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?
Dave Ramsey can be good and bad. He was the first personal finance person I listened to when I started paying attention to my finances about 2 years go, and we was great for my limited knowledge at the beginning, but I believe I has passed the scope of his teachings. I do think he has some merit in helping buying who want the hand holding, but for people like us, he doesn’t do much.
The debt snowball works, whether you accept this truth or not. It builds on little successes. Paying of a smaller debt gives you the encouragement to keep going on the larger debts.
I’m assuming the “traditional” way is attacking the debt with the largest interest rate first? So, for example, I owe $10,000 to the credit card company at 19% and $1,000 to another at 7%. Are you really advocating having that $1K hanging around while you whittle away at the $10K? That’s absurd! I’d rather get rid of the $1K and apply those payments to the 10K. Small victories are what keep people motivated.
This kind of thinking is the same thinking that gets those that roll over their debt to a lower interest card in trouble. They go out and charge up on the new empty card. Why, because they tried to play the math game. And now they are worse off than before. In your example of the guy saving $957…odds are he’ll never stick with it. Why? Because he doesn’t have the small victories and goals he’s been able to achieve along the way to fall back on when he gets discouraged.
I completely agree with the math - Dave Ramsey’s concept is flawed. But today’s society wants immediate gratification. They want to see progress NOW, which is why I think Ramsey’s program works for so many people.
Our family is in the same boat right now, although we have no credit card debt:
$500 @ 0% (student loan, honor code minimum)
$3,400 @ 4.25% (student loan, $38.50 minimum)
$130,400 @ 6.5% (mortgage, $856 minimum)
If we focused on our highest interest debt, we could theoretically pay off all three at about the same time. Not very motivating - I’ve still got three debts to pay for the next 12 years or so.
Instead, we’ll have the first student loan paid off next month. Now we’re down to two debts. Student loan 2 will be paid off in about 12 months… now we’re debt free, except for the mortgage.
Will it cost us more money? Probably. But to be debt free except for the mortgage… it’s worth it to me.
Of course, we’re also putting money into a retirement account. That happens regardless of our debt payment plans!
How is saving people money absurd? You’ll pay more money on the interest with the 10k than the 1k, plain and simple. I’m not suggesting that the debt snowball doesn’t work - I never said that at all. What I said was that it is irresponsible of a financial expert to suggest it to people because it costs them more money. A financial expert should be helping people save money, not spend more. And they should be able to offer other ways of encouragement by EDUCATING their clients and followers on ways to overcome discouragement as they pay down those existing debts.
As for the guy in my example, we made a list of how much he’ll be saving along the way - through each milestone. So, he can look back and see - in writing - what he’s been doing when he gets discouraged and he can see the savings. That is the primary reason I advocate looking at the numbers both ways, side by side. You can clearly see the difference. And I’m all for a little positive reinforcement when someone is discouraged, I just don’t think spending more money is the appropriate way to go about it. I understand your point about small victories and the like, but that’s just teaching yourself that it’s ok to pay more money so long as you feel better about doing it. That’s not advice I’m going to advocate, regardless if someone else thinks it’s absurd!
To that end, I think people who roll over their debt to the lower interest card and then charge up the empty card have a spending problem that goes beyond either the traditional method or the snowball method - those guys need credit counseling because neither method will work for them if they can’t stop spending. So it’s really not an indicator to the effectiveness of either method.
Stacey, perhaps I am reading your comment wrong.
You state that you are paying off the loans smallest to largest, which is exactly what Dave says (AKA the debt snowball). Yet you say in your first sentence his concept is flawed.
Again, I might be reading things wrong. The traditional way would tell you to pay off the $3,400 at 4.25% since that is costing you more that the $500 at 0%. But as you indicate, it’s not very motivating.
Dave Ramsey is bad at math.
I don’t care how many examples anyone gives me about emotional encouragement and needing the boost of paying off the smaller amounts first, it costs less money to pay off the higher interest debts first. If someone cannot grasp the concept that paying off the higher interest debts first will save you money, then they too are bad at math. I understand that Dave Ramsey has motivated many people to get out of debt and his plan does eventually does just that, but it is NOT the only way or even the best way to do it.
Frank, I think the people who use the debt snowball understand the math just fine. But if the people who are in debt (myself included) always went with math, we wouldn’t be in debt to begin with.
The important thing is to get the debt paid off, and the sooner you can knock them out, the better.
While it is important to pay your debts off, paying extra to do so isn’t in anyone’s best interest. It’s very clear that you like the debt snowball method, Bryan, but you’re probably spending more money to get out of debt than you need to, all for the sake of a little psychological boost that you can achieve other ways if you really disciplined yourself. And that goes for anyone who is using the debt snowball method.
See, when you say Traditional method, I think of what I see most people do. They pay a debt off and then use the money from that debt for anything but putting it on the next bill.
To me, debt snowball is paying the same amount on all your bills until they are gone. I happen to use the highest interest rate snowball. Ramsey uses the highest bill snowball.
I agree with what a few say here. Ramsey is working with human nature and emotion. Most people want the instant gratification and can continue the work if they see the results. If that is you, his method works but comes at a price. If you can stay the course without being depressed about slow movement, highest interest rate is the way to go. The reward for that is the least amount of money spent. Patience is cheaper but more difficult for most.
Well said Patrick, except I think you mean Ramsey uses the lowest bill snowball (pay off debts smallest to largest).
I’ve never had debt, but my hubby did. When we were engaged, he had a car loan at 7% and he was saving in his savings account in bank of america which paid 0.5%. I kept on asking him why doesn’t he just pay it all off and he said that he needed the savings. Then I explained he is losing money this way and then I paid it off for him and moved his money to higher yielding accounts. He lets me manage the money now. Oh, so what does this have to do with Dave Ramsey? Well, I think his “save for an emergency fund” first thing is kind of dumb. People should really work on the debts with the highest interest rates first and then work on the savings. If there is an emergency they can obviously just borrow more money.
It’s crash diet versus long haul - both have merits and neither will work for everyone. For someone who needs the motivation in order to maintain the discipline Ramsey’s math is likely correct simply because that person may very well backslide (fail to maintain or even fall behind) costing more in the long run than would be saved using the traditional method. Ironically, the traditional method also offers a psychological boost - to those who find saving money encouraging. For them the extra savings is itself the best motivation even if they have to forgo the quicker victories in order to do it.
For some people paying an extra $1000 is worth it just for the comfort of seeing progress - and the relief they feel from that. The money is less important than relieving the stress they are under. For others there’s no way that it’s worth paying even a dollar extra - in fact, it would only add to their stress. People are just different like that.
To my mind, as a long term diet survivor, go with what you can make work. The prospect of saving $1000 isn’t gonna do anything if you can’t maintain the program and reach the goal. Neither are the little victories gonna mean much if you spend your time fuming over the $1000 you lose using the snowball method.
As long as it isn’t reckless or harmful (skip the all cabbage diet - it’s as stupid as it sounds) the method is less important than the ability to reach the goal. In dieting the goal is to lose weight - if you can do it low cal great! If low carb works for you, also great. Neither is perfect - and no diet works if you don’t maintain it. It seems to me that becoming debt free is much the same - the object is to get rid of the debt not prove you can stick to a method. Go with what you can make work.
