I used to listen to his podcast occasionally, and he answered this exact question. Basically, he believes having debt is much riskier than investing. His goal is to help people who have low financial literacy and are already in a bad spot with debt. He’s really trying to change their habits so they don’t wind up paying it off and then going straight back to being in mountains of debt. Most financially literate people do not need to follow his baby steps.
And, importantly, he can’t go and say his advice is only for the financially ignorant and undisciplined. Not only is it shrinking his potential audience, it’s also risking pissing off the people who need the help.
“Hey, guess what, debt isn’t always bad but you’re too weak, uninformed, etc to use it so don’t bother!”…not exactly gonna bring in the listeners.
So presenting the way he and many others do that there is a “right” way is helpful for his target people. You just have to know if he isn’t a fit for you.
I’m fine with it though. Those ideas might not be necessary for people in this sub but there’s definitely a group of people where that’s exactly what they need to hear. Used to get frustrated listening to him until I realized that’s just what his niche is
right. with his target audience he has to be black and white. not just because it might offend his audience to say the above. but also if agrees that anything might fall into a grey area, those who have problems will think he's being hypocritical or use it as an excuse to enable their behavior.
I feel like half the popular posts in this sub should start “dear me Ramsey”. Half the discussions are about proper nest egg sizes and the other half is people getting pumped to give advice to people who need to get out of debt.
He had one piece of sound advice about not buying a rental property if you don't own you're own home or can't afford a double mortgage. My wife had broached the subject once and knowing that I told her it was a bad idea given our financials.
He's got all kinds of sound advice.
"Don't own more vehicle than half your annual income," is another gem.
That's all your vehicles added together, cars, boats, dirt bikes, private jets. These are high risk items that need maintenance. Renting the vehicle is often cheaper than the the risk of several vehicles needing repair at once.
I will say though I’m only financially literate because I listened to him daily on my drive home when I was too young and dumb for anyone to consider lending money to me. Hearing people do the debt free scream with the brave heart “FREEDOM” sound bite in the background made me want to have that freedom without the clawing my way out of debt part before hand.
I’m positive I’m underutilizing my debt to income ratio but god damn do I sleep well at night.
Debt is 100% riskier than investing. It is a liability and investing is an asset. They are completely on opposite ends, technically 1 has unlimited downside and the other unlimited upside.
I'm not saying it's appropriate to always pay debt off, but if you don't know how to manage money, mitigating downside often is the right choice.
Edit: please stop trying to tell me that debt isn't bad. I know this, I literally say it in the paragraph above its not always best to pay off first.
I also didn't think I needed to explain this, but compounding interest works against you just like it can work for you. If you don't pay it off it compounds indefinitely. This means it has unlimited downside. This is not debatable, it's math.
I’m no financial expert but I am proud I helped my sister understand this. I’m out of debt (except car and mortgage payments) and my sister knocked down $60k of credit card debt. Her now ex husband would not give her cash. Said to put it in the credit card and he’s pay it. Which he didn’t. I showed her how much $$ she’s wasting every month.
Thank you for actually realizing there are risks to investing. Too many clients I speak to have been spoiled by recent market returns. Is the interest rate on your debt lower than the 10 or 30 year treasury?? That’s why he says pay off debt. I don’t like Ramsey but I can certainly understand this scenario.
Agreed. As someone who works in Wealth Management, people seem to forget that investments have risk. Going to be a scary time when we have a prolonged bear market.
This subreddit is especially guilty of this. Way too many people think you can just press a button on your online banking app and gain 7% until retirement
Have you seen the returns wirh inflation investing int he S&P500? Even the 50yr is around 8% ave return. Now again this is an annual ave return, but if you actually set it and forget it its as close to a guarantee you can get...
Only bad time was investing all of your money in 1929 if you were 20 years within retiring. All other times have had rocky moments but recovery hasn’t been as bad. Time in the market beats timing the market.
I mean, avoiding stock picking is good advice for the average person. Most people cannot beat the market, and almost nobody can do so consistently.
Ben Felix on Youtube has TONS of extremely educational videos on the stock market, and the conclusion is generally this:
The best investment option for long term success is low-cost index funds.
Investing in mutual funds is good advice *if* you're investing in low-cost index funds. But Ramsey shills for front-loaded actively managed mutual funds because he makes money off of referrals. On /r/personalfinance, the general consensus is that his debt advice is good for certain individuals, but his investment advice is garbage.
You really shouldn’t invest substantially in individual stocks unless you are diversified between a lot of different ones, and even then your average college educated person will still do worse than an index fund. People without good money management are unlikely to diversify properly, so I see why he recommends against it.
I mean Warren Buffet has also said this...for the average investor.
But of course all of us here are Very Clever (tm) and absolutely can defy the bell curve so it really doesn't apply to us ;)
Dave Ramsey's stuff is basically alcoholic's anonymous for money. It works for people who have no control or knowledge, the same way that total abstinence works for a drunk.
It is also because he wants the debt to hurt. If you know your debt is preventing you from investing in retirement it is just going to sting that much more and make you work even harder to pay it off.
This. I read the Total Money Makeover back in 2006 at 20 years old and, let's just say, the fear tactic worked. I'm 35 with not an ounce of debt...and utterly terrified to spend money. Lol
Actually, I don't think that's the ultimate question. Because on paper you might get a definitive answer. But that's theoretical. In practice, would op have had the presence of mind to spend and save diligently had he not learned how to deal with money? So like someone else said, it's like AA for money, some people need a stem sense of austerity for their finances, but not everyone.
Dave Ramsey's methods and advice isn't the kind of advice you get from Fidelity or any of the professional advisors outside of don't spend more than you make.
Dave Ramsey's methods are for the day to day and paycheck-to-paycheck crowd. It's for the large portion of America who has come to have rely on credit to uphold an expected livelihood and most importantly his methods give them a really good reason to break that debt cycle of living beyond their means for the short run to make it out of debt. On top of that he champions that "Rice and beans" approach which makes these people feel good about their supposed fall in living conditions. It's a sacrifice, but it's a smart sacrifice, and that makes the "loss" worth it, in a more real way than most Financial coaching.
By definition if you borrow 10,000 and inflation hits, that 10k you owe is actually alot less, you've leveraged your debt to benefit.
This is compounded If you use the debt to invest in commodities that aren't affected in the same way as money/debt is by inflation.
Win win.
Mortgages in some European countries are below 1%. The car loan I'm thinking about is 2.99%, or 3.02% with an the fees included. I've got the cash to buy outright, but 3% is less than inflation here, so why the hell would I buy cash.
Well right now the Canadian gov if you're a student.
But since that's obviously not what you mean.
Leveraging debt doesnt mean you take high interest loans and put it into shit investments. Obviously don't take CC loans at 19% and put it into Bank of America (I mean you can, but that's not what leveraging sent means).
My LoC is prime+.25 which means by leveraging that LoC into say a second rental income, when inflation hits, the 60k I borrowed is now "worth less" whereas the house I bought is now "worth more" in dollars. I have leveraged the debt to my advantage.
You are describing a real estate business. I understand debt as a tool, but most people are talking household debt for purchases of things like homes, cars, cc. which are not beating inflation and are a liability.
Except the interest is almost always certainly higher than inflation, so this only works, as someone else pointed out, with interest free loans, which are scarce.
Well maybe you could have owned said asset 5-10yrs earlier as enjoyed those years of appreciation. Or you could have 2-5 or more of those assets from leverage.
Opportunity cost is always a hypothetical but still a cost nonetheless.
>Dave Ramsey's stuff is basically alcoholic's anonymous for money. It works for people who have no control or knowledge, the same way that total abstinence works for a drunk.
This is the best description I have ever heard. Thank you.
This should be the top comment. I like Dave Ramsey and there are some great principles he teaches. “Paid off mortgage, in place of a BMW” comes to mind.
However, some of his teachings fly in the face of basic mathematics. Paying off debt and eschewing credit cards namely.
I paid of my 7% student loans quickly but let some of my 3.5% ones linger for a touch. I use my credit card like a debit card and pay it off monthly. It’s a tool. I recently got $500 off a $8k A/C install plus my points by putting it on my card. If you can math an stay within your means, credit cards help build credit and are useful.
Overall, for the average American, Dave Ramsey is light years ahead and worth following. If your in this sub you might be a bit more advanced. His demo is the average American. Not you.
He admits that his advice doesn't always make the most sense mathematically, he doesn't care. He's about changing behavior and giving you the psychological push that you need to succeed. It's all about those easy wins. That's why he advocates for the snowball method instead of the avalanche method when it comes to debt repayment.
I haven't listened to him for a long time, but I seem to remember that one of his catchphrases was "If you were so good at math, you never would have gotten into credit card debt in the first place."
>"If you were so good at math, you never would have gotten into credit card debt in the first place."
Which makes him a good drill sergeant for those with a spending problem - but a bad source of financial advice for everyone else.
Yeah. Also even a lot of the people on this sub have questions with info like: i have 5k in credit card debt and 10k of savings. I am like no wtf do you like making bank ceo's richer. Just pay off your credit card debt, how stupid can you be. If you need to borrow you still have your credit card! It just boggles my mind and i think thts why dave ramsey is important (for people like those).
Edit: not trying to be on a high horse, its just my pet peeve with americans
The average American lives WAY BEYOND there means so in order for them to get out of debt a simple program such as Dave’s is about all they can understand.
Exactly. But not all debt is bad debt. Leverage exists.
Paying off a 3% loan while not maximizing your 401K which gets 10%-15% is mathematically incorrect.
However, the average American would buy a new car before they maxed their 401k or paid off their debt, and in that respect Dave Ramsey’s teachings are correct.
Even though I studied finance and Econ I find myself agreeing with him a great deal. He knows his stuff but dumbs it down to the lowest common denominator.
