What I Think of Dave Ramsey
I get asked about Dave Ramsey a lot. Several people come into the credit union spouting the words of Dave Ramsey and then ask if we know who he is. Well, any banker worth their salt should know who he is. He’s only made our lives more difficult when it comes to educating people about the proper way to handle debt. But, recent conversations have prompted me to address the matter of Dave Ramsey and the debt snowball on this forum, so here goes:
My opinion of Dave Ramsey is that he’s horrible with math and probably not so good at psychology, either.
I’ve posted before on the fact that I don’t like the snowball method. I understand the reason for it existing, but I don’t think it makes good financial sense to teach people a method that costs them more money just because it may make them feel better.
I like the idea of taking things slow to achieve financial success, which is the basis of his 7-step plan; however, I don’t agree with some of his methodology. By the way, just in case anyone isn’t familiar with Dave Ramsey, he’s the guy that invented the debt snowball method, i.e. you pay your debt down in order from the smallest amount to the largest irregardless of interest rate. He has his own radio show and he’s also got a television show somewhere on network TV, but I’ve never seen it. His 7-step process looks like this:
- $1000 to start an emergency fund
- Pay off all debt (except the home) using the debt snowball
- Build 3-6 months of expenses in savings
- Invest 15% of household income into Roth IRAs and pre-tax retirement accounts
- College funding for children
- Pay off home early
- Build wealth by investing
First and foremost, I’m a firm believer in paying yourself first and continuing to do so even when money’s a little tight. If you don’t, you’ll never find the money to save. Likewise, if you don’t have an emergency fund with 3-6 months expenses in savings, you won’t be making any payments on anything in the event something happens with your job. With that said, one and three should be combined.
I’ve already mentioned that I don’t like the debt snowball method, so for me Ramsey’s number two is ridiculous. As a financial “expert,” he should be teaching people the right way to manage their debts and offer advice on how to overcome their discouragement with regard to paying off those high interest debts. He shouldn’t be offering easy-out solutions that don’t teach people the value of working to pay down their debts. Beyond that, I’m just opposed to giving financial advice that costs people more money.
I think what people need to do is sit down and work a side by side comparison of the debt snowball and the traditional methods. Compare the time it takes to pay everything off and the amount of money spent at the end. Once they see the numbers in black and white, I think most people will fully begin to understand why so many financial experts are against the debt snowball. However, I realize that for some, this is the only method they’ll use and there’s no changing their minds. As you wish, but you’re still paying more money than you should and I imagine there’s other things you’d like to be doing with that money!
Investing into pre-tax retirement accounts and Roth IRAs is an important step for taking care of your retirement needs, so I’m good with number four. Your retirement is up to you as no one else will take care of it. I will add that this should not be neglected while you’re paying down your debts. And to finish off the list, the last three are fine with me as well.
So that makes my list a six-step process that looks like this:
- Build a savings account with 3-6 months worth of expenses
- Pay off all debt (except the home) using the traditional method
- Invest 15% of household income into Roth IRAs and pre-tax retirement accounts – with the caveat that this is not neglected at any point in the overall process
- College funding for children
- Pay off home early
- Build wealth by investing – be sure to diversify your portfolio
I was talking to a member today who was a huge fan of Dave Ramsey. He asked me if I knew who he was and I said yes. He went on about how his advice was great and he’s working to pay off all of his debts, etc. He was even opening an account for his emergency fund and dropped about three months worth of expenses in it. Then he asked what I thought…Something you have to understand about me is that I don’t like to sugarcoat stuff, especially when it comes to finances. I’m a bit like Suze Orman in that I tell it like it is. People need to hear the truth.
So, I told the member that I’m not a fan of Ramsey’s, but that I was glad he was opening the savings account. He asked my why I didn’t like Ramsey. I told him everything that I’ve said here and then I told him I would show him. So we sat down with his debts and worked the numbers both ways. If he did the debt snowball method it would take him 29 months to pay back his debts and it would cost him $8945 in finance charges. If he paid his debts the traditional method it would take him 27 months and only cost him $7988. That’s a difference of $957. So, to me it’s clearly obvious that the traditional method was better. I don’t think he’d ever considered it that way before because he seemed blown away. We talked about some other options to shorten the time span and save even more on the interest all of which he declined, but at least he walked away with better options. And that’s what a financial expert should do – they give you options that help save you time and money. They offer advice on areas you could improve. They DO NOT give you easy-out solutions that cost you more money in the long run!
