Momentum, Resilience and Dave Ramsey

For those of you unaware, Dave Ramsey runs a popular provider of financial advice based out of Tennessee. While he operates in a radically different domain, he can provide a useful model for managing the resources within a startup or business environment as well. He’s known for incredible charisma, practical advice, and his baby steps methodology. Despite what a demonstrable track record of helping people improve their financial condition, he is quite controversial among many financial advice circles. In fact, you can find entire sites dedicated to denouncing him. The reason for this is quite simple; he advocates a collection of practices that go against conventional financial wisdom. If you follow his rules, the mathematical models show you losing to more traditional financial methods. Strategies like eliminating borrowing, paying off your mortgage early and maintaining sizeable liquid cash reserves represent substantial opportunity costs compared to having as much money at work in the market as possible and leveraging debt and usage incentives efficiently.

But Ramsey’s reasoning is sound and applies to realms of behavior and strategy well beyond household finance. In particular, Ramsey’s plan prioritizes momentum and resilience. He focuses on building momentum by front-loading the quickest possible wins. Just like startups embrace a "ship weekly" mentality. It will take you years, maybe decades to fully complete his program, but you have constant wins and reinforcement early in the process. Paying off small debts first is the equivalent of getting validation for a POC or getting your early adopters happily vesting in the platform. There are many advantages to hitting the market with a fully fleshed out product offering that appeals to the broadest possible audience, but it’s the longest time to market and time imposes risk. Having small early wins increases the likelihood of Maven users starting to advocate your product and increases the rate of learning for the product team. Knowing something works gives you the confidence to walk further down the path. Not having confirmation that something is working will cause you to devalue your work or stray down the wrong path.

Similarly, Ramsey emphasizes resilience. Instead of focusing on the highest return first, Ramsey encourages people to invest in safety early and often within the plan. By maintaining and growing a safety net, you reduce the risk of unforeseen events. In Ramsey’s words, you turn a “catastrophe into an inconvenience.” He gives the model of a car failure being either a bad day if you have the cash for the repair to a major catastrophic event if it leaves you unable to execute a fix and without transportation to work. Good capital management and having sufficient runway surface frequently appear in every piece of startup advice for the same reason. The fundamental rule for any business is “Never run out of money.” You can recover from every other sin or crisis provided you have the cash reserves you need. In most cases, maximizing flexibility and resilience means minimizing leverage. If I’ve pulled money from the future into the present, I’m going to need to repay that money. I can’t deviate from that obligation, and it can constrain my options considerably. Perhaps the most significant recent case study of the consequences placed on business from having a substantial debt obligation is Toys R Us. Most analysts agree that the firm would have made it didn't carry such a massive debt load.

In general, I find the advice to push money into the future and the power of leveraging early wins to be compelling for both personal and business strategy. We have very different goals and time horizons as humans and businesses. As humans, we have significantly fewer options to distance ourselves from liability, and in most countries have a very slim safety net. , however, have significant liability protections and due to the agency problem, much lower perceived risk by those making decisions. A business also frequently start with a liability concerning investor equity that never goes away. Managing this liability skews the equations a fair bit in decision making. Effectively, it is impossible for a business to lower its obligation below a certain threshold given investor demands for ROI. Even a sole-proprietorship operates under a significantly vested investor interest, even if she isn’t aware of it in those terms.