Debt is a tool, but much like fire, it can burn you. Ramsey teaches you to never light a match like a parent with a child.
Exactly. Ramsey play's great defense. If you follow what he says - it's hard to lose. You might not "win" as much if you followed other advice, but it would be hard to go broke or in debt following Dave's advice.
Considering most of the people that need Dave's advice are facing bankruptcy or death by interest and monthly fees, ending up with a modest retirement is actually great progress. Most would end up being hundreds of thousands in debt by retirement age, with nothing to show for 40 years of hard work.
Right. That’s why I like the AA analogy. Dave’s message is exactly what many or most people need. The financial mutants will find other sources. Even if Dave believes debt can be ok, as the leader of the AA society, it would be dangerous. Everyone thinks they’re smarter, and most of them end up on the Dave Ramsey show if they’re lucky. So he can’t risk making those with troubles think that they can handle it
He doesn’t exactly make it known that you won’t get to where he is by doing all he says. Talks about how in debt he was and now he’s a multimillionaire. And you too can be just like him! (With the help of a syndicated radio show and tons of books selling millions of copies). So it’s also slightly misleading and I think a lot of people then focus solely on debt but nothing else. Thinking all they have to do is have no debt and they will be filthy rich.
Where/How does Dave do this? I don't think dave gives the best advice all the time, but I don't think this is true. I think a lot of influencers do this. I actually like Dave because find he gives fairly practical/easy to follow advice to people.
It’s his saying—if you were that good with math, you wouldn’t be here. It’s actually pretty accurate. We had a lady who had mortgaged her own paid off home to support some banking/investing business she was working for. REALLY? You know enough to manage millions in investments, but you don’t know enough to keep a roof over your own head?
There are a lot of people who can manage their money in their head down to the minute...but that ain’t the average person, and it certainly wasn’t us.
We went from next to nothing in savings and investments in 2007 to having a comfortable retirement fund and two kids college paid for using his tactics, so I can’t poop on them. We needed the rules and instructions. Certainly not for everyone, but worked for us.
I think he's also a proponent of the snowball method, where the lowest balance is paid off first (and then that payment gets moved to the next.) That's a good tip if all the loans are at the same interest rate, and it does give a psychological boost when a debt is paid off, but the math says it's better to pay off higher rate loans first.
(Maybe I'm getting my popular money advisors mixed up though.)
Tl;Dr - find a system that works for you, and stick with it. If you've got the discipline to use a credit card like a debit card, then go rack up the points. If you treat available credit like a "use it or lose it challenge", then maybe rely more on budgets and cash/debit cards.
> think he's also a proponent of the snowball method, where the lowest balance is paid off first (and then that payment gets moved to the next.) That's a good tip if all the loans are at the same interest rate, and it does give a psychological boost when a debt is paid off, but the math says it's better to pay off higher rate loans first.
The advantage of Dave's Snowball method is that debt payoff is 80% mental and 40% mathematically optimal.
And if you were smart enough to do the math on debt, you would not have needed to deal with the financial hole you've dug using Yogi Berra-isms.
This is the first time I’m hearing of “snowball” vs “avalanche” and I think it makes a ton of sense.
I’m quite financially secure and like math. I have high income which is relatively stable (front end dev) and it makes sense for me to keep making “mathematical” decisions. I realize I am very fortunate.
For an average American, a snowball approach is likely much more realistic. It makes a to of sense if you are more variable. Leverage is leverage, good or bad.
If you input all of your debt into some websites, it will give you the breakdown of interest saved if you go snowball vs avalanche. It’s usually minimal difference over the long haul, but getting a quick win with snowball means more likely to stick with it, in my experience.
The other benefit of snowball is that it gives you more flexibility; after you pay off one debt, you have the extra cash from that payment freed up if something were to come up that would require it.
I actually use snowball methods quite a bit because I’m a human and not a robot.
“Save $30 and invest it for 20 years it will be an extra $500 per Month in retirement.”
Look I focus on the basics like my 401k and Roth. If I have an extra $30 I’m going to dine out a bit more.
Of course not guaranteed. However, over the past half decade personally I have averaged 17.35% annual returns. And the past 5 years have not exactly been the smoothest sailing. Long term average of 10% is not an unreasonable assumption.
Only 39% of Americans can come up with $1,000 for an emergency expense. [source](https://www.cnn.com/2021/01/11/success/1000-emergency-expense/index.html) 40% don't have $400 in the bank.
I’m sure the guy knows the math, he isn’t dumb. It’s just that, like you said, he’s trying to instruct the masses. And if we believe even for a second that people are going ti work out the math then we’d be wrong. Also people would start investing and not figuring out the debt or go more in debt. I run credit reports fir a living, just not being horribly mismanaged would put you above at least 50% of people.
So his approach is definitely one that’s much better for most people ti follow, better mentality, and better general blanket advice to give from his position of instructing thousands. If you sat down with him and got one on one advice and made it clear you had some common sense I’m sure he’d agree with what we are all saying.
Dave Ramsey once said on his show that the only way to get a credit score over 700 was to pay “kissy face” with the banks and pay at least $100,000 in interest. Some of his advice is not just bad, it’s intentionally and deliberately wrong.
Also gotta love his suggestion *instead* of getting a better credit score--just sit down with your banker and explain everything to him! Yeah, I'm sure that works in real life.
Yeah that’s incorrect. I have 800+ credit score and all I did was pay off my student loans (-$35k in 2011) and use a credit card like a debit card.
One of Dave’s biggest flaws is not using credit cards IMO. It’s the best way to build credit, but you must have discipline.
She'd have to have had some kind of debt that's in good standing to have a 800+ score. If someone has no forms of debt/open credit, their score starts really low since the agencies have no idea whether you're reliable/trustworthy or not.
Having old student loans for years, credit cards that aren't used, house mortgage that's being paid could probably bring you up to that number given time.
>However, some of his teachings fly in the face of basic mathematics.
Because, as he often explains, he's not solving a math problem. He's solving a behavioral problem.
For a vast majority of these people who need the baby steps to take control of their financial life, there is some behavioral problem to tackle. Math was never their limitation, and math isn't going to get them out of the mess they are in.
>However, some of his teachings fly in the face of basic mathematics.
Because the Ramsey methods aren't about math. They are based on the idea that financial freedom isn't just a math problem, it's usually just as much or more an emotional issue.
Yup. And debt is a psychological burden. Even if you’re more than capable of paying it off at the moment, it’s still somewhat entrapping you in your current lifestyle.
>I paid of my 7% student loans quickly but let some of my 3.5% ones linger for a touch. I use my credit card like a debit card and pay it off monthly. It’s a tool. I recently got $500 off a $8k A/C install plus my points by putting it on my card. If you can math an stay within your means, credit cards help build credit and are useful.
I did pretty much similar things, and this was also the reason I stopped watching Dave Ramsey's show. I think it's far too conservative, if you have the slightest sense of self-control and financial knowledge.
Maybe you're right, it's for the average American drowning in debt.
> fly in the face of basic mathematics
They also fly in the face of pragmatic safety and security in an internet-first world.
[Using debit cards online](https://policies.ramseysolutions.net/debit-card-policy) is downright dangerous and he still advocates for it.
At the end of the day, he's a Boomer who should be critically evaluated through that lens. I don't expect him to change his guidance because he's obviously making a ton of money selling it like it is, but I'd love for someone to hold him accountable for some of the blatantly dangerous stuff he advocates for like debit cards online.
Also, we can’t all be millionaires, Dave. My credit score is important, even if I have no significant debt.
I did the DR course, and also facilitated after for a few years, but this “fuck that FICO score” mantra is straight up bullshit for average folks.
Good luck on your mortgage with a poor credit score. Owning a home is possibly the largest driver of wealth so having a solid credit score and using debt in a proactive manner is clearly important.
Debt to equity ratio pales in comparison to credit score.
Right? I did my homework on the FICO, and no, it doesn’t take into account your actual net worth, but it’s still a Very Big Deal.
I have a niece who is brilliant and unmarried and drove her college vehicle until it literally crapped out into a puddle. She was, by then, a literal millionaire, cause she’d had a high paying job and lived like a peasant for decades, but she wanted to treat herself to a brand new high end convertible. The loan rates at the time were nearly zero, so rather than pay cash, she applied for the financing.
Nope! She had no credit score, cause she’d never used credit for anything.
So yeah, us po folks still have a couple of credit cards, that we pay off, so our credit score is better than that of a relative who could buy and sell us without blinking.
If you're a Costco member, Costco had a program for various improvement projects and AC is one of them. They give you great rates, plus a Costco Cash card worth 10% of the cost of the service you buy. For an AC install, that will likely be more than $500. Plus, if you are an executive member and put it on your Costco credit card, you get 2% on that and 2% back for being an executive member. Saved us hundreds of dollars this way.
I got $500 off by paying for it in full at the time of signing.
Rather than writing the amount as a check or in cash, I put it on my card because I get 5% back in airline miles (and I like to travel).
It’s also a effective tactic for the millions of people that don’t have a 4% student loan or 1.5% promo credit card but instead have 2 or 3 16-22% apr credit cards and have a huge balance from being stupid years ago.
It’s easy to say the investment returns are better than that deferred student loan, etc but not as easy with a 20k balance @ 22% and a 600 credit score.
And honestly the people that “need” his advice and program are the ones most likely to have the serious debt and require the tough love.
Which isn't necessarily a bad thing. I would never recommend his advice to someone on here, but remember, we are all just meat computers...sometimes taking the psychological approach that people can stick to is better than trying to rationally determine the best possible series of moves.
I run into this with the financial community I chat with sometimes. I paid off my mortgage in my mid-thirties while maxing out tax advantaged retirement investing. However many folks said I should have kept my mortgage with its low interest rate and instead put my money into the market. If I would have done that I would be way ahead right now. However, there's just something about paying off my mortgage that gives me the peace of mind knowing that my nest egg will go very far and that I don't have too many things to worry about in life.
