, the chance that it is going to break down becomes greater. Yes, the make and model have a huge effect on this but it is universally true. So what is the problem with breaking down? Well, if you are in less than excellent financial straits, the unexpected repair bills can throw you back into debt quickly. But this is probably not a big deal for those reading this. The… Read more »

Mike in Missouri
Mike in Missouri
12 years ago

I agree with #45… Listen to the source. Dave Ramsey has a very good system to “change” the way you think about your money.
It’s more than just driving an old car and saving money….It’s about faceing the person in the mirror, You!
I’ve listened to Dave’s radio program for years and he is very motivational!

Life is short, take control of your finances!!

Ethel
Ethel
12 years ago

I think #46 has a good point – some people can not afford any extra risk. Breaking down *should* be a consideration. However, I don’t think the message should be, “Don’t buy older used cars.” I think the message should be, “Be selective about risk, and recognize the risk.” Our family opted for a high-risk old car with known issues because we could buy 9 or more used cars just like it for the price of a new car *and* we could afford the risks. I have a car-free commute, we drive on mostly quiet roads at relatively slow speeds,… Read more »

Melinda
Melinda
11 years ago

This discussion reminds me of the time my DH and I were looking to buy a Range Rover. We were looking at a 10yo RR, and my DH happened to find the insurance papers and sales receipt from the previous owner in the glove box. They had paid about $2,500 less (five years previously) than the dealer was asking us to pay. When we pointed it out, the dealer told us “a Range Rover is an appreciating asset” at which point my mother (who’d come with us just for the day out) piped up and asked if we could look… Read more »

Michelle
Michelle
11 years ago

LOL what a great story Melinda. Gotta love mom’s sensibility.

Sarah
Sarah
10 years ago

I appreciate your take, Ethel. For our family, having a car breakdown wouldn’t be a good time. Add to that, we have at least four children in the house (two under 5!) at any given time. So, our family is limited on what kind of car we can have (minivans it is – and even used they are not cheap) and it MUST be reliable.

So, we buy what we can afford comfortably for the family vehicle. My husband’s car will be paid off in two years, and that will be driven until it dies.

patrick
patrick
10 years ago

I appreciate Dave’s advise, but some of this seems like obsession with money and saving,etc. Buying this car, driving it for so many years, selling, buy an upgrade, saving more, selling, etc….just seems like obession with money and savings to me. Just make sensible decisions with your finances, but dont’ spend all your waking hours obssessing about them.

Craig
Craig
10 years ago

Dave Ramsey is very good at remembering things like fees, interest, and depreciation when they support his arguments, and very bad at remembering them when they don’t. Like a lot of what he says, this advice is pretty sound in its general intent–drive less expensive cars, and save rather than borrow–and pretty terrible when it comes down to the specifics. Older cars have more mechanical trouble. It’s not a question of setting up sinking funds or anything else–you have to pay more to keep an older car running than a newer one. The total cost of ownership–which is what matters… Read more »

parry nickols
parry nickols
5 years ago
Reply to  Craig

great stuff. i love it. dave is a real headcase

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