For an audio version of this post, please click on the speaker icon (top left).
When I first tried to claw my way out of debt I started reading a lot of financial books and financial websites.
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Nevertheless, Dave Ramsey has some philosophies that I would call out of date for modern society.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.
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