Oh, and me? Traditional. I’m 2 years away from being debt free and that’s all I really want.
When I first decided to become debt free, I ran 3 or 4 different scenarios. It may have been my mix of debt/interest rates, but I found that the difference between Ramsey’s snowball and going with the highest interest rate and working my way to the lowest interest rate was minimal. Because I need that strong motivation to pay off 12 different credit cards ranging from a little over $100 to close to $10,000, I chose Ramsey.
Debt can be extremely overwhelming, especially when you have a huge amount spread over many different sources. If I started with the card with $10,000, I honestly believe that I would have been too overwhelmed to continue and would have just gave up. Knocking out those cards that were under $1000 gave me the encouragement I needed to keep it going. Once I get the smaller credit cards paid off, I am reassessing those over $5,000 to see which route will minimize my total payout.
I believe the best route to go is dependent upon the person and their debt situation and their mental situation. It differs from person to person. What works for one may not always work for the next.
Because I haven’t personally read any of Dave Ramsey’s books yet, I haven’t formulated a first-hand opinion of his financial advice. I do agree that the debt snowball method is clearly more expensive in the long run. I think it should be used when all attempts at sticking with a traditional debt repayment plan have failed; in other words, only as a last resort.
This post combined with the one above (Creating a Financial Emergency Plan) reminds me of a few questions I’ve been wanting to ask: how do you save for both an emergency fund AND invest for retirement at the same time? Does one take priority over the other? And how do you justify having 3-6 months’ salary sitting in savings with only a 3% return on average, when that relatively large sum of money could be wisely invested for a much higher return?
We read The Total Money Makeover, and found it helpful (if a bit heavy-handed). The main thing we got from the book that we still do is to track all of our spending in a zero-based written budget. That helped us get spending under control like nothing else. We used the traditional interest-rate-based method to pay off our consumer debt, and now have nothing but the mortgage and my student loans. I get reimbursed by my employer for payments on those, so we decided the emergency fund and investing for retirement was the better next course.
Megan, we have 3 months of savings in a relatively high-yield savings account. The justification (for us, at least) is that it’s liquid and available–not tied up in an investment where we’d pay penalties to get at it. We’re beginning the process now of saving at least 15% of income for retirement in savings vehicles with higher interest rates (Roths and the like).
I know a lot of people dislike Ramsey’s total anathema approach to credit cards. I agree with him on it, but not because I feel that it would lead us personally back into debt. I’m a legal services attorney, and know that the only reason credit card companies can offer incentives to people like me (who pay off their balances each month) is because of people like my clients (who get driven into bankruptcy trying to make the minimum payment). At 33, I’ve built up enough of a credit rating that not having a card doesn’t matter.
I think Dave Ramsey’s advice is excellent for his typical audience. Spend some time listening to his show and you will hear unbelievable tales of the consequences of financial ignorance that will make you shudder. A simple method is what they need to hear.
I would say this about Dave’s show, it is entertaining and has put personal responsibility out there as something we all should be thinking about. From that angle I believe his show (and books) achieves that goal.
I just considered my debt as one amount and my purpose was to lower the amount as soon as possible. To do this I needed to pay the highest interest first. I dont know the reason people consider each debt a separate entity when the total debt has to be erased. Actually to me net worth is a more important number than your debt total.
In my case the Dave Ramsey method is the same as the traditional snowball method (lowest amount first vs. highest interest rate first). All of my debt is currently student loans and they small ones are highest interest. So for me it’s a pretty easy decision on which debts to pay off first.
[…] Your Card: What I Think Of Dave Ramsey. Although I love the idea behind the snowball I don’t implement it in the same way Ramsey […]
One of the things I like about Dave’s debt snowball is that you are starting with your smallest debt. I know he says it is to get the psychological boost. I like it because the sooner you pay stuff off, the sooner you reduce the amount of your minimum payments. You are supposed to put this amount onto the next debt in line, but if something comes up, or you loose your job, having fewer payments in general (because you were able to pay something off quicker with his method) will help you get through an emergency better. We always have only had 1 debt at a time other than our mortgage and it has been a few years since we had any debt other than our mortgage, so we never really had a debt snowball to work on, but this is just my opinion.
Part of the bad math is this - If I have a $10,000 card maxed out and 24%, but making those payments, I should try to find a lower interest card, maybe at 12%. For whatever reason, that card comes in at $4,000 credit line. The DR advocates suggest (after I wave my wand and have $6,000 at 24%, and $4,000 at 12%) that the $4,000 card get paid off first. Nonsense. As Kristy suggests, this is more costly. A small spreadsheet listing all CC debt will show a total balance along with the monthly total interest costs. Easy to see that $1000 paid to the 24% debt saves $20/mo vs the 12% debt saving $10/mo. It doesn’t take long before you see a huge difference in the amount of principal getting paid off each month. It’s too bad Dave focuses on the feelings. I feel better when my net worth is accelerating faster, not getting bogged down by bad advice. Sorry to the rest of you (who are Dave fans) but Kristy and some of the posters here are right on target.
Joe
When I was first introduced to snowballing debts, it was with the highest-interest-first method. It was only later that I heard about D Ramsey’s lowest-amount-first method. Regardless of the method (although I think one should work out the cost/benefit of each method before choosing), the whole point of a ’snowball’ is that when one debt is paid off, the amount previously applied to that debt gets applied to another debt. When you talk about ‘traditional’ method, and just assume that ’snowballing’ is all about paying off the smallest debt first, I think you’ve missed the point of snowballing. I do think this is a good article, though, because it will educate those folks who weren’t aware of the cost of their debt that they should look at the whole cost before deciding to use the lowest-amount-first method.
Kristy- since you asked, I’ll offer this.
I find that a lot of Dave Ramsey critics are partially so because of unfamiliarity. I’ve listened to his radio show on a regular basis for over 3 years, read some of his books, and coordinated FPU courses. I’m pretty familiar with him, his mission, and what he teaches and why.
1) I’ve read post after post across PF blogs talking about haw Dave Ramsey is bad at math, Dave can’t do math, Dave can’t use a calculator. Let me assure you, Dave can do math. He’s a self-described ‘math nerd’. He can run a finance calculator like it’s no ones business. Dave knows full well that his snowball method of smallest to largest debt may very well cost you more money in the long run. He largely favors this method because people actually stick with it. As he says quite often, “If we were such math experts, we wouldn’t have high interest debt to begin with. Math didn’t get you into this and it won’t get you out.” Behavior, and psychology got you in, and addressing those will get you out *and* keep you out - that last part is important. Which leads me to:
2) Nearly every one of these ‘Dave can’t do math’ posts also sharply negates the psychology factor of Dave’s advice. It’s misguided, minuscule, or minor. We’ve used his method, and let me tell you, it’s a HUGE boost to be able to scratch a creditor off of the list. It is an event when you can put some nagging fly out of your life. The same is true for project management. If you have 14 projects on your list, it’s best to knock out a few of the easy, little ones to get them off of your back, rather that trying to tackle the big harry one that carries the most weight. As you knock out those little debts, it give you more ammo to go after those big ones. Towards the end, we were throwing over $3k per *month* at a car loan. That debt, which had the highest interest, would have taken forever had we of tackled it first. Here, it didn’t last long.