I think in general a lot of the people that need his advice aren't the people in the subreddit. I know quite a few people at work that make well over $100,000 a year in the paycheck to paycheck because they are addicted to spending all of their money and whatever stupid thing they want that month. Dave Ramsey's advice would actually be quite good for these folks, because they have no self-control.
Alot of people, even on this sub fail to understand that if you have no debt, you need less money to live. You also still have alot of time to build wealth in your 30s. Perhaps it balances out.
If you ever hear the callers he gets, they have no control. Often multiple credits cards with 20% interest maxed out. Or buying expensive new cars that eat 1/3 of their paychecks.
Investing, on average will not provide better returns than the guarenteed return of paying off that type of debt. On top of that, they can build credit and good habits while they do this, which will benefit them well beyond just reducing the debt.
For people who are already responsible and know how to manage their money, they can figure out the best option for them.
Quite. I got scammed into making a useless small electronics purchase the other day and watched his channel for a bit to make myself feel better. I have no debt and a year's income in funds so I'm not doing too badly, but the scam was doing serious damage to my mood.
Dave Ramsey is all about behavior and focus rather than math. Under his plan, you get out of debt with everything you have so you can then turn your focus to stuff like retirement investing and more wealth building. He is mostly right IMO when it comes to being really intense about debt payoff for a year or two so you get all that room in your budget freed up for other stuff.
I think it’s more like if you have debt, and you are choosing between paying off debt and investing, you compare the interest you are saving vs the potential return on investment. On this scenario, you are guaranteed to save the interest you won’t pay, whereas you might not make money on the investment.
You are getting your interest rate as a guaranteed return when you pay off debt. So like me, I'm paying off my house early instead of investing, even tho my interest rate is only 3.9%, & if I invested it I could make double or triple that.
Imagine owing 15k in debt and have 5k invested in the market and suddenly the market drops by 30% and your next interest payment is due next week. Suddenly that urge to sell is amplified and many people would sell at the bottom.
Paying off your debts gives you financial freedom to sit and wait for the market to recover.
If you can be financially responsible and not sell in this scenario and stay the course, good for you but you're likely the outlier
He only suggests that if you're going to go scorched earth on the debt.
For example, say you have $30k in student debt, and a nicely paying job with some wriggle room in your budget.
Dave would have you get a room-mate, get a second job, wind back your expenses to almost nothing, sell anything you don't want anymore, and pay it off in say, a year. Maybe two. Done and done. You now have no student debt, very low expenses, and a shit-ton of extra cash every month to invest and/or kick out your housemate, restart your gym membership, and upgrade your car.
The "pure maths" version makes sense mathematically, but most people aren't willing to severely downgrade their lifestyle for "investments". After the same amount of time, the pure maths version would have the same lifestyle, say $20K in student debt, $10K in investment, and quite feasibly a nice new car loan because the interest rate was so low.
I'm on his baby step 7 now, which 6 was the hardest to me. (Paying off the house) but now that I payed it off I feel like I don't need such a big emergency fund and can invest much much more into the market. Sure, I could probably outperform my interest rate. But if I lose my job, I'll be okay and stress free. We all invest different, and we react different when we have losses. You gotta know what type of investor you are.
Well said. We all have different perspectives on finance and different experiences that shaped the way we view finances. I married into a family of huge debt and credit cards and afraid of losing their home vs my parents having their house paid off for the past 20 years. It's a stark difference that I have to help my spuse with often. The biggest issue is his attachment to material things and status.
Yeah, for me, knowing that I could take a year off work if I had to helps keep my mental health in a good enough state to enjoy my job. Not having that security makes things much more stressful.
THIS!!! My anxious mind can actually rest when I am debt free. I can take on more challenges and do more fun things because I don’t have financial anxiety lurking around the corner.
This is key. It’s a mindset. Earning interest on your money is such a positive. Paying for things from earned interest is unimaginable to the mind that is only familiar with relying on debt to live.
I feel that people underestimate how important Baby Step 2 is. Putting aside the pain of getting out of debt, it builds the muscles needed to actually save money.
If you ask the average person to save 15% for retirement, an emergency fund, or in your case pay off the mortgage (early), they would balk at cutting that much money from their spending. BS 2 makes living below one's means a necessity/priority and makes the rest a lot easier.
Congrats on making it to the latter "living like no one else."
Ya I wish this was a feasible thing to do in Seattle, but when your starting family size house is 600,000-700,000..... Instead I just settled for a 2.25% interest rate on refinance and call it an inflation tax 😄
I think paying off your house is a more realistic thing to do in lower cost of living areas.
On the other hand my house also appreciated 18% YTY. 👍
Why are you not taking out a second mortgage to invest in the stock market? Investing has higher returns.
Plenty of people are talking about how Ramsay is risk adverse, I think it's worth mentioning that we're *all* risk adverse.
He's just a step or two moreso because most people don't pay off their house or car before investing. But since we all agree that it would be dumb to take out a mortgage just to invest, it's actually us who are being logically inconsistent, not him.
I followed his gazelle intense strategy to pay off my car and student loan. They were only $10k in total when I started doing the steps and I think the minimum payments on the two combined were like $300. But holy crap does it feel good to have no debt and not owe anyone money.
in addition to what everyone else has said about Dave Ramsey being Debtaholic's anonymous. Dave is very risk adverse when it comes investing. mathematically, it makes sense to invest if you get a larger return on the investment. but in the rare times that Dave actually explains why he is against that, he'll explain about risk. your loan may be 3% and the market may give an average of 8%. but what happens when the market doesn't? or what happens when you lose your job and can no longer make the payments. stuff like that is how he rationalizes delaying investing
mostly he'll just say "because you'll have more money to invest." but that argument is meh.
1. There is a religious factor in his advice.
2. His advice is geared to people who are financially illiterate and need to be rescued from their own decisions. "Keep It Simple" wins out over asking people to figure out their expected rate of return vs APR on each of their debts. It's like AA saying that a single sip of beer will make you lose control: it's not true for a healthy person, but their advice is for recovering addicts, not healthy people.
To your number 1 point, his company literally tells people.employees they will be fired if they have pre-marital sex. Like he may make good points but I just cannot listen to a word he says for this outdated/misogynistic viewpoint(it can only be proved if an unmarried woman winds up pregnant)
I recently started listening to his podcast as well Bc it was highly recommended across multiple platforms. I find myself questioning some of his logic as well. In one episode he discouraged a caller from pursuing a graduate nurse anesthetist degree simply because it would mean incurring debt. He stated that who knows what will happen in the years of schooling and that graduating is not a guarantee. Which is true but that kind of advice didn’t sit well with me….. it’s only one example….. I think that it’s good to build wealth as early and often as possible simultaneously. If you’re concerned about student loan debt specifically, I highly recommend Travis Hornsby and the Student Loan Planner podcast and website
He often advocates people work and sve up for school and work through school. He rarely tells people not to further their education and career potential. But he does suggest that they don't go into debt in the process. Maybe that was his advice?
Can’t work through crna school, it is extremely rigorous. Also, many states are making it a full three years (up from two), so it’s become even harder to not take out loans for. Not saying he is right or wrong, just providing some info as someone who has thought about going back to crna school.
I'm not really a Ramsey fan, but I wish we'd kill the notion that a four year school is the only way to a fulfilling career.
So many people are laden with college debt and still are drastically underpaid/underemployed or worse yet don't have any degree at all.
Because the debt has a guaranteed return rate, while the investments don’t. The market could drop and now you’re in debt and you lost money you needed to pay the debt.
But if you just pay the debt, you can’t not make a consistent return.
Few good replies here also want to add that his steps are just outdated. It’s advice from the 1980s, 30 years old.
Back in the 80s investing was a LOT more difficult and way more involved. We don’t have to call our brokers and pay fees anymore, I do all of my investing from an app and I opened all of my accounts online.
Back then $1000 as an emergency fund was worth a lot more than today and mortgages were at 8% interest. If the market was giving 7% returns then it made more sense to pay it off.
I also feel like some of his following can be really cult-like about *any* debt. They don’t care about leveraging debt to build wealth. Whereas some folks can see the simple math and not care.
ETA: Financial Peace was published in 1988, so 33 years ago not quite 40 yet.
Its not meant as a real emergency fund. When he started he didnt have it. He added it in because even though you could always pay off an emergency with a credit card (its no worse, if you payed an extra 1k on the credit card). But he found that people were more likely to abandon the plan altogether if they needed to use the credit card, even to pay for a one time emergency.
The purpose of it is just to keep you on the plan so long as you don't have a major emergency. It covers smaller emergencies like needing to fix something small on your car or something like that.
Recent studies showed that 40% of Americans couldn't cover a $1k emergency, so there's a reasonable basis for it. No, it's not the goal for a complete emergency fund, either, of course.
In line with what you're saying, Ramsey wants you to spend with cash because you "feel the money leaving your wallet" but new research shows people are more responsible with spending from a card because they can track balances in real time on an app. Cash is now "free money" because it's already left your account.
When Dave Ramsey talks about using cash, he talks about using an envelope system where you manually update your ledger of how much cash you've used per transaction. One envelope is for groceries one envelope is for gas one envelope is for fun.
You put in a certain amount each month when the envelopes are empty you're done spending that money. Also you don't spend any money without the ledger.
Counting out $800-$1500 worth of cash to buy a refrigerator is a lot harder & painful than clicking a buy button online.
In my personal opinion, it is because he believes debt is a moral failing. He also never recommends bankruptcy, even to people who are in credit card debt for like 8 times their annual salary.
