Dave Ramsey. Probably the most famous influencer on the planet when it comes to paying off debt. If you want to get out of debt then read his books. It’s that simple. Or is it? Is there a better way? Let’s discuss.
First off, I want to say this. I started following Dave Ramsey a few years ago and “somewhat” adapting his philosophies. He’s a multi-millionaire and I’m not, and his programs have worked for countless people. I mean for the most part, it’s pretty good advice. However, that doesn’t mean we shouldn’t break down his programs and see if it’s the best option.
Now the fact of the matter is, that most people are living above their means and if they don’t change something soon, are set to be in debt for the rest of their lives.
When most people are living paycheck to paycheck and don’t have any savings built up to get them by if something out of the ordinary happens (cough, pandemic), then maybe we need to change the way we are living.
Now if you’re not familiar with Dave Ramsey’s core philosophy, it’s called the “debt snowball” method. We’re going to break down this method to analyze what’s wrong with it.
Before I get into this it’s important for you to know that I’m not a financial advisor and none of this is financial advice. It’s simply my opinion and it’s entirely up to you whether or not you choose to follow any specific method. You should do your own research and take everything with a grain of salt. And for all I know maybe Dave Ramsey is a certified financial advisor (don’t know or care) and if that means something to you then maybe that should outweigh anything I’m saying here…but…with that being said…
Dave Ramsey is Wrong About the Debt Snowball Method Being the Best Option
This is his core philosophy to paying down debt. If you’re not familiar with the program it goes something like this:
Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all of your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.
Technically he says to save a grand first in case of emergencies, then start this, but as for paying off debt, the main thing here is that it is focused on paying off all of your smallest debts first, regardless of the interest rate. Now, there is an alternate philosophy that says to pay off your highest interest rate loans first regardless of the loan amount, this is referred to as the “the debt avalanche method”, as opposed to the debt snowball method.
Now, mathematically the avalanche approach is actually going to make more sense. But Dave’s key philosophy here is that it psychologically makes more sense to pay off your smaller debts first.
Basically you’ll see the “reward” of paying off your debt and lowering your monthly bills faster, and therefore this is going to work better for most people, even if it technically costs more money mathematically.
Now this, of course, is completely subjective, and I’m not sure if there really is any science on the matter. I mean essentially what he is saying is that people won’t follow through with the debt avalanche approach like they would with the debt snowball approach.
Hmm..ok. Hard to argue with this theory without breaking out charts of dozens if not hundreds of people who have tried both approaches, and then comparing the two different strategies and then looking at the data. Now, as far as I know, this data doesn’t exist. So this approach Dave Ramsey is pushing would simply be a theory.
Which, don’t get me wrong, this is great if you’re in the red with a massive amount of debt and you want to get out of debt. Taking on this strategy works great and of course it’s far better than doing whatever you’ve been doing up to this point to get you in debt in the first place.
But maybe the math should play more of a role? I doubt everyone will see things the same way in terms of what motivates them to get out of debt, and the problem with this is if you’re in a situation with drastically different interest rates on separate loans.
For example. Let’s say you have a car loan for $15,000 and the interest rate on your car is 4%, however you have $30,000 on a credit card that has a 25% interest rate.
I mean, my goodness-that’s a high interest rate! It seems like with such a drastic difference in interest rates it would make complete sense to hit the credit card first.
Now, assuming the difference isn’t that drastic, then using the debt snowball method could be a better way to go since you’re not getting crushed mathematically. Paying a small amount more in interest to get that dopamine hit of paying off a loan might just be worth it.
As a matter of fact, I think it probably is going to be worth it most of the time. Especially considering that it’s going to lower your stress levels paying off a debt and not being forced to make that payment each month. (Although I’m sure you could argue that the stress of having that payment would incentivize you to work and make money!)
Gee, so if Dave Ramsey is mostly right, then what’s the problem? Why even write this article? Well, here is my biggest issue with what Dave Ramsey teaches.
Dave Ramsey is Wrong About His Investment Recommendations
This isn’t speculative, we can literally look back at charts and see just how wrong Dave Ramsey has been. He should be apologizing, not doubling down. Anyways, just what exactly am I talking about? I guess I should be more specific on his overall plan. He has “7 baby steps” and they go like this:
Baby Step 1: Save $1,000 for your starter emergency fund.