Keep in mind, Dave’s snowball method, his babysteps, and everything else he teaches, is derived from decades of counseling families both one-on-one and over the radio, and successfully coaching hundreds of thousands of families out of debt and into financial stability. He’s been doing this a long time, and he teaches his methods because they flat out work.
It’s more than numbers. It’s not just about making a budget and paying off debt. It’s about getting excited about budgeting and paying off debt. It’s getting people interested in their finances, and getting spouses to communicate. It’s about teaching people how to handle money, and not fear it. Dave isn’t injecting psychology and emotions into personal finance - it’s already there. He’s just dealing with it, instead of ignoring it. Listen to his podcast for a week and you’ll begin to understand this. Don’t miss Friday’s show - You’ll learn a lot about psychology and emotion.
I think NtJS hit the nail on the head. While Kristy is correct in pointing out that her member might be forgoing some savings, NtJS is far more on target with his analysis of the psychology behind the Dave Ramsey method. The psychology is far more powerful than the math as it comes with a peace of mind which is frequently missing from the traditional method of debt reduction.
Having said that, my personal problem with the Dave Ramsey method is that it doesn’t fit my life. I’ve got no debt aside from my mortgage but we’re going through enough other life changes that we’re just trying to hang on and measure our baseline before we start drawing (or redrawing) strict budgets. New babies and significant home repairs, etc. These blew our previous budget apart.
Completely agree with your thoughts, NtJS. I will also second listening to the Friday’s Dave Ramsey show which is his Debt free show, to allow people to scream “I am Debt Free!!!” and being able to hear how much people have paid off and the excitement in their voices. It is definitely keeping me on track with getting out of debt, paid off a little more than $17,000 in six months.
@ In debt too - You make an interesting point about people not realizing the snowball effect in general. However, when I talk about the traditional method, I mean that as a snowball effect. I’m not suggesting that when one debt is paid that you just continue to pay minimums on everything else. To me, the natural thing to do would be to apply the same amount you were paying on the previous debt to the next debt - and this is what I teach my clients. However, this is where people going the “traditional” route can get in trouble and why educating people on finance is important. The point of this post is really to show the cost benefit of going the traditional method - with the snowball effect - as opposed to Dave Ramsey’s method.
@ NtJS - thank you for your comments! Let me start by saying that I am actually very familiar with Dave Ramsey’s methodology and his teachings. When I say he’s bad at math I don’t literally mean the man can’t add. My point was to show that his method costs people more money and financial experts shouldn’t be advocating that particular avenue. While I’m fully aware that he tells people his method does cost them more, he glosses it over with how it will make people feel to get out of debt. I have a problem with that. I understand that it can be encouraging to wipe debts off your list and the psychology of this method does in fact work for some people. I’ve never said his method doesn’t work. I’m simply saying that I don’t think it’s the best method. Number one, I don’t think it’s a good idea to pay more money on debts you already owe. Number two, I’m not a believer in advocating easy-outs because it makes someone feel better about running up their debts. The problem is that people have rose-colored glasses on when it comes to their spending and financial experts are supposed to be the ones that help take those off. I also don’t like the fact that he advocates paying off your debts BEFORE you start saving for retirement. With Ramsey’s plan, you can’t move on from one step until it is completed. So, while you’re working to pay off debts, you’re neglecting retirement. I have a huge problem with that, particularly with those in their 40s who really can’t afford to wait. Something needs to be started for retirement and people need to be contributing as much as they can - even while trying to pay off debts. Then, once their debts are eliminated, they can contribute more to retirement. But, it should not be neglected while they’re paying off their debts and Dave Ramsey should know better than to even suggest that!
I believe Kristy’s steps will take longer than Dave Ramsey’s. If someone is barely making minimum payments, how long will it take to save 3-6 months expenses. That could be a couple extra years of interest on the debt, costing much more than paying of debts Dave’s way smallest to largest.
Kristy’s…
So that makes my list a six-step process that looks like this:
1. Build a savings account with 3-6 months worth of expenses
2. Pay off all debt (except the home) using the traditional method
3. 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
4. College funding for children
5. Pay off home early
6. Build wealth by investing - be sure to diversify your portfolio
[…] What I Think of Dave Ramsey - Master Your Card argues that debt snowballing is a shoddy idea and that Dave Ramsey is bad at math. Personally, I think Dave Ramsey’s teachings are useful insofar as they promote financial responsibility, but Dave’s methods are not always the best methods (for instance, see my post The real truth about credit cards: why Dave Ramsey is wrong). Via the Festival of Frugality. […]
Kristy-
I’m happy to comment, and this is a great discussion. In response:
“Number one, I don’t think it’s a good idea to pay more money on debts you already owe.”
Well, no its not, and it doesn’t necessarily always work out that way. But you’re already in the soup. You signed up for the debt. You made the financial decision that got you into the mess. You’re not going to get out of them without a little pain. People tend to learn and remember when there is ‘pain’ associated with the process. It’s the trade that he’s made to keep people on track, rather than giving up, and there is nothing irresponsible about that.
In fact, by trying to minimize the interest paid with the traditional method, one could argue that the traditional method is the ‘easy-out’ as it would have less pain associated with it.
Jennifer also makes a great point about reducing your overall exposure faster with the smallest debt first snowball.
“Number two, I’m not a believer in advocating easy-outs because it makes someone feel better about running up their debts. The problem is that people have rose-colored glasses on when it comes to their spending and financial experts are supposed to be the ones that help take those off.”
Well, there is nothing easy about his way out of debt. Dave regularly refers to his program as ‘a slowcooker and not a microwave; it takes longer, but tastes better’. It’s not an ‘easy-out’ or magic pill. I wouldn’t say that he’s putting ‘rose colored glasses’ on folks when it comes to their finances. He talks about broke being normal which helps bring you down from the ledge about being a financial failure. He’ll certainly knock you around a bit and call a spade, a spade. Stupid is stupid. It just doesn’t do anyone any good to beat people up. There is enough extreme emotions and actions around money and Dave is able to be a calming voice in those situations. He’s always quite positive, which is something I admire a lot. People usually have no trouble being negative and down on themselves.
“I also don’t like the fact that he advocates paying off your debts BEFORE you start saving for retirement. With Ramsey’s plan, you can’t move on from one step until it is completed. So, while you’re working to pay off debts, you’re neglecting retirement. I have a huge problem with that, particularly with those in their 40s who really can’t afford to wait. Something needs to be started for retirement and people need to be contributing as much as they can - even while trying to pay off debts.”
Yeah, that’s called ‘focus’ and ‘intensity’. Some more of that psychology that people like to gloss over. This is the same as the decision to focus on one debt at a time instead of, say three. Yes, Dave will have you stop retirement investing (assuming you’ve started) during baby step 2. The point is to focus your most powerful wealth building tool (your income) on getting out of debt. And that freaks a lot of people out. There’s more to the baby steps than what’s on the surface - there’s a bigger picture. For instance, Dave says that your debt snowball shouldn’t take you more than 2-3 years to complete. Otherwise, you need to sell something big or make a big change to get it into that range. It’s really not long. Plus that extra money will help you get out of debt faster. Otherwise you are essentially borrowing money to invest. You may be making 10% on mutual funds, but what interest rate are you paying on debt? Dave REALLY wants you to be investing and saving for retirement as early as possible, but he REALLY REALLY wants you out of debt. Having debt severely hampers your ability to save and invest, thus you take care of it first.
