5 Things Dave Ramsey Gets Wrong

Eugene Adams

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Dave Ramsey has been giving money advice for decades. He is one of the most popular financial advice gurus out there. I have long been a big fan of most of his financial advice. However, nobody is perfect. 

There are some bits of advice he continually gives that are questionable. Most of them have to do with how rigid he is in his plan. One size fits all solutions never actually fit all. Usually, it is more like one size fits most.

Here are 5 pieces of advice that I think Dave Ramsey gets wrong. 

1. $1,000 Starter Emergency Fund

In Dave Ramsey's popular baby steps, step one is to save $1,000 as a starter emergency fund. He argues that $1,000 is enough for small emergencies, but not so much that you will be comfortable. 

He argues that discomfort over the size of your emergency fund will force you to attack debt with “gazelle intensity.”

The problem is that $1,000 is really not all that much money. $1,000 buys you less and less every year. Most adults who have gone through hard times will be extremely uncomfortable with only $1,000 in the bank. 

So Dave and I can agree to disagree here. I understand what he is saying about discomfort, causing you to attack your debt harder. However, that is what goals are for. If your financial goals don’t motivate you to work hard, you need better goals, not a smaller emergency fund. 

What to do instead 

The amount of money that will allow you to sleep comfortably at night will vary from person to person. You need to decide what an appropriate emergency fund will look like for you.

People who have gone through real financial hardship will naturally want a little bigger emergency fund. That is fine. There is absolutely no reason to lose sleep over money unless you have to. 

2. Debt Snowball 

When you have multiple forms of debt Dave Ramsey recommends something he calls the debt snowball. This method ignores the interest rates and instead pays your debts from smallest to largest. 

Obviously, this is not the mathematically correct thing to do. Paying off debt with the highest interest rate first will get you out of debt faster. Ramsey’s rationale is that finance is a psychological problem. 

He feels that paying off the smallest debt will feel like a win and keep you motivated. He feels that people need to see victories. Otherwise, they risk losing motivation. 

My biggest confusion over the debt snowball is why it is necessary. Remember, Ramsey, claims that a tiny emergency fund gives people the urgency to attack debt with “gazelle intensity.”

If you are already attacking with “gazelle intensity,” why do you need the extra motivation of the debt snowball?

What to do instead

If you really need small wins to stay motivated, go for it. But, if you are enough of an adult to self motivate, skip the debt snowball. Pay off the debts with the highest interest rates first. There is no reason to be in debt longer than you have to be. 

3. Mutual Funds

Dave Ramsey is obsessed with mutual funds. He thinks that they are the best place for the average person to invest their money (other than real estate). Suggesting mutual funds is not bad advice. It is just not nearly as good as he makes it sound. 

Over the years, Ramsey has claimed repeatedly that you can get a 12% return on your mutual funds. He also claims that many mutual funds beat the S&P 500 over the long run. He repeatedly declines to produce proof of these claims. The specific funds he invests in remain a mystery. 

Legendary investor Warren Buffet has long recommended Index Funds that track the S&P 500. He believes so strongly in Index Funds that he bet $1 million against Protege Partners in 2007. The hedge funds failed miserably to outperform the S&P 500. 

What to do instead

If you really want a mutual fund get one. If you want an Index Fund, get one of those.

At the end of the day, it really does not matter. One thing Ramsey consistently gets right is that your return on investments is not going to determine whether or not you retire rich. 

Staying out of debt and consistently spending less than you earn is all that really matters. What you invest your extra money in only makes a small difference, assuming you don’t invest it in anything truly terrible. 

4. Cut up All Credit Cards

Ramsey likes to say that nobody ever became a millionaire from credit card rewards. That is a fair point. Credit cards are not necessary. 

However, his advice to cut up all your credit cards and never use them is a little much. 

If you are not mature enough to use a credit card responsibly, you will fail at Dave Ramsey’s baby steps anyway. So instead of being scared of credit cards, learn to use them responsibly. 

What to do instead

If you really can’t handle them, cut them up. Otherwise, use them like an adult. 

One of my cards gives me 5% cashback on gas. Am I really supposed to turn down 5% on something I would buy anyway because Dave Ramsey thinks I am too much of a child to handle credit cards?

5. Avoid All Student Loans 

Avoiding student loans is not bad advice. It is just a little unrealistic for many. If you can avoid student loans, you absolutely should. 

Picking a public, in-state school instead of a private and/or out of state school is also great advice that Ramsey gives often. Avoiding college if all you are going to do is get a worthless degree you will never use is also great advice. 

Where Dave Ramsey loses me is when he starts talking about paying your own way through school. 

Take a look at these numbers from The New Republic, 

In 1979, it took a student working at minimum wage ($2.90 per hour) 385.5 hours to pay off one year of the average college tuition.)(Today, it takes 2,229 hours working at the federal minimum wage ($7.25 per hour) to pay off one year of the average college tuition.

2,229 hours is 6 hours a day, 365 days a year. Good luck working that much and going to school full time. 

What to do instead

Do everything possible to take out a little in student loans as possible. Go to an in-state public school if possible. Work part-time or full-time while you go to school. 

However, if you do those things and still can’t pay your tuition, you may need to consider loans. The idea that people shouldn't be doctors unless they can pay every penny of Med School themselves is laughable. 

Final Thoughts

Dave Ramsey is well respected in the personal finance world (for good reason). However, he is not perfect. His ideas are proven to work consistently. But, they are often too rigid. 

You are an adult, be smart, and adjust the plan to meet your individual needs and situation. Don’t blindly accept a one size fits all solution to money. 

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Certified Personal Trainer | Certified ESL Teacher |I mostly write about all things Southern California, but I also cover national topics.

Los Angeles, CA
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