Ok, so let’s have some friendly bipartisan debate here:
For those who side with Ramsey, why do you like the debt snowball method? For those who agree with me, what’s your biggest objection to it?
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Wow, sounds like Mark’s opinion about Dave Ramsey is certainly in the minority. The truth is: The reason Mark that you hear so much about Dave Ramsey is that his plan works when people stick to it. People call into his show all the time with success stories.
Dave Ramsey has stated that he knows it’s a psychological thing with people in paying off the smaller debts first. That’s why he has them do it because many people won’t. I have two small debts and a much larger one. Do I want those two small debts sitting there sucking money in interest even though they aren’t the greatest when I can knock them out in two months? Of course not. I’m going to get rid of them and work on the last largest debt.
Sounds like your a fan of debt
Dave Ramsey has a new mansion palace in Franklin, TN that looks amazing.
http://www.coolsprings.com/news/dave-ramseys-house/
Funny thing is Dave even stated that he used to talk just like you are talking now as far as the numbers go. But then Dave said he realized something even more powerful than math, when concerning finances. That which is behavior. So the numbers are not the real argument, it is behavior vs math. Dave mentions that in over 20 years of counseling people in debt, he noticed that behavior was 80% of it and head knowledge was only 20%. Thank you for the article, but I just think the argument is misplaced. You sound very knowlegable but in the end practical wisdom wins over analytical theory anyday as far as I am concerned.
Dave doesn’t hide the fact that the debt snow ball method can cost you more, he just knows that if people quit the aggressive ridding of debt they will be even worse of financially. He knows what has worked in those he has counseled. His main focus is to get rid of debt any way you can, ie. Selling things, working OT, picking up a second job, but only until debt is eliminated. So really I just think you’re picking at Dave cause you agree with everything but the debt snowball, what if the snowball started with the largest debt? Would you agree with Dave then? I just think Dave has probably had more experience than you and chose to teach in a way that would be most effective for the most people.
Someone is really bitter, when you have a radio show that reaches 5 million people come back and talk.
Wow, people here feel strongly about Dave. Well, I agree with this post actually. I have several of his books (all given to me by a very stubborn father-in-law) and have read them. But my husband and I have just spent the last year and a half laid off and struggling and all anyone can talk about is ‘how much debt do you have’ I think it is quite stupid th have only $1000 saved. For example, Mr. Ramsey says if you have 10,000 saved, take 9,000 and pay of debt. Well after spending this last year living off unemployment and with my husband in a shaky field, I would rather save it all and keep making payments on my debt. For example, I have a $400 medical bill. I’d rather wait and pay in one large sum when I have a enough to do so and still feel safe, or make small payments on it!
I watched my sister in law take most of her svaings out to pay off things. She is having her 3rd child in 4 years and has a car payment, roof payment and has to take 3 months work off. I think it would be better to save and make payments with in your reasonable budget. I refuse to buy a house til I have 6 months saved and people tell me that’s stupid, but I’d much rather pay rent and feel safe then put to much stress on me and my husband.
someone is a hater. i think dave ramey is great i was in so much debt and i followed his exact plan and im living GREAT!! i dont have any credit cards and i have so much money to spare and i love to give . i pay everything in cash and im happy . GOD BLESS YOU DAVE RAMSEY KEEP DOING WHAT GOD HAS PUT YOU ON EARTH TO DO
I love the debt snowball strategy, specifically the way Dave Ramsey suggests accomplishing it. If you are speaking to the world like Dave, the one thing everyone does not have is definitely inspiration. Many people must be determined to keep going, therefore begin with the tiniest financial debt and pay it back first.
Having just started watching some DVDs and reading a book given to me by someone who has succeeded with Dave’s work, I am glad to have seen this site. I agree with those who posted that the approach is strictly psychological. I say this because when I decided to tackle our debt on my own I followed similar steps: minimum payments on our large debt and bend as much as we could to wipe out smaller debts. Why I did this is simple: I am bad at bills. Simply put I am among those who have been charged twice their dept in late fees and charges. Hence, wiping it out is not a matter of pracitcal money, but simply getting one more bill out of the bin and erasing the potential for me to accrue late fees.