Now, looking at your modified 6-step process… (I’m long winded, I know)
“1. Build a savings account with 3-6 months worth of expenses
2. Pay off all debt (except the home) using the traditional method
3. 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
4. College funding for children
5. Pay off home early
6. Build wealth by investing - be sure to diversify your portfolio”
Do you know how long it would take someone to save a 3-6 month emergency fund, WHILE still in debt?! WHILE funding retirement?! As Got Money / Not Debt points out, a long time. Maybe years. Part of the point of paying off debt is to take control of your income. At step one, you likely have very little control of it and little experience budgeting. With out doing any math, I would speculate that this 6-step process would easily cost you much more in interest than Dave’s 7. Just for the simple fact that you are waiting so long to start step two as well as handicapping yourself by continuing retirement savings. Early on in Dave’s financial counseling career, the debt snowball was Dave’s step one. The problem was that when getting out of debt, emergencies would come up, even just small ones, and derail the process. Usually it meant having to borrow money, but we’re not doing that anymore, but we have no money, but we have an emergency…. He had to insert the baby emergency fund as step one, to keep things on track until you were able to put away a proper emergency fund.
Now, I do think that $1000 is not necessarily adequate for the baby emergency fund for all families. You need to access potential emergencies and other parts of your situation (dental, health insurance…). You may have above average risks. Certainly no more than $3000, as you shouldn’t be putting off step two. $1000 is a good amount and more than many have in savings prior to starting. But you may need a bit more to get you by until step three. My opinion, from experience.
Like I said, his method is what it is because it flat out works. He’s spent years and years and years getting it right and watching people succeed with it. We’ve been using his method for ~4 years now. I have to say that his assessment of personal finance being 80% behavior and 20% math is dead on.
I know that not everybody likes Dave, and thats OK. But I think you may have less of a conflict with his methods than you think. Maybe I’m wrong. Anyways, once again, great discussion.
Cheers
Problem is that most people using Dave Ramsey’s method are bad with money PERIOD. They have no self-control and are unable to live within ones means. So they need to snowball debt bceause they can’t control themselves.
They need the direction Dave Ramsey Gives them. I too believe he’s bad at math, but he knows his audience. People with large car payments, large student loans, lots of credit card debt.
They are broke. These are people who have no common sense. They don’t get that you have to even live on a budget. So how financially savvy are they to realize that % matters?
I think that at least they are doing something right.
I think a lot of people are underestimating the psychological aspect of getting out of debt. We’re in a Dave Ramsey class right now, and there are some people in there that have huge debt - and haven’t been able to get out before. Now with the debt snowball they’re able to stick to it - and get a huge psychological boost every time they pay off one of the littler debts, and they’re working their way up to the bigger ones. It isn’t easy - but putting those notches in their belts has helped them stay on track.
Is the mathematically the best way to get out of debt? probably not. Dave Ramsey even touches on this in the class we’re taking. But it does take into account the huge emotional and psychological factors that go into finances. People get into debt because they spend emotionally, or have things that trigger them to spend. You don’t get into debt by being good at math. By the same token, getting out of debt might not be done in the cheapest way, but it is an effective way - which is very important for most of these people.
My wife and I are blessed that we paid off our last consumer debt last year before taking the class, but Ramsey has a whole lot to offer others as well including my personal favorite - the zero based budget - so you know where all your money is going.
NtJS,
It’s funny, I do agree with a lot of what you’re saying, just from a different angle.
First, I don’t think that Ramsey is putting the rose-colored glasses on these folks. They were there to begin with, I just don’t think he does a good job of taking them off in a lot of ways. I 100% agree that most people learn and remember when there is a little pain associated with the process and therein lies the problem with Dave’s method. The extra money isn’t the pain people are going to feel, nor what they need to feel in order to learn. Dave’s method caters to what the root of the problem is in the first place, the need for instant gratification. By paying off these smaller debts, this method feeds into the mindset that we deserve what we want now. The extra money they pay isn’t an issue for people because if it was, they wouldn’t have put it on credit to begin with. They just want to see themselves get out of debt quickly and effortlessly. The traditional method, on the other hand, really puts people in a place to focus their efforts because they aren’t going to have that instant gratification. They’re going to have to sacrifice and make tough decisions to get the results they want. It takes time and they don’t see the immediate results, which is why so many people give up. I think this is very important as well, because in order for people to learn from their mistakes, they have feel that pain that you mentioned. While I still don’t think teaching people a method that costs them more money is appropriate, unfortunately, money isn’t the learning factor for most people. That said, I have to disagree that the traditional method is the easy-out. If it were so easy, Dave wouldn’t have a job.
I understand your point about it taking longer to pay off debts while still trying to save for your emergency fund and retirements, but it brings us back to the pain. People choose to put themselves in debt and no one has ever suggested that getting out was easy. However, I got myself out of debt in 18 months while I continued to save for my emergency fund and contribute 6% to my 401(K). I lived off of a TIGHT budget for those 18 months, believe me. A lot of people would probably choose to have more of a life than I did for that period, but I did it. In the grand scheme of things, it didn’t take me that much longer to pay the debts than it would if I weren’t saving at the same time. Each person will be different. I’m not suggesting that someone must save $200 a month to their savings and 10% to their 401(k). However, they can probably spare $20 bucks a month and 1% to their 401(k) while working on their debt. It’s not a lot, but that’s the beauty of compounding interest. Besides, those who wait run the risk of never starting to save because they’ve gotten into the habit of spending that money AND those who wait to contribute for their retirement have less money when the time comes to retire. Women especially run a very heavy risk with that. The statistics from last year showed women making $.77 to the average dollar that their male counterparts made. That’s a little over $300,000 lost over the life of a career - imagine what that does to their retirement fund. Now couple that with the fact that women tend to be too conservative with their investments in the first place and they really can’t afford not to be contributing. Plus, with social security not being guaranteed for the next generations, people have to consider their options. Getting out of debt is important, but so is contributing to a retirement plan and I just don’t think it’s unreasonable to expect people to spare $20 a month and 1% while they work on getting out of debt.
I think Dave compartmentalizes each aspect of a person’s financial picture and you run a very dangerous risk of adversely affecting another area when you don’t look at the whole picture. If you’re operating a business you don’t just focus on getting rid of your accounts payable for a month and neglect the other aspects of a business. Things get out hand and it tends to hurt more than it helps. The same holds true for personal finances in terms of debts and savings. Retirement and savings are a part of the whole picture, just as debt is. You can’t simply cut it out of the equation and return to it when you feel like it. Certainly, the focus can be shifted from savings and retirement to debt by some degree, but it should never be cut completely from the picture.
As I’ve said, I’m not suggesting that his method doesn’t work, I simply don’t think it’s the most effective way to educate people, keep them out of debt, and prepare them for their financial futures. However, I’m very glad that the method has worked for you and hope that you guys continue to stay out of debt!
Very good discussion by everyone here! Please continue to contribute your thoughts and ideas!
One long comment deserves another.
I’ll try and be more brief for everyone’s sake.
“The traditional method, on the other hand, really puts people in a place to focus their efforts because they aren’t going to have that instant gratification.”
Instant gratification isn’t a bad thing when it’s a good behavior that caused the gratification.