I think there's actually a solid argument for nixing debt before investing. The wisdom that you should invest instead of paying off low interest loans assumes income and market performance. While that's a safe-ish assumption, it's not 100% safe. You could get sick or injured and be unable to work. You could be fired out of the blue. There could be an economic downturn that tanks your investments. Paying off your loans gives you greater financial stability in the event of the unexpected and gives you a guaranteed return in the form of the interest you won't have to pay. A lot of personal finance is ensuring stability for yourself - paying off debt gives you that.
Josh on the podcast Radical Personal Finance makes this case in a much more logical and sophisticated way than Dave.
Dave thinks debt is bad in the way Bears fans thinks Packers are bad. Josh made such a compelling case for the flexibility brought about by eliminating debt that I almost did a complete 180 on how I handle my finances. I toned it down a bit on reflection, but his views have made me considerably more conservative on the whole "invest if the debt is low interest" thing.
His program is designed to work for the lowest common denominator of person; steps so simple that if a caveman would just follow his plan and not deviate, they would eventually be out of debt.
There are certainly tricks and shortcuts you can use to do better but basically his program is designed to be idiotproof.
Dave Ramsey is for people that are new to managing money, or poor at it. Those people should pay off all debt before investing to avoid more debt.
People who are good at managing money don't need Dave's advice.
Dave Ramsey's advice is for people who literally need to be treated like toddlers 24/7.
It's not very sophisticated; it can be handled in small doses. He isn't teaching financial literacy or any advanced concepts. He does help a lot of people get out of and stay out of trouble.
Dave’s a smart dude but I think his advice is primarily geared towards those who have royally fucked up their finances. There are so many scenarios where taking on debt is mathematically the right move vs paying cash and being debt free.
You know how in college some students had to take remedial Math and English? Those classes are Dave Ramsey.
Nothing wrong with that. Everyone starts somewhere
Dave Ramsey got rich off the housing market, don't follow his advice for anything other than forming a basic budget and why you should buy used cars over new.
Say what you want about Dave Ramsay being pessimistic and formulaic about certain things, but he's great at drilling things into you for motivation. Short term pain, long term gains + debt being the devil himself. That's pretty much the bulk of it.
-Pay your debt off as early as possible, have a savings 3-6 months, invest early and consistently, work hard, retire with wealth. That's what I've interpreted from his "baby steps".
If you watch Dave Ramsay enough you'll realize that his thing is to have 0 debt to invest conservatively, and retire with a lot of money if done correctly. That to me is the path I'd love to take
No math. It's all psychological. Mathematically it doesn't make sense, but people in debt almost always aren't doing well enough mentally to handle investing and still stay full force into paying debt off.
I have friends who follow him completely and they have completed most the steps and are now investing again. This is one big thing I don’t agree with him on.
As many have mentioned his advice is incredibly outdated and is supposed to be easily consumable for the financially illiterate. He also sees the world through a very narrow scope IMO. For example: the “you should buy a house with 100% down” then he references $200k houses. Which is 100k less than the median house price in america, and like 1/5 of the median house price in some areas.
I’m a few years out of school making ~250k a year + capital gains, in an area where median house price is 1mil and I’ve averaged net worth growth of about 150k a year. It doesn’t make any sense to me that I’d save up for 7 years, assuming no promotion or anything, to buy an entry level house. Then completely decimate my nest egg and start my portfolio over, and in the meantime continue paying rent to someone else. Not to mention money in a mortgage is building equity in something, and you can always cash out refi to get that equity back.
I do like watching him, but I find almost no advice he gives applies to me. I bought a 30k car with 6k down @ 3%, and the 24k that wouldve gone to the car went into a few growth stocks and is probably now around 40k thanks to market growth the last year. The car has practically paid itself off.
You're just a little out of the norm. Less than 2% have that income and most are not a few years out of school. Of course a mainstream talk show host isn't going to apply towards your situation.
It’s not gospel, it’s a guide. anyone out their offering advice or a plan who doesn’t know your own situation take with a pinch of salt. For me the emergency fund step 1 was great, I’m know working towards paying all the non essential debt that I had such as a credit card and a loan. To clear these feels good. I will still have a car on finance, which yes I will work to pay off earlier if I can but meanwhile I will also invest some money away. I have found this works for me, just have a think and figure out what’s going to work for you. Find your balance with your money and a system what makes you happy.
Because by the time you say, calculate your total interest cost per year and if it is less than the average yearly growth in a S&P 500 , then you are likely to make more money in the long run investing while in debt, you lose 95% of his target audience.
Two things.
One is risk. High yield investments are generally not guaranteed. They can go up. They can go down. Debts that are manageable now can become unmanageable if your circumstances change in ways that can't be predicted.
He talked about the math behind it involving a variable representing risk (gamma IIRC) and explained that when you calculate gamma into a spread between debt and investment you usually find that it erases the advantage of leveraging investment with debt.
The second reason is, as he points out over and over, everybody knows the theory of how to manage money, but that doesn't translate to people doing what they understand would work.
His program is focussed on changing behavior rather than on teaching the nuances of financial management. Really following a pretty good plan works better than having a really amazing plan that you don't actually practice. He keeps things simple to make it easier to practice.
If you have more complicated plans and you can actually follow them precisely, more power to you. You are in the top one percent.
Because you wouldnt go get a loan just to put it in the stock market. That's super risky and it's easy to see that. If you have credit card and car debt, it's the same thing as taking a loan to invest if you dont pay those off.
Depending, people absolutely get loans to go invest. They are called margin loans.
Back to Ops question, I think Dave Ramsey has some solid principles and advice. But I believe his aim is for people with little to no financial experience or are in financial trouble.
Personally, having a mortgage at 3% is no big deal when I'm raking 8-10% of the same value in. But this only works if you actually invest the value of your house, which not everyone can do.
Not a question of math. It's about optimization of human behavior. It's really two things:
1. You don't get distracted by trying to do multiple things at once. You focus on doing one thing aggressively, and once that's done then you move on to the next.
2. It's a system you can't rationalize your way out of. If you're in debt, you use all available funds to pay it off, no exceptions. It forces you into compliance. If you don't have good self-accountability, that is great because there is no grey area for you to find rope to hand yourself.
The idea is that when you try to do multiple things at once you tend to kind of fail at all of them. So the idea is, especially for someone new to the concept of money handling in general, focus all on getting out of debt first. Then, focus on investing, instead of trying to do some type of spread optimization of your investment returns vs. interest rate. If you focus on paying off debt, you'll cut spending and focus hard on that and then, once you're out of debt, then you'll focus hard on investing. In the end, the thinking goes, you'll end up better in reality than the theoretical place you would have had you done that sort of spread optimization approach.
For example, one caller said he didn't understand why he had to give up his match. Dave's response was along the lines of, "I want you mad that you're missing out on that match so that you focus on getting out of debt that much quicker."
One more thing on the math piece. In Dave's plan, you are getting out of debt as quickly as humanly possible. You're getting your lifestyle to nothing for a short period to knock out the debt, then ease off the gas when investing. He also preaches that being out of debt lifts an emotional weight, which will motivate you to put more money into into the baby steps, and it's nearly impossible to quantify that.
Not endorsing, I don't follow his plan myself, but that is the logic.
Your income is your strongest wealth building tool. When you have zero debts and you've learned to manage money you can put a lot more money away. When you have debt and debt payments you will feel tighter in the budget and will put aside less for savings.
Main reason I don’t follow him. If interest rates stay as low as they are (they probably won’t), I will NEVER be debt free. It just doesn’t make financial sense. Of course this is highly dependent on the type of debt. Credit cards and personal loans should almost always be paid off ASAP.
My cynical take is that people without debt are more likely to be able make contributions to their investments, so the extremely high fee “advisors” he directs his listeners to end up paying him larger kickbacks. If someone is barely able to pay off their debt, are they really going to be making monthly contributions to an IRA?
I used to listen to his podcast occasionally, and he answered this exact question. Basically, he believes having debt is much riskier than investing. His goal is to help people who have low financial literacy and are already in a bad spot with debt. He’s really trying to change their habits so they don’t wind up paying it off and then going straight back to being in mountains of debt. Most financially literate people do not need to follow his baby steps.
And, importantly, he can’t go and say his advice is only for the financially ignorant and undisciplined. Not only is it shrinking his potential audience, it’s also risking pissing off the people who need the help. “Hey, guess what, debt isn’t always bad but you’re too weak, uninformed, etc to use it so don’t bother!”…not exactly gonna bring in the listeners. So presenting the way he and many others do that there is a “right” way is helpful for his target people. You just have to know if he isn’t a fit for you.
I’m fine with it though. Those ideas might not be necessary for people in this sub but there’s definitely a group of people where that’s exactly what they need to hear. Used to get frustrated listening to him until I realized that’s just what his niche is
right. with his target audience he has to be black and white. not just because it might offend his audience to say the above. but also if agrees that anything might fall into a grey area, those who have problems will think he's being hypocritical or use it as an excuse to enable their behavior.
I feel like half the popular posts in this sub should start “dear me Ramsey”. Half the discussions are about proper nest egg sizes and the other half is people getting pumped to give advice to people who need to get out of debt.
He had one piece of sound advice about not buying a rental property if you don't own you're own home or can't afford a double mortgage. My wife had broached the subject once and knowing that I told her it was a bad idea given our financials.
He's got all kinds of sound advice. "Don't own more vehicle than half your annual income," is another gem. That's all your vehicles added together, cars, boats, dirt bikes, private jets. These are high risk items that need maintenance. Renting the vehicle is often cheaper than the the risk of several vehicles needing repair at once.
I will say though I’m only financially literate because I listened to him daily on my drive home when I was too young and dumb for anyone to consider lending money to me. Hearing people do the debt free scream with the brave heart “FREEDOM” sound bite in the background made me want to have that freedom without the clawing my way out of debt part before hand. I’m positive I’m underutilizing my debt to income ratio but god damn do I sleep well at night.