Logically, paying off 1000$ at 30% interest vs 600$ at 15% and 400$ at 11.5% is a no-brainer. Or at least it shouldn’t be. But those who get into debt usually aren’t getting there because they pay attention to math.
I will say after reading this that when I sit down with my wife to review our debt and financial plan I will reconsider my mentality, which would have apparently been underscored by Mr. Ramsey. I have started our debt-payment journey and can propbably afford to move past the comfort steps and act in a more fiscally aware and practical manner.
Thanks to Kristy and Dave for their contributions to my financial recovery. :)
Dave is right…”Don’t be normal”
Weird is cool…and debt free!
Haha, the author used the word “irregardless.” I wonder if he will unloosen the valve on my hot water heater. LOL!
I find it very difficult to take anyone seriously that uses the nonsensical word “irregardless”.
However, both opinions are valid, and both opinions are acknowledged as viable ways to pay off debt. I think you’re making a mountain out of a molehill. But with respect to the claim that retirement should be maintained throughout the debt payoff period, some folks just might not be able to swing it. If it takes 2 years to pay off $100,000, the recommended approach of 15% retirement savings may not be achievable. Some folks on the brink of bankrupcy can barely pay their bills, let alone themselves.
I think the Dave Ramsey is really a motivational speaker. he gets you motivated to take action. it’s like dieting, my wife complains she’s over weight but is NOT willing to exercise greater than the food she eats — hence remains over weight. Finances are the same … if you spend less than you earn you eventually become wealthy. the root problem is that our congress has no spending limits, they offshore our jobs, import our workers with no consequences to the employers for hiring them or the illegals that use someone else’s social security card, no wonder our economy is in a mess. Now of course our television, instant lifestyle — fast food, microwave meals, and having to work two jobs just to survive are the real cuprits of our society.
i think the one different between dave ramsey and the others is he talks about motivation …. get angry … get rid of debt … never take on debt again. your credit is only as good as your job stability … and we have no job stability in this country anymore.
for myself, i got laid off. filed bankruptcy … all we have left are student loans. both our cars and our motorcycle are paid for. in a nutshell, i’ll go work that second job and get completely debt free, 1 year buffer on all bills including our chest freezer full of food, and start enjoying life.
my suggestion, motivation and follow thru are more important than all the anal banker math. yeah, according to some banker, paying off your most costly debt i.e. the mortgage is financially wise; however, most people don’t have that level of discipline.
summary: mathematically, using principle reduction is the quickest way to debt free by eliminating your most costly financed item — the home. using the credit only for emergencies — and i do mean true emergencies — will get you debt free faster than what Dave has stated; however, in defense of him, the principle reduction method is logical where as some people like my wife are emotional. the snowball method is emotional based and she is gaining motivation as in a positive attitude and willingness to stay on track with his program as opposed to the math approach using principle reduction.
honestly, either way works. there are serious pro and cons to both methods … just figure how you are motivated … emotional or logically motivated.
for myself, buy the book and just put some elbow grease behind his his approach to the book before you say it doesn’t work.
If you’re reasonably intelligent and have the will power to pay off the debt that is charging you the most interest, do it that way. Otherwise smallest to largest works, too. Either way…or find one that achieves the same goal and you will be a lot better off than paying interest. I worked out my own method back when Dave was wallowing in debt. However I’m all for what he’s doing, which is getting people to wise up regarding money management. Spending beyond your means is a dead end method and always will be!
Except for my house, I honestly don’t remember that last time I paid interest or a finance charge.
Very good article. Mathematically you are right. BUT, if you lived life with this mathematical sense YOU WOULDN’T BE IN DEBT IN THE FIRST PLACE! Dave wins
A lot of what Dave says about the debt snowball is misinterpreted. It is meant for people with a large amount of debt and a large number of credit cards. Normally, one would have $20,000 to $60,000 in non-home debt to pay off. The reason people get into these situation is they are not deep thinkers like most of the people reading this post. Obviously if you can figure out in detail how to systematically pay off your debts according to the optimum interest rates, you would not need Dave Ramsey and you would not have got yourself in that much debt anyway. If you have a small number of cards and debt it would “make a happy meals difference”.
