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When I first tried to claw my way out of debt I started reading a lot of financial books and financial websites.
Dave Ramsey’s Complete Guide To Money and The Total Money Makeover were two books that I purchased off of Amazon and read cover to cover.
There were a lot of helpful financial tidbits from these books that I incorporated into my personal life to improve my finances.
However not all of Dave Ramsey’s advice was applicable to me and I had to filter what I wanted to follow and what I needed to ignore.
Apparently I am not the only one who feels that some of the musings of Dave Ramsey may not be in an individual’s best interest (Dave Ramsey is known for promoting actively managed investments through his recommended financial advisor network, from which I am sure he receives compensation and perhaps biased because of it).
I received the following guest post by Justin Haber from Ascend Finance who eloquently writes why it is okay to disagree with one of the pillars of the finance industry.
Dave Ramsey ranks as one of the top-notch personal finance gurus and has helped lots of people get out of debt.
Nevertheless, Dave Ramsey has some philosophies that I would call out of date for modern society.
Let’s dive into five approaches on how my perspectives differ from that of Dave Ramsey’s.
Dave Ramsey View 1: You should never have debt, all debt is bad.
Contrary to Dave Ramsey, I believe that not all debt should be considered bad.
In fact, I would go so far as to say that there are certain debts that can be considered to be quite beneficial.
If you are able to gain a positive interest arbitrage by taking advantage of situations where the yield you get from a particular debt surpasses the interest penalty of that debt, you financially come out ahead.
For example, back in college I took a loan out that had a 0% deferred interest rate.
I was then able to invest that money into a CD that yielded 5%.
Dave Ramsey View 2: Everyone should use the Snowball Method.
Dave Ramsey is a huge advocate for the snowball method for debt repayment.
Dave Ramsey’s main point is that seeing the progress being made through paying off small debts will motivate you to continue to pay off the larger ones.
My point of contention is that Dave Ramsey takes a stance saying that using the Snowball method works in every situation.
Everyone is different when it comes to the amount of motivation needed to pay off debt.
There is a portion of people who do not need the constant positive feedback loop provided by the snowball method.
This particular segment of individuals are therefore penalized if they blindly follow Dave Ramsey’s advice as the gospel truth as the snowball method is not the best economic choice as evidenced below:
If you use the snowball method to take care of your debt, you can potentially lose thousands of dollars because of the excess interest you will pay.
Paying a debt off first just because of its smaller balance does not make financial sense if it has the lowest interest rate and the larger debts carry higher interest rates.
The best way to pay off your debt may be in fact some combination of the snowball method and the alternative avalanche method.
An app like Savvy Debt Payoff Planner will help aid you in the best plan of attack for debt payoff by doing just this.
This planner will advise you where you should spend your money to get the best result and make the process of paying off debt a lot simpler.
Dave Ramsey View 3: You can receive 12% on your investment.
Dave Ramsey wrote an article about 12% returns, which was influenced by the average of S&P annual return from 1923 to 2016 (12.25%).
This particular stance has received a lot of criticism from financial experts.
Robert Berger gave four valid reasons in his US News & World Report article why a 12% return is unlikely.
Investors who blindly follow Dave Ramsey can find themselves in a financial predicament later in life, when it may be too late to correct one’s course, as they discover that what they actually achieved falls short of what Ramsey preached.
Dave Ramsey View 4: Everyone should pay off their mortgage early.
It is always great to pay off your house mortgage early, but Dave Ramsey advises people to pay off a mortgage in a more rigid way, rather than a flexible one that would work for anyone.
An example where it is better to not pay your mortgage early is when you have an investment somewhere that has a higher yield than the interest rate on the mortgage loan, again taking advantage of interest arbitrage.
When this is your situation, you should be making your minimum payments on the mortgage and the maximum payments on the investment.
[I personally am happy I concentrated on paying off my mortgage first as it gave me peace of mind as well as a guaranteed rate of return (my interest rate).
Although I may have initially left some money on the table because of the long bull run in the following years, that difference is shrinking because of the current recession we are going through.]
Dave Ramsey View 5: You should save $1000 for your emergency fund.
In Dave Ramsey’s book, Baby Steps, he recommends that you should save $1,000 for an emergency.
While this may have been enough money 30 years ago, it is woefully inadequate in modern times.
A better way to save for emergencies is by saving a percentage of what your monthly expenses are, or your monthly income.
In this situation, you want to choose whichever fits best for you.
Although Dave Ramsey has helped a lot of people in this world, I do disagree with some of his views.
I believe that some of the things he recommends need to be updated and reviewed.
Every situation is different and it is important to tailor a financial plan that gives you the best chance of financial success.
Justin Haber is the digital marketing manager for Ascend Finance with the goal to make debt freedom easier, cheaper and faster.
Ascend specializes in calculators to help get out of such as the Chapter 13 Payment Calculator and the Chapter 7 Means Test Calculator.
If you are in search of financial help, please consider enlisting the service of any of the sponsors of this blog who I feel are part of the “good guys and gals of finance.”
Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
NOTE: The website XRAYVSN contains affiliate links and thus receives compensation whenever a purchase through these links is made (at no further cost to you). As an Amazon Associate I earn from qualifying purchases. Although these proceeds help keep this site going they do not have any bearing on the reviews of any products I endorse which are from my own honest experiences. Thank you- XRAYVSN
Personally, I see two components to debt repayment: emotional vs mathematical. My approach heavily leaned towards the emotional. Yes, you can do the math and figure out how to hack a few extra dollars out of every financial decision. But none of that matters if you are staying up late at night worrying about paying your loans. This has become even more relevant in the setting of the Coronovirus pandemic. How many doctors do you personally know who are over-leveraged, and have now been furloughed or had significant cuts in salary? Unfortunately, I know too many in this situation. I… Read more »
I credit being debt free to surviving the decreased pay I have been subjected to from the pandemic and low patient volumes (salary was cut 60%).
