Mr. Ramsey gets a lot of things right, and regardless of what you’re about to read, I’m actually a fan. At least half of the time, anyway. If you took no other financial advice, his Baby Steps are a safe and effective path to financial security. However, some aspects of his teachings are not ideal. This article will explain why Dave Ramsey is wrong and offers counterpoints and alternatives.
The typical argument for Ramsey’s method is that it works for those who don’t have the discipline to take a more conventional road. However, that assumes other approaches are more difficult or even harmful, which is not always the case.
- Debt Snowball Method
- Emergency Fund
- Credit is Unnecessary
- Credit Cards are Evil
- Pay Cash for Autos
- You Should Only Have One Mortgage
- Mutual Fund Returns
- Investment Allocation Advice
- Pay (Exorbitantly) to Invest
- Actively Managed Funds
- Student Loan Approach
- Give—Even if it Makes You Worse Off
- Insurance Recommendations
Debt Snowball Method
Ramsey exclusively recommends this method of repaying debt, which focuses on paying off the debt with the lowest balance first. While there is nothing wrong with this strategy, there are others that may be more applicable to your situation. We’ve outlined the pros and cons of each in the article Debt Payoff Methods.
Emergency Fund
The first step on Ramsey’s list is to set aside $1,000 for a starter emergency fund. Early in your journey to being debt-free, you may not have that luxury. This is where the cash flow debt payoff method may help, depending on your debt situation.
In step 3, he recommends saving 3-6 months for an emergency fund. I would argue that it’s a good start, but ultimately not enough, especially if you follow his advice about not having or using credit—which brings me to my controversial opinion that credit cards (with no balance, of course) function perfectly well as a temporary emergency fund. There are caveats to this, which will be covered in a future article.
Credit is Unnecessary
Ramsey advises that having credit at all is unnecessary and that achieving high FICO scores costs money. Neither is true, and in fact the former assumes that people listening to his advice don’t already have a credit history, which is almost never the case. He also frequently promotes manual underwriting as a viable alternative to traditional credit-based mortgage approval. While this option exists, it typically results in higher interest rates, larger down payment requirements, and fewer lender choices. Manual underwriting also often requires extensive documentation of payment history for utilities, rent, and other recurring bills—a process that’s more cumbersome than maintaining a good credit score through responsible credit use.
Credit Cards are Evil
Ramsey argues that using credit cards always results in a net loss and that doing so is never acceptable or useful. When faced with the opposing view that reward programs can be used to your advantage, he frequently lumps those rewards into the category of travel benefits—using that as an opportunity to segue into scolding you for even considering taking a vacation.
The reality is that cash rewards are a thing, as are cards with no annual fees and lengthy introductory interest-free periods. Paying interest is completely unnecessary if you are debt-free and your income supports your spending.
Pay Cash for Autos
While paying cash for a 3-year-old car is the ideal scenario for avoiding the bulk of depreciation as well as saving money on interest and catching the tail end of a manufacturer’s warranty, there are other factors to consider. The most obvious is how much (or how little) money you have to spend.
Unless you are a professional mechanic who can acquire parts wholesale, spending $2,000 for a car that you will depend on daily for work and school is never a good idea, regardless of brand. Despite their reputations, a $2,000 Honda or Toyota is not a reliable car. If you already own such a vehicle, start tracking every penny you spend on maintenance and fuel, as well as instances of missed work and other inconveniences. You may find that a $200-300 car payment is not only a worthwhile tradeoff, but a necessity. Modern cars are also significantly, undeniably safer than their 20-year-old high-mileage counterparts.
You Should Only Have One Mortgage
Dave begrudgingly allows taking out a 15-year loan for your first property, but insists that any additional properties be purchased using cash. This is a natural extension of his anti-debt stance, but the reality is that if you minimize risk, leverage works, and the math proves it.
You can see this for yourself by using a spreadsheet to calculate two different scenarios for a decade or two into the future. In one scenario, you’ll be paying cash for all additional properties. In the other, assume a 25% down payment (a common lender minimum for investment properties). To play it very conservatively, you can leave out any potential appreciation entirely. At the end, you’ll find that your net worth is not-insignificantly higher in the leveraged scenario.
The average young worker already has a difficult enough time buying their first home with a 30-year mortgage, so we can enthusiastically opt out of his 15-year mortgage decree as well. Yes, you’ll pay significantly more interest. However, the long-term benefits of home ownership far outweigh that penalty.
Mutual Fund Returns
Ramsey consistently promotes the idea that you can expect 12% returns from good growth stock mutual funds. This projection is optimistic at best and potentially misleading at worst. While there have been periods where the stock market has produced such returns, using 12% as a planning number ignores both inflation and the impact of fees. A more conservative 7-8% real return (after inflation) would be more appropriate for long-term planning. Using inflated return projections could lead to significant shortfalls in retirement.
Investment Allocation Advice
His recommendation of an even split between four types of mutual funds (growth, aggressive growth, growth and income, and international) is overly simplistic and doesn’t account for individual circumstances. This one-size-fits-all approach ignores important factors like age, risk tolerance, and specific financial goals. His strong aversion to bonds, even for those approaching retirement, also goes against conventional wisdom about reducing portfolio volatility as you age.
Pay (Exorbitantly) to Invest
Ramsey’s endorsement of commission-based financial advisors (many of his “SmartVestor Pros”) contradicts the growing consensus that fee-only fiduciary advisors better serve clients’ interests. Commission-based advisors may be incentivized to recommend products that generate higher commissions rather than those that best suit the client’s needs. This potential conflict of interest is particularly concerning given his influence over his followers’ financial decisions. While some of the SmartVestor advisors do work on a fee-only basis, those fees are higher than you would pay simply by investing in Vanguard equity and bond ETFs on your own.
Actively Managed Funds
Despite overwhelming evidence supporting index fund investing, Ramsey continues to advocate for actively managed mutual funds. This recommendation typically leads to higher fees and, statistically, lower long-term returns compared to passive index funds. The academic research consistently shows that very few actively managed funds outperform their benchmark indices over extended periods, especially after accounting for fees.
Student Loan Approach
His blanket advice against student loans fails to account for the complexity of education financing decisions. While avoiding excessive student debt is wise, his suggestion to cash-flow college or choose a cheaper school regardless of career implications oversimplifies the ROI calculation of higher education. For certain high-earning professions, taking on reasonable student loan debt can be a sound investment in future earning potential.
Give—Even if it Makes You Worse Off
Ramsey’s insistence that people should tithe 10% of their income even while deeply in debt or facing bankruptcy is terrible advice. While charitable giving is admirable, advocating for significant charitable contributions before achieving basic financial stability can prolong financial hardship and delay debt repayment.
Insurance Recommendations
Term life insurance is the right choice for the vast majority of people. However, completely dismissing whole life insurance in all situations fails to acknowledge that certain high-net-worth individuals might benefit from whole life insurance for estate planning purposes. Additionally, his recommendation for high-deductible health plans without considering individual health situations or financial circumstances could leave some families vulnerable to unnecessary medical debt.
In conclusion, math, common sense, and your own due diligence are tools that should take precedence over any financial advisor’s charisma, whether you pay for their advice or not.