The advantage of the Ramsey method is simple – the more accounts you have open the more stress you have in your life with all the flies to swat (bills to pay) each month. If a you get distracted, you may miss a bill and then they hit you with a late charge and can hike you interest rates to 30% and call you for payments. That can be very expensive monetarily and emotionally. Dave’s plan provides motivation and a teaching experience to change your bad habits that got you in the wrong place. It also reduces stress in your life so you can focus and achieve your goals.
I realize this is an old thread, but… whereas I absolutely see the reality of paying more by organizing one’s debt according to amount owed vs interest rates, I still think Dave Ramsey’s method is EXACTLY what a lot of people need to hear. If getting out of debt were easy, people would do it. Fact is, most Americans cannot control their spending. I am not saying people are stupid. I am saying that people do not know how to manage their money. People who are absolutely drowning in debt, do need step-by-step instructions such as Dave provides to take control of their finances. And I think people who are especially beaten down financially by job loss, illness or divorce, etc, DO need that psychological bump of paying off a small debt to realize: “Yes, I can do this. I can get control of my life back.” My point is, Dave makes starting the process of getting out of debt accessible. Basically, if you never start, you will never finish. Dave gets people to start.
As a Banker myself, I can appreciate where this author is coming from as our job is to SELL DEBT/CREDIT PRODUCTS and DRIVE DEPOSIT BALANCE VALUE. By encouraging our customers to pay off large debts, we reduce the assets of the bank & the amount we as a financial institution can lend and invest to other members for profit. Banks don’t want you to pay off debts early if it means keeping only $1,000 in the bank. Bankers don’t want you to pay for things in cash if we can present you the option to finance it and turn a profit on your loan interest rate. It’s what we do, and it’s how we keep ourselves employed.
Of course the Dave Ramsey method isn’t for everyone, and Bankers don’t dare endorse it while acting in their professional capacity. However, when I leave the office and drive home, the first thoughts in my mind are about how fast I can pay off the debts I have, and how I will never turn to credit products for anything in the future ,including a home purchase. The stress of a 15/30 year mortgage and the many caveats/catches/insurances/interest charges/loan servicing problems that plague my customers is worth avoiding in full if it means renting inexpensively for an additional 2-3 years.
Before wholeheartedly endorsing the Debt Snowball Method, it is important to consider unique situations with which some people are faced when evaluating this technique. For example, some debts come to term sooner than others and it may not be as practical to make a lump payment only a few periods before the debt is paid.
Also, some debts, such as settlement options, have a required “pay by” date and must be prioritized to avoid certain penalties. For example, I owed $10,000 to my grad school after leaving mid-semester to pursue a career in banking (the degree was in Psychology, and the $10,000 was the student aid refund). They wanted it back, but were willing to settle for $5,000 if I’m paid-up by the end of August, 2011. If it’s not, the debt reverts to $10,000. Obviously this situation makes this debt a priority, even though it is my highest one.
I will agree with the author of this article that $1,000 is not enough for most people to cover expenses in the event of a major emergency. I do, however, think that the $1,000 is psychologically motivating to produce well and maintain a job. It puts you in an uncomfortable position to clear out debts, keep your nose clean, and actively seek financial stability.
tiffany your situation is the exception to the rule, ive heard of many callers with your issue and he has told them to keep their savings until they land they’re new job…really it all depends on how long its going to take in this shaky economy because if its another year before a new job land then debt payments are going to drain your savings anywayz…please understand that his philosophy is for the average person that has a job and situations like yours will call for a little improvising…my recommendation would be too keep your savings until your employed again and then start back at baby step 1…if you’re against dave ramsey then noone’s gonna change your mind but hes in the best position to make any kind of call on turning finances around based off of what he’s been through in his life….good luck on the job hunt and hopefully youll learn his philosophies work like none other!!
Generally, the Dave Ramsey haters are people who are in debt up to their eyeballs. Some of the new “so called pro’s” in finance are recommending getting out of unsecured debt. this has been preached by DR for 20 years. It is a difficult plan to adhere to because most people have no will power and live in a world of instand gratification. My only porblem with Dave is that he still recommends getting 8% in retirement and the last 10 years that would cause eating into your retirement nest egg. I have no arguement as to his steps to get out of debt.