Baby Step 2: Pay off all debt (except the mortgage) using the debt snowball.
Baby Step 3: Save 3-6 months of expenses in a fully funded emergency fund.
Baby Step 4: Invest 15% of your household income in retirement.
Baby Step 5: Save for your children’s college fund.
Baby Step 6: Pay off your home early.
Baby Step 7: Build wealth and give.
Now before I go off here it’s important to note that of course there is no way to know what the future lies in the stock market or other various assets, so I’m sure it’s easy to say this is a bit unfair to look back now and say he should have said this or that, but look, this guy is one of the biggest voices in the financial world and he just missed out big time and cost his followers a ton of money.
I’m specifically talking about his advice last year (2020) when the stock market fell off a cliff at the beginning of the pandemic. This was an opportunity for everyone to invest instead of paying off additional debt (if you were able to), and really any idiot who bought stocks could have at minimum, doubled their money in less than a year, and possibly 10x’d (or more) their money if they did things right.
This was a once in decades type opportunity for investing. Look, of course there was risk and some questions as to whether companies were going to make it through, but ultimately knowing our history we should have expected a corporate bailout, in other words, it really wasn’t that risky.
At some point maybe this all catches up to us, but now looking back at recent history, investing in stocks would have been far more beneficial than paying off debt.
A lot of people who never invested in their life (like myself) invested last year, a lot of people talked about it and at least entertained the idea even if they didn’t follow through. So why didn’t Dave Ramsey the financial guru see this?
Imagine putting 10k in the stock market and having it be worth 50k or 100k in 12 months. That was possible last year and instead Dave was telling people to pay off debt.
I’ve wrote in more detail about whether us “average blue collar middle class” folks should be investing over paying off debt. Timing is important, and Dave’s strategy is completely black or white and ignores these moments. In simple terms, there will be times where investing is worth it over paying off debt. Just like there will be times where paying off debt will make more sense and it’s all about finding that balance.
There are also other factors that go into play Dave doesn’t consider. Imagine paying off zero percent interest instead of investing in an asset that 3, 5, or 10x’d in a year? How stupid is that?
Now, he also recommends investing in mutual funds. This basically is just another way of investing in a more “safe” way because you’re going to have your investments spread out to mitigate your risk.
Personally, I like investing in individual stocks. Why? Because with more risk their is also more to gain, but more importantly there is a psychological benefit to doing this.
Isn’t that Dave’s big philosophy? He likes the debt snowball method because it allegedly improves morale so apparently it doesn’t even matter that you pay more money lol.
But with individual stocks you are now improving your assets, thus improving your net worth.
Watching your money gain, at least to me, is more exciting than seeing your debt slowly dwindle down. And at the end of the day, you can always choose to sell your investments to pay off your debts whenever you choose.
Obviously, this all depends on the math. Ultimately isn’t that what matters? If you can make gains at a rate that outpaces what you would pay in interest on your debt, then obviously that is winning strategy.
So this depends on timing. Last year I really hope you weren’t paying additional amount to your debts when you could have been buying Tesla stock.
Now, going forward it’s up which avenue to take, but I think it’s important to consider investing at certain times, where as other times it will make sense to pay down debts. And this isn’t even considering borrowing for a business endeavor that could also make you returns.
Bottom line. This isn’t black or white, and there may just be shades of gray here. And this is why we need to talk about some of big investments people take on.
Dave Ramsey is Wrong About Mortgage Loans
Here is Dave’s incredibly bad take on home loans, he says to not take out a home loan until:
- You are completely debt free
- You have an emergency fund of 3-6 months
- You have save a down payment of 10-20%
- Can qualify for a 15-year-fixed-rate mortgage
Wow. A lot to unpack here.
First of all, looking at data from 1967 and 2022, and I qoute: “Housing experienced an average inflation rate of 4.18% per year. This rate of change indicates significant inflation. In other words, housing costing $100,000 in the year 1967 would cost $950,536.40 in 2022 for an equivalent purchase. Compared to the overall inflation rate of 3.98% during this same period, inflation for housing was higher.”
via in2013dollars.com
And honestly, I think we all know inflation numbers tend to be a lot higher than reported. Either way, housing is a great long term investment where your home value and appreciation will likely match or even supercede what you are paying in interest.