“By paying off these smaller debts, this method feeds into the mindset that we deserve what we want now.” “They just want to see themselves get out of debt quickly and effortlessly.”
No. You’ve got it wrong. It’s a win. It’s not an entitlement thing at all. Paying off a small debt is a small win. It gives you self-confidence to tackle something bigger.
“The traditional method, on the other hand, really puts people in a place to focus their efforts because they aren’t going to have that instant gratification. They’re going to have to sacrifice and make tough decisions to get the results they want. It takes time and they don’t see the immediate results, which is why so many people give up. I think this is very important as well, because in order for people to learn from their mistakes, they have feel that pain that you mentioned.”
Whoa! People aren’t going to have to sacrifice and make tough decisions to get results simply by using Dave’s debt snowball?! Let me tell you that it is not the ‘easy street’ you seem to think that it is. It’s all about “sacrificing now, so that we can win later”, “beans and rice, rice and beans”. I think you are mistakenly associating ‘people succeeding and feeling good about it’ with ‘this plan must be easy and painless’. Many of your statements point to that, and it couldn’t be further from the truth.
Potentially having to tackle a very large debt first using the traditional method is not putting you in a place to focus. It’s setting you up to fail. If you start a diet and set lose 50 lbs as your first goal, then you are setting yourself up for failure. Week after week, weight loss or not, you’ll not hit your 50 lb goal for quite some time. But a first goal of 5 lbs, a second goal of 15, and a third of 30, is something you are more likely to stick with as you are more likely to see some achievement. People like to win, and it’s good to achieve goals especially when they set you up to achieve the next one. I never though I’d have to explain why that’s a good thing.
“However, I got myself out of debt in 18 months while I continued to save for my emergency fund and contribute 6% to my 401(K).” “In the grand scheme of things, it didn’t take me that much longer to pay the debts than it would if I weren’t saving at the same time.”
But it took you longer. And during that extra time, you paid more in interest. I though your point was to not pay more? Again, it’s focus and intensity. If it freaks you out that you aren’t saving for retirement while debt-snowballing, then good! Maybe you’ll get more intense and get out of debt faster. Every available dollar that you don’t put towards debt reductions is just more time that you spend in debt. Compound interest is a beautiful thing, but that knife cuts both ways.
Your business analogy doesn’t make sense. Accounts payable and receivable are still happening, shipments are still going out. But you’re focused on profitability for a period of time. Then product quality. Then customer service. Then innovation. Each area doesn’t just fall apart when you switch gears. “You can’t simply cut it out of the equation and return to it when you feel like it.” Yes, you can. And in the baby steps, you do. It’s not difficult to temporarily stop 401k contributions (other than mentally), and it’s not hard to turn them back on when you get to that step.
“As I’ve said, I’m not suggesting that his method doesn’t work, I simply don’t think it’s the most effective way to educate people, keep them out of debt, and prepare them for their financial futures.”
There’s easily a million or so people out there that will disagree with you on that one. Seriously I think you’re confused about what he teaches and how it works. You need to call him. He’ll be more than happy to explain it.
Congrats on being debt-free.
I know this is an old post but I just had to comment. I think the important thing to take a way for this discussion is don’t get soooooo locked in to one approach that you close your eyes to other options. Before you choose to use either the small balance method or the highest interest method it only wise to do a full analysis of your situation and then choose and implement the one you feel most comfortable with. In some cases it might be best to use a combination of both methods depending on the mix of debt.
One last point….
It is amazing at the number of people that have never heard of either method to pay down their debt and as a result of their lack of knowledge they the often do not concentrate on paying any accounts off but will instead add a little bits of extra money meaning paying more than the minimum required payment across all of their revolving accounts fully believing they are making progress paying down their debts. This method ill cost several thousands of dollars more than either the snowball or traditional.
[…] alone speaks volumes about Ramsey’s reach in the personal finance sector, but not all of the reviews have been glowing. I personally consider his book, The Total Money Makeover, one of my all-time top […]
NtJS - I think it’s safe to say that we’re going to have to agree to disagree. I’m not confused about his methodology at all, I simply don’t like it. I don’t like what it enforces; instant gratification - well meaning or not - is what put people in debt in the first place and I don’t like that people spend more money than they have to on their debts without focusing on something more meaningful. The business analogy makes perfect sense, if you focus only on one area of the business and neglect the others - as you do with Dave’s method - the neglected areas fall to the wayside and then it is always a game of catch-up. If you had maintained the other areas while putting a little more focus into the one area, then it’s not a battle to rein everything back in and catch-up.
To my own situation, 18 months is hardly a long time for someone with $25k in debt. I had the means to pay it off and still contribute what I did. However, had I not been contributing, it would have taken me 14 months - but I would be that far behind on my retirement. That four months difference on my 6% credit card as opposed to four months at 18% saved me money, even though I did pay a little more in that four month time. However, with Dave’s method, I would have been paying way more simply because the interest and the balance was higher on that card (the rate got jacked up on me because I didn’t read the fine print when I got the card - 0% for 6 months and then it went to 18%). So in my case, four months worth of interest at 6% while I was contributing to my 401(k) and savings was well worth it to me. If memory serves, the balance on that card was only $5,000 which was something like $1260 a month I applied to that card. And since I was 22 at the time, my retirement has quite a bit built up from mine and my employers contributions with plenty of time for it to grow to what I want it to be. That was a great incentive for myself.
All that said, I’m fully aware that people need smaller goals to achieve the bigger picture. I’ve actually written another post on how to do that - a step-by-step guide on how to get out of credit card debt, with the traditional snowball method of course, and I’m just waiting on Jonathan to approve it. Your weight loss goal is absolutely correct; however, that doesn’t mean it can’t be applied to the traditional method. If you’ve got a card at 18% with a $10,000 balance, that needs to get paid off before a $5,000 or $1,000 at 6%; plain and simple, you’re spending way too much to go the other way around. But you can set smaller goals for yourself to achieve and then reward yourself along the way. For example, say you set a goal of paying off $2400 in 6 months. When you achieve that goal, reward yourself. There are many ways to do it, so long as it’s consistent with your overall plan. Some people get to scratch that goal off their list and that works. Myself, I reached a goal and I got to buy a new DVD - that’s my thing. I’m all about positive reinforcements, but there is a big difference between positive reinforcement and instant gratification.
[…] What I Think of Dave Ramsey @ Master Your Card […]
Actually the last baby step is: Build wealth and give!
This (giving) is what caught my eye and led me to look at what he had to say. This is the first “financial planning” person to provide you with a life plan to focus your efforts. The first step in having a small emergency fund of $1K, keeps Murphy’s Law away while you chip away at your debt. Sure Dave is no Warren Buffet, but I have seen first hand how he has helped so many people in our personal budget training.
I followed a slightly modified Dave Ramsey snowball when we destroyed 70k of debt in about 4 years. The place were a lot of people disagree is with reality not theory. Traditional snowball makes mathematical sense, agreed. But if the best theoretical plan doesn’t actually achieve the end goal it’s not the best plan anymore.
A good analogy may be two people that are standing in front of a mountain and one climbs it because it is the shortest distance and another walks 20 miles out of her way to go around the mountain. The second person gets to the destination and the other gives up because the path was too hard.