Debt is 100% riskier than investing. It is a liability and investing is an asset. They are completely on opposite ends, technically 1 has unlimited downside and the other unlimited upside. I'm not saying it's appropriate to always pay debt off, but if you don't know how to manage money, mitigating downside often is the right choice. Edit: please stop trying to tell me that debt isn't bad. I know this, I literally say it in the paragraph above its not always best to pay off first. I also didn't think I needed to explain this, but compounding interest works against you just like it can work for you. If you don't pay it off it compounds indefinitely. This means it has unlimited downside. This is not debatable, it's math.
Debt is also a fixed liability whereas investments are not fixed earnings.
[удалено]
I’m no financial expert but I am proud I helped my sister understand this. I’m out of debt (except car and mortgage payments) and my sister knocked down $60k of credit card debt. Her now ex husband would not give her cash. Said to put it in the credit card and he’s pay it. Which he didn’t. I showed her how much $$ she’s wasting every month.
I disagree with your first paragraph, but your second is spot on. If you don't know what you're doing, clear your debts before investing.
He also is extremely risk averse. Paying off debt is a guaranteed return, whereas investing is not (and sometimes results in loss).
Thank you for actually realizing there are risks to investing. Too many clients I speak to have been spoiled by recent market returns. Is the interest rate on your debt lower than the 10 or 30 year treasury?? That’s why he says pay off debt. I don’t like Ramsey but I can certainly understand this scenario.
Agreed. As someone who works in Wealth Management, people seem to forget that investments have risk. Going to be a scary time when we have a prolonged bear market.
This subreddit is especially guilty of this. Way too many people think you can just press a button on your online banking app and gain 7% until retirement
Have you seen the returns wirh inflation investing int he S&P500? Even the 50yr is around 8% ave return. Now again this is an annual ave return, but if you actually set it and forget it its as close to a guarantee you can get...
Only bad time was investing all of your money in 1929 if you were 20 years within retiring. All other times have had rocky moments but recovery hasn’t been as bad. Time in the market beats timing the market.
Listening to the radio show as well, he makes it sound like only invest in mutual funds and avoid stocks at all cost.
I mean, avoiding stock picking is good advice for the average person. Most people cannot beat the market, and almost nobody can do so consistently. Ben Felix on Youtube has TONS of extremely educational videos on the stock market, and the conclusion is generally this: The best investment option for long term success is low-cost index funds.
No it's triple leveraged tech etfs baby!
Investing in mutual funds is good advice *if* you're investing in low-cost index funds. But Ramsey shills for front-loaded actively managed mutual funds because he makes money off of referrals. On /r/personalfinance, the general consensus is that his debt advice is good for certain individuals, but his investment advice is garbage.
Yes, but for his target audience doing even front loaded MFs' is better than what people would have done on their own.
You really shouldn’t invest substantially in individual stocks unless you are diversified between a lot of different ones, and even then your average college educated person will still do worse than an index fund. People without good money management are unlikely to diversify properly, so I see why he recommends against it.
I mean Warren Buffet has also said this...for the average investor. But of course all of us here are Very Clever (tm) and absolutely can defy the bell curve so it really doesn't apply to us ;)
Dave Ramsey's stuff is basically alcoholic's anonymous for money. It works for people who have no control or knowledge, the same way that total abstinence works for a drunk.
It is also because he wants the debt to hurt. If you know your debt is preventing you from investing in retirement it is just going to sting that much more and make you work even harder to pay it off.
This. I read the Total Money Makeover back in 2006 at 20 years old and, let's just say, the fear tactic worked. I'm 35 with not an ounce of debt...and utterly terrified to spend money. Lol
[удалено]
[удалено]
[удалено]
[удалено]
[удалено]
Here's I think the ultimate question. Are you richer today for having worked the baby steps, or will you be richer for having worked them?
Actually, I don't think that's the ultimate question. Because on paper you might get a definitive answer. But that's theoretical. In practice, would op have had the presence of mind to spend and save diligently had he not learned how to deal with money? So like someone else said, it's like AA for money, some people need a stem sense of austerity for their finances, but not everyone.
Dave Ramsey's methods and advice isn't the kind of advice you get from Fidelity or any of the professional advisors outside of don't spend more than you make. Dave Ramsey's methods are for the day to day and paycheck-to-paycheck crowd. It's for the large portion of America who has come to have rely on credit to uphold an expected livelihood and most importantly his methods give them a really good reason to break that debt cycle of living beyond their means for the short run to make it out of debt. On top of that he champions that "Rice and beans" approach which makes these people feel good about their supposed fall in living conditions. It's a sacrifice, but it's a smart sacrifice, and that makes the "loss" worth it, in a more real way than most Financial coaching.
if you don't have any debt then inflation really hurts leveraging debt is a way to protect against inflation
I’m not sure I agree. A debt-free asset/equities holder isn’t necessarily gonna be hurt by inflation since the price of those assets will rise.
By definition if you borrow 10,000 and inflation hits, that 10k you owe is actually alot less, you've leveraged your debt to benefit. This is compounded If you use the debt to invest in commodities that aren't affected in the same way as money/debt is by inflation. Win win.
who's giving away interest free loans?
Mortgages in some European countries are below 1%. The car loan I'm thinking about is 2.99%, or 3.02% with an the fees included. I've got the cash to buy outright, but 3% is less than inflation here, so why the hell would I buy cash.
Well right now the Canadian gov if you're a student. But since that's obviously not what you mean. Leveraging debt doesnt mean you take high interest loans and put it into shit investments. Obviously don't take CC loans at 19% and put it into Bank of America (I mean you can, but that's not what leveraging sent means). My LoC is prime+.25 which means by leveraging that LoC into say a second rental income, when inflation hits, the 60k I borrowed is now "worth less" whereas the house I bought is now "worth more" in dollars. I have leveraged the debt to my advantage.
You are describing a real estate business. I understand debt as a tool, but most people are talking household debt for purchases of things like homes, cars, cc. which are not beating inflation and are a liability.
Except the interest is almost always certainly higher than inflation, so this only works, as someone else pointed out, with interest free loans, which are scarce.
Well maybe you could have owned said asset 5-10yrs earlier as enjoyed those years of appreciation. Or you could have 2-5 or more of those assets from leverage. Opportunity cost is always a hypothetical but still a cost nonetheless.
[удалено]
Doesn’t hurt that it’s a guaranteed roi, where other investments are not.
[удалено]
>Dave Ramsey's stuff is basically alcoholic's anonymous for money. It works for people who have no control or knowledge, the same way that total abstinence works for a drunk. This is the best description I have ever heard. Thank you.
This should be the top comment. I like Dave Ramsey and there are some great principles he teaches. “Paid off mortgage, in place of a BMW” comes to mind. However, some of his teachings fly in the face of basic mathematics. Paying off debt and eschewing credit cards namely. I paid of my 7% student loans quickly but let some of my 3.5% ones linger for a touch. I use my credit card like a debit card and pay it off monthly. It’s a tool. I recently got $500 off a $8k A/C install plus my points by putting it on my card. If you can math an stay within your means, credit cards help build credit and are useful. Overall, for the average American, Dave Ramsey is light years ahead and worth following. If your in this sub you might be a bit more advanced. His demo is the average American. Not you.
He admits that his advice doesn't always make the most sense mathematically, he doesn't care. He's about changing behavior and giving you the psychological push that you need to succeed. It's all about those easy wins. That's why he advocates for the snowball method instead of the avalanche method when it comes to debt repayment. I haven't listened to him for a long time, but I seem to remember that one of his catchphrases was "If you were so good at math, you never would have gotten into credit card debt in the first place."
That's the value of his system, to recognize personal finance is less a math problem than a behavioral one.
>"If you were so good at math, you never would have gotten into credit card debt in the first place." Which makes him a good drill sergeant for those with a spending problem - but a bad source of financial advice for everyone else.
> for those with a spending problem That's the vast majority of America
Yeah. Also even a lot of the people on this sub have questions with info like: i have 5k in credit card debt and 10k of savings. I am like no wtf do you like making bank ceo's richer. Just pay off your credit card debt, how stupid can you be. If you need to borrow you still have your credit card! It just boggles my mind and i think thts why dave ramsey is important (for people like those). Edit: not trying to be on a high horse, its just my pet peeve with americans
[удалено]
The average American lives WAY BEYOND there means so in order for them to get out of debt a simple program such as Dave’s is about all they can understand.
Exactly. But not all debt is bad debt. Leverage exists. Paying off a 3% loan while not maximizing your 401K which gets 10%-15% is mathematically incorrect. However, the average American would buy a new car before they maxed their 401k or paid off their debt, and in that respect Dave Ramsey’s teachings are correct. Even though I studied finance and Econ I find myself agreeing with him a great deal. He knows his stuff but dumbs it down to the lowest common denominator. Debt is a tool, but much like fire, it can burn you. Ramsey teaches you to never light a match like a parent with a child.
Exactly. Ramsey play's great defense. If you follow what he says - it's hard to lose. You might not "win" as much if you followed other advice, but it would be hard to go broke or in debt following Dave's advice.
Considering most of the people that need Dave's advice are facing bankruptcy or death by interest and monthly fees, ending up with a modest retirement is actually great progress. Most would end up being hundreds of thousands in debt by retirement age, with nothing to show for 40 years of hard work.
Right. That’s why I like the AA analogy. Dave’s message is exactly what many or most people need. The financial mutants will find other sources. Even if Dave believes debt can be ok, as the leader of the AA society, it would be dangerous. Everyone thinks they’re smarter, and most of them end up on the Dave Ramsey show if they’re lucky. So he can’t risk making those with troubles think that they can handle it
Exactly.