And most other debt you take out will likely be at higher rates than whatever you get from a mortgage rate. This puts it in the category of “good debt”.
Now granted, hitting all of those targets Dave has mentioned above would be great, but doing so might require that you live in your mother’s basement until age 30.
Personally, I say doing anything to get approved for a mortgage with as little down as possible is the strategy I would use as long you aren’t taking out a mortgage that is too much for your budget.
Dave’s strategy probably would leave most people living with their parents…or in a box for several years. Having a good home to live in is important on so many different levels and owning a home makes sense over renting in most cases.
Dave Ramsey is Wrong About Credit Cards (and Credit Scores)
Finally, this needs to be said as well. Recently, Dave Ramsey claimed he has a zero credit score. Now, to be completely honest I have a hard time believing that. Ok, I don’t believe that for one second.
Anyways, he has stated that a credit score is nothing more than an “I love debt score”. He makes the argument that we need to be getting out of debt and that in order to have a good credit score you need to stay in debt.
He’s not entirely wrong, and it’s definitely a flaw in the system. You shouldn’t have to have debt to have a good credit score. Either way, as much as we need to realize that debt is basically just a form of slavery, it’s still important to have a good credit score. Especially until you’re completely financially free.
For most of us who are trying to get out of debt, ignoring our credit in the mean time is a stupid idea. It’s going to be a balancing act where we may even be forced to take out some debt we don’t want to. I mean it’s not a perfect world. As much as getting out of debt should be a priority, we shouldn’t pretend that there won’t be bumps in the road.
And after all, if he only has you keep one grand in savings while you’re on your journey to pay off debt, then there is a good chance that won’t be enough to cover something that comes up (which is also another reason to buy stocks you can sell if needed).
You’re also completely losing out on investments you could be getting with low rate loans if you have bad credit. I mean I get it, the goal is to get out of debt, but is this applicable to all debt? What about real estate at 3-4%? What about a business loan that could possibly change your life? Having good credit is important to building wealth. You have to wonder if he is just sticking to this advice simply because “it’s his schtick”. Again, this is just another area where he completely ignores the math.
This brings us to credit cards. Dave says to avoid these at all costs. And yeah, if you’re bad with money then that’s probably good advice. But here’s what I do instead (actually recently started doing). I buy everything I can on credit cards and pay it off in full each month.
Now, you may think this is dangerous, but if you keep a monthly budget then it shouldn’t be any different than spending money on your debit card. Plan ahead and you won’t have worry about getting into credit card debt.
The reason it’s important to use credit cards is simply to earn the points/miles. Now forewarning, credit card companies are able to pay out these rewards because most people aren’t disciplined enough to pay off their bill every month and are likely to pay a shit ton in interest.
If you know you’re not going to be disciplined then don’t do this. But instead, I’d rather be disciplined, earn miles and take free vacations.
For years I always felt guilty taking vacations when I have debts to pay off, now I don’t have to because I can use my credit card rewards for that instead. Yes, technically I could use that to pay my bill/etc. but you get the idea. I cash in the miles I wouldn’t have if I didn’t do this and can take vacations with money I would normally have to spend out of my pocket.
Just think about this. If you’re making a big purchase, let’s say a car or a laptop or something, would you rather pay 2 grand and get nothing, or pay 2 grand and get up to $100 (or more) in credits for doing it? Yeah, obviously the latter. So apparently Dave thinks you’re too stupid to be able to get free vacations. I don’t know.
Conclusion
I went over a lot of things Dave is simply getting wrong, and it doesn’t take a genius to see this. That being said, I still follow him on social media and even recommend buying his books. Why? Because even with all of these flaws his philosophy in general is ten times better than what most people are doing.
Most people are massively in debt living paycheck to paycheck with no end in site, go out and make purchases they can’t afford, then complain about their financial situation.
How about we change this? Dave Ramsey is very helpful in helping you change your mindset out of this life of debt philosophy where you’re basically trapped financially.
Following him and reading his books I think are a great way to recondition yourself to change your mindset and get on track financially.
However, maybe just take what he says with a grain of salt and realize you can always make some alterations to his recommendations. What about you, do you follow Dave Ramsey’s recommendations? Did this article give you any insight into what strategy you want to follow? Let me know in the comments below!