The personal factors like psychology, motivation, and personal history are extremely important, often more important in the grand scheme than theory.
“……but I believe I have passed the scope of his teachings”, I agree with MyMoneyAdventure (#1 comment)
I’m beyond what he do also. However, I would recommend him to a beginner that does not know anything about how money works.
DR takes a biblical approch, he wants to see people out of debt PERIOD. Debt is not a good thing, according to the christian approach.
I never did his plan while getting out of debt. I kinda did all steps at once:
save, pay debts, invest in 401k, invest for college fund and had non-retirement investments… at the same time
According to DR plan, you can have $200K in student loan, so if it takes 5 yrs to pay back, you cannot invest in a retirement until you pay it off.
I have to disagree.
Irregardless is not a word. It’s just regardless. No ir.
[…] of Dave Ramsey is that he’s horrible with math and probably not so good at psychology, either,” Kristy writes at Master Your […]
We paid off $52,500+ in debt in 12 and a half months using Dave Ramsey TMM baby steps. When we first created our excel chart documenting our debt snow-ball plan, my husband advocated for paying off the debt by interest rate as he felt that made the most sense. Since I had just read TMM I wanted to follow the Ramsey plan and it worked for us. We paid off 7 of our 8 debts in the first 6-7 months and then paid off the biggest debt (husband’s grad school) over the next 6 months.
We also changed our spending habits and no longer use credit cards for our day to day spending (we do still use them for travel or to take advantage of a 0% offer) and we had a dramatic decrease in our spending.
I think Dave Ramsey’s plan is more than just the snow-ball, its about changing one’s finanical habits by moving away from using debt, having a budget or a plan, etc.
I guess my college educated husband (2 degrees) and my law school educated self just lack the common sense to really really get ourselves out of debt, because we tried ALL the debt repayment methods, NEVER got anywhere because our money was going in small amounts to many sources, and so finally out of desperation and depression we chose to try Dave Ramsey.
Despite our ignorance, being bad at math apparently, and lacking common sense it has worked for us (I know, I know, shocking).
Are we Dave Ramsey clones? No and we won’t be. We have modified some of the suggestions he makes.
NtJs is absolutely correct: Human psychology cannot be removed from financial matters just look at what happens in the markets in response to various news stories. Just watch what happens when bank customers are upset about new account fees, overdraft fees and the like. Listen to the average person whose investments suddenly lose 50 percent of their value (on paper, not realized). Do they explain it away as “oh that’s just the way the business cycle works”? I didn’t think so. Why did so many people avoid investing in tech stocks after the dot come bubble burst? FEAR.
People should just go with whatever method they feel works best for them. If that means the traditional approach, good; ;if that means Dave Ramsey’s program, that’s good too; if that means something else, such as?
I think Kristy has never been in any significant debt.
Why does Dave Ramsey work?
For the same reason that we have the subprime mess.
People are lazy, selfish, and greedy.
Most people don’t want to think for themselves, especially when it comes to math and finances. Nor do they really want to discuss their finances with anyone else. They would rather be told what to do. Dave Ramsey realizes this and presents a plan that works for the lowest common denominator. If you can read and think just a little, his plan works. When you present people with options, they get overloaded and decide to do nothing instead of something because they can’t figure out what is best. If Dave Ramsey’s followers really cared about doing something, they would have done their research long before they found Dave Ramsey. How many times have you read stories about people complaining that before they found Dave Ramsey they were going nowhere? Dave Ramsey presents people with a basic financial plan and a basic way of implementing it. It may not be optimal, but something is better than nothing.
Hopefully, these people will educate themselves about proper finances.
I find it absolutely fascinating that you think that anyone that has accrued debt and chooses DR’s approach to get out of it is uneducated/lazy/lacking common sense. Well educated, high paying jobs and we love his approach. My husband and I put in 140 hours a week between 3 jobs to get out of debt at this point in time. We will only be doing it once and the time frame will last less than a year for the debt to be gone…period. Dave’s program isn’t meant for a slow walk to the debt free finish line, its a race…get there as fast as you can and get rid of that part of your life. We are looking forward to the end of the year when we free up 4k a month in our budget from no debt payments. How fast do you think we can build wealth with 4k a month in investments?
Dave is about teaching people a different way to go through life. I know lots of people in my very expensive neighborhood who have a lot more risk/debt than we do. Most people would think they are very successful, manage their credit card debt responsibly…as did we. We just realized there was a different way…and we are taking it. Dave motivates, brings people along in steps that increase their security, their confidence and makes them proud of what they are accomplishing. Obviously, some of you have never experienced a major life crisis that puts you in a position you NEVER thought you would be in, no matter how well you have planned things.
In the end, people’s lives are changing forever and they are learning…does a few dollars in interest along the way negate that? I don’t think so…and depending on their debt, their highest interest might very well be their smallest as dept stores tend to have the lowest credit amounts with ridiculous interest rates. If he is teaching them to get out of debt, walking them through the steps and showing them a different way - he deserves a vote of confidence. He’s not bad at math, he’s good at people.
I have not said that people who use the Dave Ramsey’s method are uneducated, lazy, or lacking of common sense! If that’s what you took from my post and subsequent comments, then you’ve missed the point. As someone in the financial industry, it is my responsibility to educate people about their finances. Very intelligent, well-educated people don’t know everything, especially when it comes to their finances. I would never assume that because someone is in debt and needs help getting out that they are lazy or lacking in common sense. I have stated, time and again, that I realize the Ramsey method works for some people; however, I don’t believe it is the best method. Financial experts should not be teaching people methods that cost more money just to make someone feel better about being in debt. That has nothing to do with the individual and everything to do with the financial expert. If you want to debate my reasons, that’s perfectly alright with me. However, I respectfully ask that you not put such negative words in my mouth. I would NEVER assume those things about people struggling with debt, nor did I imply it. All of my comments have been geared towards Dave Ramsey’s method and the fact that I disagree with it being the best method to get out of debt.
Dave Ramsey is not teaching peope to save money. He is teaching them to live without debt
Years ago (1980’s) in Philadelphia I used to listen to a radio broadcast hosted by Harry Gross on finances. Year later and now living in a different part of the country I heard of Dave Ramsey. Started listening and got caught up in the hype and excitement created by the show. His constant outbursts, attitude and treatment of anyone who does not follow his steps exactly was a real TURNOFF. Didn’t some one in an earlier blog state that his show was calming? His methods work, but in reality are not the best method in the long run. I listened with an open mind and do not agree with most of his teachings. Eating beans and rice all the time will lead to expensive health issues not to mention the need for beano. His only real focus is Debt elimination using the Emotional tough love method. Listening to DR is a stepping stone for those who have no financial education to move on to a real financial plan. DR steps are not all negative, by listening to Dave Ramsey I realized the need to simplify my life. I adapted the snowball method to highest interest first. There are other financial, frugal websites out there who all point out that the mathematics used by DR cost more in the long run. I’ve created my own excel financial plan and work and re-work the plan adapting to changes. And Yes, I still on rare occasions use credit cards when an emergency arises. I see that a log of the readers here are caught up in DR’s hyper explosive personality and attitude that there is one and only one way, His.
Debt is debt and the total amount of all debts with the exception of mortgages should be consider as one, work on the total amount and do not focus on the number of debts and go from there.