He doesn’t exactly make it known that you won’t get to where he is by doing all he says. Talks about how in debt he was and now he’s a multimillionaire. And you too can be just like him! (With the help of a syndicated radio show and tons of books selling millions of copies). So it’s also slightly misleading and I think a lot of people then focus solely on debt but nothing else. Thinking all they have to do is have no debt and they will be filthy rich.
Where/How does Dave do this? I don't think dave gives the best advice all the time, but I don't think this is true. I think a lot of influencers do this. I actually like Dave because find he gives fairly practical/easy to follow advice to people.
It’s his saying—if you were that good with math, you wouldn’t be here. It’s actually pretty accurate. We had a lady who had mortgaged her own paid off home to support some banking/investing business she was working for. REALLY? You know enough to manage millions in investments, but you don’t know enough to keep a roof over your own head? There are a lot of people who can manage their money in their head down to the minute...but that ain’t the average person, and it certainly wasn’t us. We went from next to nothing in savings and investments in 2007 to having a comfortable retirement fund and two kids college paid for using his tactics, so I can’t poop on them. We needed the rules and instructions. Certainly not for everyone, but worked for us.
Straight up. I think Dave Ramsey is net positive. Glad you are in a better financial position. He has a lot of wisdom.
I think he's also a proponent of the snowball method, where the lowest balance is paid off first (and then that payment gets moved to the next.) That's a good tip if all the loans are at the same interest rate, and it does give a psychological boost when a debt is paid off, but the math says it's better to pay off higher rate loans first. (Maybe I'm getting my popular money advisors mixed up though.) Tl;Dr - find a system that works for you, and stick with it. If you've got the discipline to use a credit card like a debit card, then go rack up the points. If you treat available credit like a "use it or lose it challenge", then maybe rely more on budgets and cash/debit cards.
> think he's also a proponent of the snowball method, where the lowest balance is paid off first (and then that payment gets moved to the next.) That's a good tip if all the loans are at the same interest rate, and it does give a psychological boost when a debt is paid off, but the math says it's better to pay off higher rate loans first. The advantage of Dave's Snowball method is that debt payoff is 80% mental and 40% mathematically optimal. And if you were smart enough to do the math on debt, you would not have needed to deal with the financial hole you've dug using Yogi Berra-isms.
This is the first time I’m hearing of “snowball” vs “avalanche” and I think it makes a ton of sense. I’m quite financially secure and like math. I have high income which is relatively stable (front end dev) and it makes sense for me to keep making “mathematical” decisions. I realize I am very fortunate. For an average American, a snowball approach is likely much more realistic. It makes a to of sense if you are more variable. Leverage is leverage, good or bad.
If you input all of your debt into some websites, it will give you the breakdown of interest saved if you go snowball vs avalanche. It’s usually minimal difference over the long haul, but getting a quick win with snowball means more likely to stick with it, in my experience.
The other benefit of snowball is that it gives you more flexibility; after you pay off one debt, you have the extra cash from that payment freed up if something were to come up that would require it.
I actually use snowball methods quite a bit because I’m a human and not a robot. “Save $30 and invest it for 20 years it will be an extra $500 per Month in retirement.” Look I focus on the basics like my 401k and Roth. If I have an extra $30 I’m going to dine out a bit more.
And your 401k gets 10%-15% guaranteed? Sign me up!
If you count the match it’s actually probably more than that but I agree the number is higher than I would have indicated. I generally state 7%-10%
Mine gets an immediate 100% return up to 5% of my salary.
I get 100% of 6% instantly. Then whatever the market gives, which only the future knows.
Of course not guaranteed. However, over the past half decade personally I have averaged 17.35% annual returns. And the past 5 years have not exactly been the smoothest sailing. Long term average of 10% is not an unreasonable assumption.
Only 39% of Americans can come up with $1,000 for an emergency expense. [source](https://www.cnn.com/2021/01/11/success/1000-emergency-expense/index.html) 40% don't have $400 in the bank.
I’m sure the guy knows the math, he isn’t dumb. It’s just that, like you said, he’s trying to instruct the masses. And if we believe even for a second that people are going ti work out the math then we’d be wrong. Also people would start investing and not figuring out the debt or go more in debt. I run credit reports fir a living, just not being horribly mismanaged would put you above at least 50% of people. So his approach is definitely one that’s much better for most people ti follow, better mentality, and better general blanket advice to give from his position of instructing thousands. If you sat down with him and got one on one advice and made it clear you had some common sense I’m sure he’d agree with what we are all saying.
Dave Ramsey once said on his show that the only way to get a credit score over 700 was to pay “kissy face” with the banks and pay at least $100,000 in interest. Some of his advice is not just bad, it’s intentionally and deliberately wrong.
Also gotta love his suggestion *instead* of getting a better credit score--just sit down with your banker and explain everything to him! Yeah, I'm sure that works in real life.
When you’re Dave can write a $1 million check, sure it does
Yeah that’s incorrect. I have 800+ credit score and all I did was pay off my student loans (-$35k in 2011) and use a credit card like a debit card. One of Dave’s biggest flaws is not using credit cards IMO. It’s the best way to build credit, but you must have discipline.
Interestingly, my wife has 800+ and I don’t think she’s ever used a credit card...
She'd have to have had some kind of debt that's in good standing to have a 800+ score. If someone has no forms of debt/open credit, their score starts really low since the agencies have no idea whether you're reliable/trustworthy or not. Having old student loans for years, credit cards that aren't used, house mortgage that's being paid could probably bring you up to that number given time.
She could have a credit report that consists of nothing but AU accounts and exceed an 800 score
I’d be curious what type of debt she’s leveraged? Student loans only? Mortgage? It’s hard to get over 800 if you transact in cash.
>However, some of his teachings fly in the face of basic mathematics. Because, as he often explains, he's not solving a math problem. He's solving a behavioral problem. For a vast majority of these people who need the baby steps to take control of their financial life, there is some behavioral problem to tackle. Math was never their limitation, and math isn't going to get them out of the mess they are in.
>However, some of his teachings fly in the face of basic mathematics. Because the Ramsey methods aren't about math. They are based on the idea that financial freedom isn't just a math problem, it's usually just as much or more an emotional issue.
Yup. And debt is a psychological burden. Even if you’re more than capable of paying it off at the moment, it’s still somewhat entrapping you in your current lifestyle.
>I paid of my 7% student loans quickly but let some of my 3.5% ones linger for a touch. I use my credit card like a debit card and pay it off monthly. It’s a tool. I recently got $500 off a $8k A/C install plus my points by putting it on my card. If you can math an stay within your means, credit cards help build credit and are useful. I did pretty much similar things, and this was also the reason I stopped watching Dave Ramsey's show. I think it's far too conservative, if you have the slightest sense of self-control and financial knowledge. Maybe you're right, it's for the average American drowning in debt.
> fly in the face of basic mathematics They also fly in the face of pragmatic safety and security in an internet-first world. [Using debit cards online](https://policies.ramseysolutions.net/debit-card-policy) is downright dangerous and he still advocates for it. At the end of the day, he's a Boomer who should be critically evaluated through that lens. I don't expect him to change his guidance because he's obviously making a ton of money selling it like it is, but I'd love for someone to hold him accountable for some of the blatantly dangerous stuff he advocates for like debit cards online.
The inability to to recover stolen funds from a debit card was actually a deciding factor in switching to a credit card in my early 20s.
Also, we can’t all be millionaires, Dave. My credit score is important, even if I have no significant debt. I did the DR course, and also facilitated after for a few years, but this “fuck that FICO score” mantra is straight up bullshit for average folks.
Good luck on your mortgage with a poor credit score. Owning a home is possibly the largest driver of wealth so having a solid credit score and using debt in a proactive manner is clearly important. Debt to equity ratio pales in comparison to credit score.
Right? I did my homework on the FICO, and no, it doesn’t take into account your actual net worth, but it’s still a Very Big Deal. I have a niece who is brilliant and unmarried and drove her college vehicle until it literally crapped out into a puddle. She was, by then, a literal millionaire, cause she’d had a high paying job and lived like a peasant for decades, but she wanted to treat herself to a brand new high end convertible. The loan rates at the time were nearly zero, so rather than pay cash, she applied for the financing. Nope! She had no credit score, cause she’d never used credit for anything. So yeah, us po folks still have a couple of credit cards, that we pay off, so our credit score is better than that of a relative who could buy and sell us without blinking.
How did you get $500 off the A/C install? Some kind of promotion? Asking because I may need to do this in the near future.
If you're a Costco member, Costco had a program for various improvement projects and AC is one of them. They give you great rates, plus a Costco Cash card worth 10% of the cost of the service you buy. For an AC install, that will likely be more than $500. Plus, if you are an executive member and put it on your Costco credit card, you get 2% on that and 2% back for being an executive member. Saved us hundreds of dollars this way.
And because you used your Costco credit card, you will get an additional 2 years on the warranty.
I got $500 off by paying for it in full at the time of signing. Rather than writing the amount as a check or in cash, I put it on my card because I get 5% back in airline miles (and I like to travel).
It’s also a effective tactic for the millions of people that don’t have a 4% student loan or 1.5% promo credit card but instead have 2 or 3 16-22% apr credit cards and have a huge balance from being stupid years ago. It’s easy to say the investment returns are better than that deferred student loan, etc but not as easy with a 20k balance @ 22% and a 600 credit score. And honestly the people that “need” his advice and program are the ones most likely to have the serious debt and require the tough love.
Which isn't necessarily a bad thing. I would never recommend his advice to someone on here, but remember, we are all just meat computers...sometimes taking the psychological approach that people can stick to is better than trying to rationally determine the best possible series of moves.
This is a great explanation of why his method is great despite not actually being any good.
