Dave Ramsey Says This Is the Key Thing to a Successful Financial Plan Most People Ignore

If you want to grow your wealth, there are several key elements to keep in mind. It's important to try to boost your income, live within your means, and invest steadily and well over time.

But personal finance expert Dave Ramsey says many people overlook one key element when crafting a financial plan.

A caller asks for Ramsey's opinion

In a recent Facebook post, Ramsey responded to a caller on his radio show who said he and his fiancée were looking to buy their first home.

The caller said he and his partner had the ability to put 20% down on a home, but they were considering putting down 10% instead and investing the other 10%. He then asked Ramsey what he thought about this strategy.

Real-life millionaires and the real world

In his answer, Ramsey didn't pull any punches. Instead, he responded to the caller's idea by quickly saying, "It's not optimal."

Ramsey said his organization has studied more than 10,000 mostly self-made millionaires. Of this group, the number who said they became a millionaire when they optimized their home mortgage by putting as little down as possible so they could invest the rest "was precisely zero," Ramsey said.

"No one does that in the real world," Ramsey told the caller. "That's a mathematical theory that doesn't hold water."

The importance of not overlooking risk

Ramsey said the caller's formula left out one essential element that all people must consider when mapping a financial plan: risk.

He went on to say that lowering your risk helps you to get a "good night's sleep." And he argued that reducing a mortgage balance is a great way to tame risk.

"When you have no mortgage, or you've got a rapidly reducing mortgage, there's more peace in your life," he said. "Your career choices are better, your relationships are enhanced, your physical body doesn't carry the stress with it."

Ramsey's '7 Baby Steps'

Ramsey's Facebook post featured a caption emphasizing that the best financial plans follow his famous "7 Baby Steps."

The seven steps are:

• Save $1,000 in an emergency fund
• Use the snowball method to pay off debt
• Add to your emergency fund until it totals three to six months of your living expenses
• Invest 15% of your household's income for retirement
• Save money to pay for your kids' college expenses
• Pay off your home early
• Build wealth and give to good causes

The Ramsey Solutions website says putting these seven steps into practice could help you take control of your money.

As the site proclaims: "It's not a fairy tale. It works every single time!"

Applying Ramsey's philosophy to your own life

Most financial professionals agree with Ramsey that taking on too much risk could be counterproductive to your finances and your overall well-being.

Of course, it's impossible to eliminate risk in life. But with the right planning, you could manage risk better so you are less likely to experience the fallout that may come with it.

For example, putting 100% of your savings in stocks is one of the best ways to potentially get rich quickly. Unfortunately, it could also be a ticket to poverty if things go wrong in the markets.

Given this reality, many investors opt to split their savings by putting a certain percentage in stocks and the rest in safer places such as cash or bonds.

The result is that while it is likely to take them longer to reach financial goals, they also reduce the risk of being wiped out financially if markets crash. And that may bring them priceless peace of mind.

Taking a DIY approach to reducing risk

It is possible to craft your own financial plan that reduces risk while also giving your money a chance to grow. Millions of people do so without relying on outside help.

Many of these people educate themselves about money by reading the right financial books and websites. Over time, they become skilled at understanding the basics of building wealth.

Then, they apply what they have learned to their own finances and their lives.

Getting help with reducing risk

However, many other people are not comfortable handling their money. Perhaps they find the topic boring or simply would feel more confident getting the help of an expert.

For these folks, consulting with a financial advisor, tax professional, or other money expert could be the right ticket to building lasting financial wealth.

Bottom line

If your goal is to get ahead financially, you might have to take a little risk with your money. For example, investing in the stock market comes with risk that cannot be eliminated. Markets usually go up, but not always.

Balancing risk and reward is the key to successfully building wealth. Ramsey's emphasis on reducing risk is an important reminder of the need to strike this balance. Doing so could give you peace of mind and the confidence to continue to pursue your financial goals over time.

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