I think the biggest issue is everyone here is stuck on the fact that Dave Ramsey’s method is simply about making the person feel good, but it’s not entirely. It also helps reduce one’s monthly finicial obligation which allows for a bit more flexability when needed. For families living paycheck to paycheck, especially in the lower income brackets, this can be a god send in times of crisis. Having never read his book, nor listen to anything he preaches, life and trail and error pretty much brought me around to his method anyway.
In my case, my debt actually came from trying the traditional methods when my debt was much more managable, but as each family crisis came up, this method left no wiggle room to deal with and cope. Hence the vicious cycle we got stuck in. After a suprise jobloss of both me and my husband within 3 months of each other, which came 6 months AFTER the birth of our first child. Having to relocate(paid by us) and take major paycuts, we found ourselves in trouble. For 6 years we struggled to make ends met and climb out of the hole using the traditional method. Each time issues arose, it just made matters worse as our monthly obligations never decreased and each emergency usually tackled on more debt because of it.
Now for the past 2 years, we’ve used the smallest balance method instead of the largest intrest method and managed to reduce our monthly obligations by over $500 and are on track to be debt free by the end of the year. Something that the traditional methong never got us close to doing, not for the fact that we quit trying, simply that it didn’t do enough to help our overall finacial situation, so we were constantly sliding backwards when ever problems came up.
Being rid of the $500 in bills, meant we were much less stressed out by the rising gas and food prices. Nor are we going to be hard pressed to deal with the fact that my husband’s job may require a relocation in the next couple of month’s which may mean a new job for me which could very well mean a lower overall income. I can now afford up to a $10,000 pay cut and still be able to handle debt repayment. Had we not gone this route, this sort of change would have at least cause a halt to the debt repayment.. but possibly adding to the debt as we struggled to get by again.
The one thing I’ll note, is that I do agree with Kristy on the continuing to save while repaying debt. $1000 emergency fund doesn’t go very far anymore, especially when it’s a family with children involved. One car repair or ER visit can completely wipe that out and they happen more often then you’d think. We opted to continually contribute to ours while working on the debt and while it may have slowed us down, it has ensured that we were able to stick with the plan no matter what came up.
I bet this thread will last forever lol
I love love everything that NtJs spoke on. I have been on the Dave plan for 6 months. I really don’t want to get into a debate about math but I can tell you the other things that being on the plan has done for my life.
1. GIVING - I have been on the TMMO for 6 months and since I have been able to manage my finances I have been able to give to people when in need. Before I couldn’t rub two pennies together let alone give someone a helping hand. WITHOUT NEEDING IT BACK
2. EXCITEMENT ABOUT LIFE - I was in a deep deep depression almost on the verge of suicide. I was so overwhelmed at the age of 25 about life and money that I just didn’t want to be on earth anymore. Its a sad fact for young adults so please don’t discount that as just (my situation). Now that I have a hold on my finances I see an extremly bright future for myself and I am far far away from ever thinking about taking my own life.
3. MORE TIME WITH FAMILY AND FRIENDS - again I used to be stressed out. I didn’t want to be around family or friends, now I spend time with them an they love me more for it to see me doing so well and so happy all the time.
So if you don’t like Dave’s teaching well all can’t be one. Its sooooooo far away from it being about math you all don’t even know.
Dave Ramsey’s math skills are not the issue here. Neither is someone’s “feelings” about money. Dave Ramsey takes the emotion out of money and helps you to get real about it. Yes, he touts “debt free”, using cash and dumping credit cards as a form of spending, but he also explains how married couples and families need to be on board together. Then he goes on to explain doing what works for you personally.
Let’s get “real” here because we all have been encouraged for the past 20 years or more to “buy” everything on credit. Take a look at commercials and marketing campaigns that reach out to our kids, too. Board games are even utilizing credit cards. Living within your means is the basic philosophy I have interpreted from Dave Ramsey. It makes sense!
As for Dave’s debt snowball - well it worked for me and my family! I couldn’t even attempt to do the above author’s first step of building a savings account until I was out of credit card and auto loan debt. Baby step #1 gave us a little bit of financial security while working on Baby step #2. Best of all we worked on this as a family.
Life happens. Jobs are not secure. Skills are. In fact, skills are even marketable enough to help you make money to survive. Why would I want to use my skills to support someone else’s bottom line. I would prefer to use my skills to support my family’s bottom line.
We live in a capitalistic country. We have the freedom of choice here. Do we continue to let others tell us how to make our money, how much money we should make, and then tell us what to do with our money? Or do we listen to people who tell us how to hang on to more of what we earned without any benefit to themselves. Banks, Savings and Loans, Credit Unions, Credit Card Companies, etc. are all in the business of making a profit. As soon as people figure out a way to hang on to a few more of their dollars to do what they want to with it along comes a “new” or “revised” fee structure.
One of the other things Dave Ramsey touts is to “pay it forward”. Does a bank, savings and loan, credit union, credit card company, etc. “pay it forward”? I don’t think so. Unless they can figure out a way take it out of their marketing column on their balance sheet. Where do their marketing dollars come from? Maybe it comes from that “new” or “revised” fee structure?
Go Dave Ramsey!
“One of the other things Dave Ramsey touts is to “pay it forward”. Does a bank, savings and loan, credit union, credit card company, etc. “pay it forward”? I don’t think so. Unless they can figure out a way take it out of their marketing column on their balance sheet. Where do their marketing dollars come from? Maybe it comes from that “new” or “revised” fee structure?”
This paragraph came right after a paragraph where you stated that “We live in a capitalistic country.” Yes we do, which is why banks charge for their services. That is how they make a profit, which in turn gives share holders value. That is how capitalism works. As long as they stay within the legalities of fair lending practices, they charge these fees to make a profit. It also allows investors of various funds to make money. I know that Dave hates those “snakes” at the big, bad banks, but I am sure that a number of his funds contain stock in financial institutions. So those same “snakes” are making him money as well. Again, as you stated, “We live in a capitalistic country.”
But I digress…
The problem with Dave’s method of not saving for retirement before all debt is paid off is that you can never make up time; however, you can make up the extra interest you pay on your debt by saving early. Dave has even suggested stopping your 401(k), which, unless your bills are more than your take home pay, should NOT be done. Here is why:
401(k) is a pre-tax savings plan. This means that more money will go into the plan than the money you would have received after taxes. For example, at my last job I made 90K, and I put 6% in and got a 50% match to my contribution. This means that $231 was put into my 401(k) and $115 was put in by my employer, giving me a total of $346. However, my net take home pay was only $140 less than if I had not contributed. That means that I made $206 right off the bat!
Guess what that means? If two people making that income had 10K in total debt at 12% interest, and person A uses Dave’s method and person B continued to contribute, person A would pay off the debt sooner, but by the time person A starts contributing the extra money, person A will NEVER catch up to person B due to compounding interest. Doesn’t matter how much you put on the interest for the 401(k) or how much you put as the amount the people have to put against the debt. Person A simply gets an extra 140 against debt, and Person A will never catch up to person B…EVER! And even if you subtract the total interest paid from the end retirement calculation, it will still be less.