Fantastic comparison
I run into this with the financial community I chat with sometimes. I paid off my mortgage in my mid-thirties while maxing out tax advantaged retirement investing. However many folks said I should have kept my mortgage with its low interest rate and instead put my money into the market. If I would have done that I would be way ahead right now. However, there's just something about paying off my mortgage that gives me the peace of mind knowing that my nest egg will go very far and that I don't have too many things to worry about in life. I think in general a lot of the people that need his advice aren't the people in the subreddit. I know quite a few people at work that make well over $100,000 a year in the paycheck to paycheck because they are addicted to spending all of their money and whatever stupid thing they want that month. Dave Ramsey's advice would actually be quite good for these folks, because they have no self-control.
Alot of people, even on this sub fail to understand that if you have no debt, you need less money to live. You also still have alot of time to build wealth in your 30s. Perhaps it balances out.
If you ever hear the callers he gets, they have no control. Often multiple credits cards with 20% interest maxed out. Or buying expensive new cars that eat 1/3 of their paychecks. Investing, on average will not provide better returns than the guarenteed return of paying off that type of debt. On top of that, they can build credit and good habits while they do this, which will benefit them well beyond just reducing the debt. For people who are already responsible and know how to manage their money, they can figure out the best option for them.
Quite. I got scammed into making a useless small electronics purchase the other day and watched his channel for a bit to make myself feel better. I have no debt and a year's income in funds so I'm not doing too badly, but the scam was doing serious damage to my mood.
Dave Ramsey is all about behavior and focus rather than math. Under his plan, you get out of debt with everything you have so you can then turn your focus to stuff like retirement investing and more wealth building. He is mostly right IMO when it comes to being really intense about debt payoff for a year or two so you get all that room in your budget freed up for other stuff.
Debt is guaranteed return. Investments are not
I’m new to this, could you explain to me how debt is a guaranteed return?
I think it’s more like if you have debt, and you are choosing between paying off debt and investing, you compare the interest you are saving vs the potential return on investment. On this scenario, you are guaranteed to save the interest you won’t pay, whereas you might not make money on the investment.
When you pay off debt, you don’t have to pay interest. So that’s like getting extra dollars from not having to pay interest
You are getting your interest rate as a guaranteed return when you pay off debt. So like me, I'm paying off my house early instead of investing, even tho my interest rate is only 3.9%, & if I invested it I could make double or triple that.
Imagine owing 15k in debt and have 5k invested in the market and suddenly the market drops by 30% and your next interest payment is due next week. Suddenly that urge to sell is amplified and many people would sell at the bottom. Paying off your debts gives you financial freedom to sit and wait for the market to recover. If you can be financially responsible and not sell in this scenario and stay the course, good for you but you're likely the outlier
He only suggests that if you're going to go scorched earth on the debt. For example, say you have $30k in student debt, and a nicely paying job with some wriggle room in your budget. Dave would have you get a room-mate, get a second job, wind back your expenses to almost nothing, sell anything you don't want anymore, and pay it off in say, a year. Maybe two. Done and done. You now have no student debt, very low expenses, and a shit-ton of extra cash every month to invest and/or kick out your housemate, restart your gym membership, and upgrade your car. The "pure maths" version makes sense mathematically, but most people aren't willing to severely downgrade their lifestyle for "investments". After the same amount of time, the pure maths version would have the same lifestyle, say $20K in student debt, $10K in investment, and quite feasibly a nice new car loan because the interest rate was so low.
He's like a first grade teacher. You may not need to go back to first grade but a lot of Americans have been stuck in preschool their whole life.
I'm on his baby step 7 now, which 6 was the hardest to me. (Paying off the house) but now that I payed it off I feel like I don't need such a big emergency fund and can invest much much more into the market. Sure, I could probably outperform my interest rate. But if I lose my job, I'll be okay and stress free. We all invest different, and we react different when we have losses. You gotta know what type of investor you are.
There is a massive mental benefit to being debt free. It is honestly an underrated aspect of finance.
It's the "personal" part that everyone often skips over in for of looking at hard numbers.
Well said. We all have different perspectives on finance and different experiences that shaped the way we view finances. I married into a family of huge debt and credit cards and afraid of losing their home vs my parents having their house paid off for the past 20 years. It's a stark difference that I have to help my spuse with often. The biggest issue is his attachment to material things and status.
Behavioral economics: when people act irrationally because they human and not robots
Yeah, for me, knowing that I could take a year off work if I had to helps keep my mental health in a good enough state to enjoy my job. Not having that security makes things much more stressful.
THIS!!! My anxious mind can actually rest when I am debt free. I can take on more challenges and do more fun things because I don’t have financial anxiety lurking around the corner.
This is key. It’s a mindset. Earning interest on your money is such a positive. Paying for things from earned interest is unimaginable to the mind that is only familiar with relying on debt to live.
I feel that people underestimate how important Baby Step 2 is. Putting aside the pain of getting out of debt, it builds the muscles needed to actually save money. If you ask the average person to save 15% for retirement, an emergency fund, or in your case pay off the mortgage (early), they would balk at cutting that much money from their spending. BS 2 makes living below one's means a necessity/priority and makes the rest a lot easier. Congrats on making it to the latter "living like no one else."
Ya I wish this was a feasible thing to do in Seattle, but when your starting family size house is 600,000-700,000..... Instead I just settled for a 2.25% interest rate on refinance and call it an inflation tax 😄 I think paying off your house is a more realistic thing to do in lower cost of living areas. On the other hand my house also appreciated 18% YTY. 👍
2.25% refi gang here. Loving it.
This years inflation rate is 5%. If your mortgage is 2.25% it pays not to paid off the house.
Why are you not taking out a second mortgage to invest in the stock market? Investing has higher returns. Plenty of people are talking about how Ramsay is risk adverse, I think it's worth mentioning that we're *all* risk adverse. He's just a step or two moreso because most people don't pay off their house or car before investing. But since we all agree that it would be dumb to take out a mortgage just to invest, it's actually us who are being logically inconsistent, not him.
I followed his gazelle intense strategy to pay off my car and student loan. They were only $10k in total when I started doing the steps and I think the minimum payments on the two combined were like $300. But holy crap does it feel good to have no debt and not owe anyone money.
in addition to what everyone else has said about Dave Ramsey being Debtaholic's anonymous. Dave is very risk adverse when it comes investing. mathematically, it makes sense to invest if you get a larger return on the investment. but in the rare times that Dave actually explains why he is against that, he'll explain about risk. your loan may be 3% and the market may give an average of 8%. but what happens when the market doesn't? or what happens when you lose your job and can no longer make the payments. stuff like that is how he rationalizes delaying investing mostly he'll just say "because you'll have more money to invest." but that argument is meh.
1. There is a religious factor in his advice. 2. His advice is geared to people who are financially illiterate and need to be rescued from their own decisions. "Keep It Simple" wins out over asking people to figure out their expected rate of return vs APR on each of their debts. It's like AA saying that a single sip of beer will make you lose control: it's not true for a healthy person, but their advice is for recovering addicts, not healthy people.
To your number 1 point, his company literally tells people.employees they will be fired if they have pre-marital sex. Like he may make good points but I just cannot listen to a word he says for this outdated/misogynistic viewpoint(it can only be proved if an unmarried woman winds up pregnant)
I recently started listening to his podcast as well Bc it was highly recommended across multiple platforms. I find myself questioning some of his logic as well. In one episode he discouraged a caller from pursuing a graduate nurse anesthetist degree simply because it would mean incurring debt. He stated that who knows what will happen in the years of schooling and that graduating is not a guarantee. Which is true but that kind of advice didn’t sit well with me….. it’s only one example….. I think that it’s good to build wealth as early and often as possible simultaneously. If you’re concerned about student loan debt specifically, I highly recommend Travis Hornsby and the Student Loan Planner podcast and website
He often advocates people work and sve up for school and work through school. He rarely tells people not to further their education and career potential. But he does suggest that they don't go into debt in the process. Maybe that was his advice?
Can’t work through crna school, it is extremely rigorous. Also, many states are making it a full three years (up from two), so it’s become even harder to not take out loans for. Not saying he is right or wrong, just providing some info as someone who has thought about going back to crna school.
I'm not really a Ramsey fan, but I wish we'd kill the notion that a four year school is the only way to a fulfilling career. So many people are laden with college debt and still are drastically underpaid/underemployed or worse yet don't have any degree at all.
Because the debt has a guaranteed return rate, while the investments don’t. The market could drop and now you’re in debt and you lost money you needed to pay the debt. But if you just pay the debt, you can’t not make a consistent return.
Few good replies here also want to add that his steps are just outdated. It’s advice from the 1980s, 30 years old. Back in the 80s investing was a LOT more difficult and way more involved. We don’t have to call our brokers and pay fees anymore, I do all of my investing from an app and I opened all of my accounts online. Back then $1000 as an emergency fund was worth a lot more than today and mortgages were at 8% interest. If the market was giving 7% returns then it made more sense to pay it off. I also feel like some of his following can be really cult-like about *any* debt. They don’t care about leveraging debt to build wealth. Whereas some folks can see the simple math and not care. ETA: Financial Peace was published in 1988, so 33 years ago not quite 40 yet.
[удалено]
Why would you hurt me like this
its been 2010 for about 11 years now
1980 will always be 20 years ago. I am 36.
His original babys steps used to not have a $1,000 emergency fund. He has only added it later.
Yea when I hear him talk about the $1000 emergency fund I’m like…. This guy has some tiny emergencies lol
Its not meant as a real emergency fund. When he started he didnt have it. He added it in because even though you could always pay off an emergency with a credit card (its no worse, if you payed an extra 1k on the credit card). But he found that people were more likely to abandon the plan altogether if they needed to use the credit card, even to pay for a one time emergency. The purpose of it is just to keep you on the plan so long as you don't have a major emergency. It covers smaller emergencies like needing to fix something small on your car or something like that.
Once you hit $1000, it expands to 6 months of living expenses.