You are right in the long run whichever method works for you (avalanche or snowball), the fact that you are prioritizing paying down debt is the most important factor
These are all good points. We can intellectually debate the fine points of risk-adjusted returns, optimal leverage, opportunity costs, etc. But on the whole, it is hard to argue with Dave’s success. He has gotten MILLIONS of people to wake up about their finances, demolish debt, save an emergency fund, and start investing. He takes a behavioral-based approach that works. The order is simple and clear. The snowball is based entirely on behavior, not math. But it works. I disagree with a lot of what he says too. But then I imagine a world where every American follows his 7… Read more »
I agree that overall Ramsey has been a boon to most individuals because he forces them to address their financial situation and does give steps to improve it that will work if you follow. The investment advice certainly seems tainted as he seems to be incentivized to recommend certain products and that could cause people to lose a lot of money because of fees. But the getting out of debt advice is spot on and I recall a previous post of yours that shows that even with the difference mathematically, it really was not that big a hit to the… Read more »
? this article was long due. I started hearing Dave Ramsey while working in rural Illinois in 2001. Getting out of debt and living below your means is all I got out of him. In 2006 I went to a free financial advisor recommended by him in Atlanta and he was recommending a 6% front load mutual fund. Complete rip-off. I was naive but not stupid?. Fortunately, I did not go with him. He does have one of the biggest mansions in Nashville after recommending all those expensive mutual funds. I cannot believe he’s still recommending actively managed mutual funds… Read more »
Thanks Aneesh for sharing your personal experience regarding Ramsey. You were far smarter than I was when I first started out. Although it was not Ramsey, I was advised in my residency by my CPA to go to a financial planner who put me in a 5% front loaded mutual fund. Was a rip off and it took me over 10 years to realize that and switch to index funds. I am sure the financial kick-backs are enormous for Ramsey’s recommendations and it is that reason why he will likely never change (although at one point how rich do you… Read more »
I see so many holes in some of the arguments posted here. Dave Ramsey recommends a $1000 initial emergency fund when you’re up to your ears in debt. This is in case your refrigerator dies or your car needs a new water pump. This is “baby step #1” Baby step #2 recommends eliminating your debts starting smallest to largest. This is mainly credit card and car payment type debt. The plan would be to eliminate this debt over 1-2 years so the difference in total interest paid is very small no matter what the rate charged Baby step #3 is… Read more »
Thanks for your insight.
I personally am on the pay mortgage debt aggressively as well and so glad I did (https://xrayvsn.com/every-blade-of-grass/). Peace of mind of having no mortgage is priceless, especially in times like this.
Interesting about Dave endorsing index funds rather than mutual front load funds from his advisors. I had always heard the opposite and maybe it was because of a few bad seeds here and there.
I chose the avalanche method of debt payment myself but as you pointed out, the amount of money saved would probably be in the low 5 figure level at best.
Dave Ramsey is great advise for the average person who is totally clueless wondering why they have no money always. Beyond that class of people, the advise really is not all that great and agree with you.
Debt can definitely work in your favor if it is good debt. I wonder what Dave would say about me taking out a loan to buy the space I practice medicine out of. He would probably hate it and tell me to pay cash.
You are probably right because he is so debt averse. I would classify that kind of debt as good debt because it is used to acquire an income producing asset.
He usually says it’s good to be debt free but going in to debt to buy a home is fine because it’s an appreciating asset. The same probably holds true for your office. I think we can all agree that getting a mortgage for an income producing asset is a reasonable move but I’m sure you would also agree that getting rid of that debt is also a terrific goal. In reading some of these comments, it sounds like there is an abundance of misinformation regarding Dave’s recommendations. Why not sign up for his podcasts so you hear what his… Read more »
Im afraid i repeated my.mistake of letting credit card debt build up twice in my life. First time i was married. Second time i was single. What worked for me at the time was signing up with Consumer Credit Counseling Service. They were able to wtap it all up in one payment a month. For 4 years. No credit card use for 4 years. I learned to pay cash only. After 6 months CCCS was able to convince credit card companirs to reduce the interest rate quite a bit. After 4 years of no credit card use. Ive never used… Read more »
Thanks for sharing your experience. That may be worthy of a post on its own. If you are willing to write about your experience with credit counseling service (pros and cons) I would certainly put it on my platform.
You obviously do not understand Financial Peace if you thing the $1000 emergency fund he advocates as a temporary stepping stone for people starting out on a journey. Many families and individual do not have even $1000 set aside for emergencies. I agree that it does not cover much, but it is an attainable goal and helpful when initially starting on a journey. Dave Ramsey does not state that he has the only or best system to pay off debt and get debt free. He does have a system and is very consistent in his advice which is what most… Read more »
Very well said and I agree with your viewpoints. I too would feel a bit uncomfortable borrowing money to try and make more on potential investments. It’s great to think the market returns will beat the interest of the loans for the most part until it doesn’t.
No doubt Ramsey has advice that helps a lot of people due to its simplicity. For higher income earners like physicians there certainly can be other methods that potentially fit better