Another problem I have with Dave is his use of “ELP” financial advisors “with the heart of a teacher.” I looked one of them up in my area, and I wanted to check out his advice. He wanted me to do what Dave suggested with the 4 funds (Value, Growth, International, and Large Cap), but each fund ranged from 1.5 to 2.5% in cost! Ouch! If that doesn’t seem like much, do a search for John Bogle and Tyranny of Compounding Costs. Charts showing the result can be found at http://403bboondoggle.blogspot.com/2007/06/tyranny-of-compounding-costs.html showing that a 2.5% cost on a fund can cost you almost 80% of your wealth! Given Dave’s target audience, he should only suggest low cost index funds (at about .1% cost) for investing long term (index for stocks and bonds).
As Kristy pointed out, Dave’s method (both for debt and investing) cost people money, which is not the role of a financial adviser. If people have an emotional problem with money, they shouldn’t use an emotional solution; instead, they should see money as a tool, no different than a hammer or screwdriver, and should be shown the proper ways to use that tool. Anything else is fiscally irresponsible.
I’m glad to see that it was pointed out that snowballing starts small and gets bigger. What ever view you see it from.
You guys are not to smart. I hear you shouting out numbers and hating on this dave ramsey guy but if you us your head then you will see that if you pay off your small debt first then you will be able to carry the payments up and pay them off quicker. That means less in finance charges. Its ok you guys only have book smarts so it is not your own fault. But keep trying and you might get this whole common since thing just keep trying.
It’s perfectly alright for you to disagree with my views, and those of others. That is what makes a discussion thrive. However, please be respectful. Do not call each other names and do not question someone else’s intelligence. Thank you for your consideration on this.
My wife and I are Ramsey fans. We use his approach. While I haven’t read all of these comments, I’m seeing the same tried and true criticisms. Just a quick take:
1) Dave openly admits the debt snowball is not financially optimal - he says it is behaviorally optimal.
2) I find it really funny people convince themselves it is a flawed approach due to the potential of paying a little more interest. I find it funny because clearly, anyone getting into a high debt scenario isn’t thinking about the cost of interest to begin with? Why should haggling over a few extra interest points matter when the real issue is the USE of debt. That’s why Dave’s plan works well.
OK, this whole ultra anti-debt attitude is pretty messed up. Dave Ramsey won’t even take credit cards on his website. What is wrong with using a credit card (actually, several) to take advantage of cash back rewards and paying it off each month? I get about 1% off my total household expenses doing that, and that adds up to a good chunk of money each year.
Of course no one should be carrying debts that cost 10%+ in interest (in fact, 5% is somewhat high). It’s also a bad plan to run up credit card debt in the first place. However, contributing to your 401k is usually MUCH MORE IMPORTANT than paying off credit cards quickly. Say your company matches 50% up to 6% of your pay. Let’s say you make $4,000 per month. You put $240 (6%) into the 401k and your employer puts in another $120. Let’s say that you earn a reasonable 5% on the account, and you get no raises. Let’s also say you have a credit card debt of $10,000 at 5% (paying a higher rate? get in on a lifetime refinance deal - see Chase for balance transfer offers, or the Advanta 2.99% lifetime offer).
Scenario 1: We forgo the $240 401k contribution and pay the debt with that money in addition to the minimum payment. We pay off the debt in 31 months at a total interest cost of $612. After paying off the debt, we start putting the money in the 401k instead. After 10 years, we have net worth of $38,000 and in 20 years it is $117,000. Not bad!
Scenario 2: We make only minimum payments on the debt while investing the $240 in the 401k. It takes us over 20 years (!) to pay off the debt, and it costs us about $2500 in interest. However, after 10 years our net worth is $53,500 and in 20 years it is $145,000! Hmmm… that’s better!
The problem people get into when they get anti-debt is they forget about the asset side of the balance sheet. Only focusing on the interest costs makes us overlook the value of a company match.
If you believe your job is secure (and you should always UNDERestimate this), your most important priorities should be:
1. Contribute at LEAST enough to your 401k to get your company match (this is almost always a no-brainer).
2. Refinance any credit card debt onto a lifetime balance transfer offer preferably no higher than 5%.
3. Make a budget so you can live within your means. Don’t get into any additional debt through careless spending.
4. Get any free money Uncle Sam will give you with Roth and deductible IRAs.
5. Save at least 3 months of expenses in a high-yield savings account.
6. College funding and general wealth-building investing (so long as you are earning more from this than your debts cost in interest - otherwise pay down those debts).
You simply can’t afford not to take free money - period.
But there is no such thing as free money, Tim.
If you believe you have outsmarted a multi-billion dollar industry which is offering research-tested, statistically tracked loan products to you then you are mistaken. All you are doing is playing with loaded guns.
They know the numbers and know that eventually the probability is very good that you will screw up or they can invent a problem. You are late with a payment or they somehow “accidentally” don’t get the payment. They can change the rules on you pretty much at will and you don’t have much say in it. These are not honest, fair-minded people running these companies. Very easily, that 1% you are craving turns into a negative 2% loss for you.
Why is 1 percent so essential to a budget? Why not just go cash only, drive a little slower to and from work everyday, or buy some store-brand groceries once in a while. There’s your coveted 1 percent savings (probably more) without dealing with slimy credit card companies.
Hey, guess what Masteryourcard dude, I’m debt free including my hose and I am only 26. I used the baby steps: Paid off my car first, then my school loans, then my house (smallest to larges). I make what an average US citizen makes, was not given any inheritance or hand outs. I busted my butt, and my wife and I are free of debt, over $100,000 worth of it. Oh and I was also putting over 20% of my income into retirement (you are allowed to put money in retirement once everything is paid off except for the house).
Also, the amount of interest that you save in doing it your steps would probably buy you a happy meal at Mcd’s. When you are on the plan, your motivation level to pay debt off should be top priority. That means that you are putting a lot of EXTRA money on the smallest debt. This EXTRA money goes on the principal of the loan; this reduces the principal which lowers the amount of interest that is due (5th grade math).
“COMMON” (JOB BLUTH - Arrested Development), you are still paying the minimum amounts on your other debts. It makes sense, your steps just makes things complicated and annoying, (did you get out of debt using your steps?)
-Thanks for your great insight
PS
I guess I may be able to argue your point because; I HAVE NO DEBT, do you?
I’m a well educated, middle-class, business owner.
Until I read Dave Ramsey’s book, I didn’t get that debt is BAD.
I didn’t get much personal finance education at home or in school. The first day I arrived at college to pick up my first student loan, there was a handsome, well-dressed young man handing out credit card applications.
And so it started.
$108,000 in debt later (and that doesn’t include the house), I’m following Dave Ramsey’s steps, but using my judgement and the advice of my personal financial advisor to modify them to suit our own individual situation. We have consoidated the highest-interest debts into a loan at a a much lower interest rate and will be paying off the remaining debts as quickly as possible, ranking them according to an interest-saving (about $850 vs. smallest-to-largest) and tax-planning strategy.
I appreciate the framework that the Ramsey philosophy provides, but I do think that it’s best if each person educates themselves about other options and chooses to follow his steps based on that education.
I think the core argument here is — maybe his methods aren’t best for everyone, and if an individual blindly follows the path advocated by any single advisor (especially one who has formulated a plan that is designed to be used by the masses), then maybe it won’t be an optimal plan for that person.
BUT, getting control of your personal finances using any method is better than the alternative, isn’t it?