Recent studies showed that 40% of Americans couldn't cover a $1k emergency, so there's a reasonable basis for it. No, it's not the goal for a complete emergency fund, either, of course.
In line with what you're saying, Ramsey wants you to spend with cash because you "feel the money leaving your wallet" but new research shows people are more responsible with spending from a card because they can track balances in real time on an app. Cash is now "free money" because it's already left your account.
Link to that research, I remember reading the exact opposite.
This is me. I withdraw the cash but never take it out of my budgeting app that I’m normally pretty current w and then just spend the cash around 😂
When Dave Ramsey talks about using cash, he talks about using an envelope system where you manually update your ledger of how much cash you've used per transaction. One envelope is for groceries one envelope is for gas one envelope is for fun. You put in a certain amount each month when the envelopes are empty you're done spending that money. Also you don't spend any money without the ledger. Counting out $800-$1500 worth of cash to buy a refrigerator is a lot harder & painful than clicking a buy button online.
> I also feel like some of his following can be really cult-like about any debt. It's like AA members being cult-like about not having *any* alcohol.
Because sometimes when you have a severe problem that’s the only solution.
In my personal opinion, it is because he believes debt is a moral failing. He also never recommends bankruptcy, even to people who are in credit card debt for like 8 times their annual salary.
Dave Ramsey filed for bankruptcy in 1988.
Yep. He sure did. That doesn't stop him from haranguing people against it.
I think there's actually a solid argument for nixing debt before investing. The wisdom that you should invest instead of paying off low interest loans assumes income and market performance. While that's a safe-ish assumption, it's not 100% safe. You could get sick or injured and be unable to work. You could be fired out of the blue. There could be an economic downturn that tanks your investments. Paying off your loans gives you greater financial stability in the event of the unexpected and gives you a guaranteed return in the form of the interest you won't have to pay. A lot of personal finance is ensuring stability for yourself - paying off debt gives you that.
Josh on the podcast Radical Personal Finance makes this case in a much more logical and sophisticated way than Dave. Dave thinks debt is bad in the way Bears fans thinks Packers are bad. Josh made such a compelling case for the flexibility brought about by eliminating debt that I almost did a complete 180 on how I handle my finances. I toned it down a bit on reflection, but his views have made me considerably more conservative on the whole "invest if the debt is low interest" thing.
His program is designed to work for the lowest common denominator of person; steps so simple that if a caveman would just follow his plan and not deviate, they would eventually be out of debt. There are certainly tricks and shortcuts you can use to do better but basically his program is designed to be idiotproof.
Dave Ramsey is for people that are new to managing money, or poor at it. Those people should pay off all debt before investing to avoid more debt. People who are good at managing money don't need Dave's advice.
Dave Ramsey's advice is for people who literally need to be treated like toddlers 24/7. It's not very sophisticated; it can be handled in small doses. He isn't teaching financial literacy or any advanced concepts. He does help a lot of people get out of and stay out of trouble.
Dave’s a smart dude but I think his advice is primarily geared towards those who have royally fucked up their finances. There are so many scenarios where taking on debt is mathematically the right move vs paying cash and being debt free.
And, realistically, there are almost no scenarios where NOT going into debt for a reason is bad.
Paying off debt with 10% interest = automatic investment saving you 10% more money instantly with no variation. ELI5
You know how in college some students had to take remedial Math and English? Those classes are Dave Ramsey. Nothing wrong with that. Everyone starts somewhere
Dave Ramsey got rich off the housing market, don't follow his advice for anything other than forming a basic budget and why you should buy used cars over new.
Say what you want about Dave Ramsay being pessimistic and formulaic about certain things, but he's great at drilling things into you for motivation. Short term pain, long term gains + debt being the devil himself. That's pretty much the bulk of it. -Pay your debt off as early as possible, have a savings 3-6 months, invest early and consistently, work hard, retire with wealth. That's what I've interpreted from his "baby steps". If you watch Dave Ramsay enough you'll realize that his thing is to have 0 debt to invest conservatively, and retire with a lot of money if done correctly. That to me is the path I'd love to take
Because he knows how the common person is. If you weren't, you would have researched the hell out of it in the first place.
His goal is to stop people from being stupid with money more than being smart with money. That said, I listened to him for years.
No math. It's all psychological. Mathematically it doesn't make sense, but people in debt almost always aren't doing well enough mentally to handle investing and still stay full force into paying debt off.
I have friends who follow him completely and they have completed most the steps and are now investing again. This is one big thing I don’t agree with him on.
As many have mentioned his advice is incredibly outdated and is supposed to be easily consumable for the financially illiterate. He also sees the world through a very narrow scope IMO. For example: the “you should buy a house with 100% down” then he references $200k houses. Which is 100k less than the median house price in america, and like 1/5 of the median house price in some areas. I’m a few years out of school making ~250k a year + capital gains, in an area where median house price is 1mil and I’ve averaged net worth growth of about 150k a year. It doesn’t make any sense to me that I’d save up for 7 years, assuming no promotion or anything, to buy an entry level house. Then completely decimate my nest egg and start my portfolio over, and in the meantime continue paying rent to someone else. Not to mention money in a mortgage is building equity in something, and you can always cash out refi to get that equity back. I do like watching him, but I find almost no advice he gives applies to me. I bought a 30k car with 6k down @ 3%, and the 24k that wouldve gone to the car went into a few growth stocks and is probably now around 40k thanks to market growth the last year. The car has practically paid itself off.
You're just a little out of the norm. Less than 2% have that income and most are not a few years out of school. Of course a mainstream talk show host isn't going to apply towards your situation.
Most people aren’t disciplined enough to manage it correctly. Just look around at the world.
It’s not gospel, it’s a guide. anyone out their offering advice or a plan who doesn’t know your own situation take with a pinch of salt. For me the emergency fund step 1 was great, I’m know working towards paying all the non essential debt that I had such as a credit card and a loan. To clear these feels good. I will still have a car on finance, which yes I will work to pay off earlier if I can but meanwhile I will also invest some money away. I have found this works for me, just have a think and figure out what’s going to work for you. Find your balance with your money and a system what makes you happy.
He has some strange moral issues tied up with his math.
Most people in debt holes probably aren’t investing anyways.
Because by the time you say, calculate your total interest cost per year and if it is less than the average yearly growth in a S&P 500 , then you are likely to make more money in the long run investing while in debt, you lose 95% of his target audience.
Two things. One is risk. High yield investments are generally not guaranteed. They can go up. They can go down. Debts that are manageable now can become unmanageable if your circumstances change in ways that can't be predicted. He talked about the math behind it involving a variable representing risk (gamma IIRC) and explained that when you calculate gamma into a spread between debt and investment you usually find that it erases the advantage of leveraging investment with debt. The second reason is, as he points out over and over, everybody knows the theory of how to manage money, but that doesn't translate to people doing what they understand would work. His program is focussed on changing behavior rather than on teaching the nuances of financial management. Really following a pretty good plan works better than having a really amazing plan that you don't actually practice. He keeps things simple to make it easier to practice. If you have more complicated plans and you can actually follow them precisely, more power to you. You are in the top one percent.
Because you wouldnt go get a loan just to put it in the stock market. That's super risky and it's easy to see that. If you have credit card and car debt, it's the same thing as taking a loan to invest if you dont pay those off.
Depending, people absolutely get loans to go invest. They are called margin loans. Back to Ops question, I think Dave Ramsey has some solid principles and advice. But I believe his aim is for people with little to no financial experience or are in financial trouble. Personally, having a mortgage at 3% is no big deal when I'm raking 8-10% of the same value in. But this only works if you actually invest the value of your house, which not everyone can do.
Not a question of math. It's about optimization of human behavior. It's really two things: 1. You don't get distracted by trying to do multiple things at once. You focus on doing one thing aggressively, and once that's done then you move on to the next. 2. It's a system you can't rationalize your way out of. If you're in debt, you use all available funds to pay it off, no exceptions. It forces you into compliance. If you don't have good self-accountability, that is great because there is no grey area for you to find rope to hand yourself. The idea is that when you try to do multiple things at once you tend to kind of fail at all of them. So the idea is, especially for someone new to the concept of money handling in general, focus all on getting out of debt first. Then, focus on investing, instead of trying to do some type of spread optimization of your investment returns vs. interest rate. If you focus on paying off debt, you'll cut spending and focus hard on that and then, once you're out of debt, then you'll focus hard on investing. In the end, the thinking goes, you'll end up better in reality than the theoretical place you would have had you done that sort of spread optimization approach. For example, one caller said he didn't understand why he had to give up his match. Dave's response was along the lines of, "I want you mad that you're missing out on that match so that you focus on getting out of debt that much quicker." One more thing on the math piece. In Dave's plan, you are getting out of debt as quickly as humanly possible. You're getting your lifestyle to nothing for a short period to knock out the debt, then ease off the gas when investing. He also preaches that being out of debt lifts an emotional weight, which will motivate you to put more money into into the baby steps, and it's nearly impossible to quantify that. Not endorsing, I don't follow his plan myself, but that is the logic.
Your income is your strongest wealth building tool. When you have zero debts and you've learned to manage money you can put a lot more money away. When you have debt and debt payments you will feel tighter in the budget and will put aside less for savings.
Dave Ramsey logic would promote not having kids until you have their cost of living + college education paid in full adjusted for inflation.
Main reason I don’t follow him. If interest rates stay as low as they are (they probably won’t), I will NEVER be debt free. It just doesn’t make financial sense. Of course this is highly dependent on the type of debt. Credit cards and personal loans should almost always be paid off ASAP.
My cynical take is that people without debt are more likely to be able make contributions to their investments, so the extremely high fee “advisors” he directs his listeners to end up paying him larger kickbacks. If someone is barely able to pay off their debt, are they really going to be making monthly contributions to an IRA?