Why Dave Ramsey’s Advice Isn’t For Everyone
If you’ve researched how to improve your financial situation or get out of debt, you’ve probably stumbled into some sort of content from Dave Ramsey.
He’s built a multi-million dollar business selling courses, programs, conferences, and books helping people get out of debt.
While he’s had a lot of success in the business space, I think his philosophies around personal finance are something that need to be talked about.
Don’t get me wrong, if he didn’t provide some good advice he wouldn’t be in the position he’s in today. A lot of the things he says are true such as ‘you should avoid debt’ or ‘spend less than you make’ but there’s many other areas that don’t fully apply to someone who isn’t thousands of dollars in debt or 6 months late on rent.
His advice is designed to speak to one certain group of people and it’s important to understand that not all advice is equal. Something that applies to one person may not be a smart decision for your situation.
An example of this is that he strongly believes that cutting up your credit cards and living without a credit score is the right thing to do…
If you have thousands of dollars in credit card debt and can’t stop spending, yeah, you probably shouldn’t keep swiping your card — but what about the people who aren’t in debt and are just searching for sound financial advice?
It’s not applicable and if you haven’t heard financial advice from anywhere else, it may seem like the right thing to do.
With that being said, here’s why I believe Dave Ramsey’s advice isn’t for everyone.
It lacks realistic expectations
One of the things that Dave Ramsey preaches about is investing in mutual funds and getting 12% returns from those mutual funds.
This is a dangerous expectation to set for people who are getting started with investing.
The reason using 12% as a baseline for future projections is dangerous is because if you don’t get that consistent 12% return, you’re going to end up short of whatever goal you were trying to reach.
The second concern I have with this is the recommendation of investing in mutual funds. Mutual funds generally have higher fees than other types of investments such as ETFs and can eat away at your returns. Now, there’s good mutual funds out there — but I’ve never heard him mention a specific mutual fund that gets 12% returns.
He also expects people to live as cheap as possible and not enjoy themselves until they’re completely debt-free.
Looks great on paper, but who wants to live like that?
It may take 10 years to get out debt. Why would you waste a decade of your life just to get back to $0?
You can enjoy your life and improve your financial situation at the same time.
Personal finance isn’t a one-way street.
It lacks logic
One cornerstone of his financial philosophies is the debt snowball method.
The debt snowball method is where you begin to pay off debt with the smallest balances first and then slowly working your way to the debt with the largest balances. The psychology behind this is that by earning small wins and seeing debt disappear, you’ll be more motivated to continue chipping away until you’re debt free.
This is great, but it may not be the most efficient and cost effective way to go about it.
Depending on the interest rates and amounts of debt, you can potentially save thousands of dollars in interest by paying off the higher interest rate debts first rather than the smallest dollar amount.
He also recommends that you pay off all debt before investing.
Again, it depends on your situation but there’s a price you pay by delaying your retirement investing.
For example, if you’re coming out of college and decide to invest $3,000 every year starting at 24 and choose stop at age 34 — you’ve only invested $33,000 total.
Stay with me here.
Now, someone who prioritized paying off debt first and doesn’t start investing until they’re 35. They invest the same $3,000 every year until they’re 65 so they’ve invested $93,000 total.
Would you be surprised if I told you the person who only invested $33,000 ends up with over $500,000 more than the person who invested $93,000 in this example?
That my friend, is the power of compound interest and starting early.
It lacks empathy
I can sit here and debate about numbers and the best way to approach debt and investing but something that pains me to see is his lack of empathy.
He has a very abrasive, one-size-fits-all approach to his advice that completely disregards the other side of the equation.
There was one video I remember watching where he was talking to a caller on his show who was a recent graduate and weighing the option of moving in with his parents for a little while to grow his savings.
Dave said he shouldn’t do it. No questions asked.
Now, that may be the right thing to do but the part that bothered me was he never asked about the caller’s situation.
He never asked what the caller’s goals were or what he wanted to do after those couple years of living with his parents.
It may have made a lot of sense for that guy to live with his parent’s so he could get closer to achieving his goals.
Again, personal finance isn’t a one-way street.
It screams sales
He’s not making money taking calls from people on his talk show and he’s not making money from giving professional financial advice because he can’t.
I haven’t seen their company balance sheet, but I would assume a large majority of their revenue comes from selling products and affiliate deals.
In what world is a $68 dollar wallet available in 2 colors going to help you “succeed”?
Like c’mon.
If you’ve listened to his call-in show, he recommends his own services and affiliate brands more than Graham Stephan tells you to smash the like button.
There’s not necessarily anything wrong with it, he’s just a businessman.
And not someone who can professionally give financial advice.
He repeats the same things over and over.
Don’t use credit cards, stay out of debt, whatever.
They’re hollow phrases.
When does his advice make sense?
If you follow his advice, you’re not going to be in a catastrophically worse spot than you are right now, but you’re also missing out on opportunities to do even better than what his advice suggests.
If you struggle with spending and find yourself in credit card debt, his advice can be a great place to start.
While I disagree with a lot of his beliefs, the truth is he’s helped tons of people get out of debt which is amazing. But there’s more to personal finance than just getting out of debt.
If you have the basics of personal finance down and you’re looking to take the next steps & achieve financial freedom, his advice might not get you there.
His stance on credit cards and credit scores will hold you back from future opportunities such as investing in real estate or even saving money on a mortgage by getting a lower interest rate. Not to mention the rewards a credit card can bring such as cash back and free travel if used correctly.
Overall, Dave’s advice is great for a certain portion of the population, but not everyone.
Be careful where you get your advice from and always make sure it’s accurate for you and your situation.
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This post is for educational purposes only and should not be considered financial advice.
