Many folks looking for a way to get out of debt and achieve financial freedom eventually gravitate to financial expert Dave Ramsey’s Baby Steps program. One thing is certain: Regardless of the pros and cons, there is no denying Ramsey’s seven-step plan has helped many people get out of debt over the years. However, I still believe it offers plenty of dubious advice.
So what, exactly, are Ramsey’s seven baby steps?
Well … here they are, along with my assessment of each:
Step 1: Save $1000 to start an emergency fund
Ramsey’s Reasoning: Establishing a $1000 emergency fund protects you from acquiring new debt due to unforeseen circumstances while you’re working off existing debt.
Do I agree with Dave? No.
Why or why not? As long as you still have available credit, paying down your high-interest credit card debt should be priority-one.
My two cents: If I was deep in debt — but still had available credit to tap — I’d skip this step and rely on my credit card for those rare emergencies.
Step 2: Pay off all non-mortgage debt using the Debt Snowball method
Ramsey’s Reasoning: Paying off debt is all about staying motivated; the debt snowball provides the inspiration required to keep yourself committed to the debt-elimination process.
Do I agree with Dave? No.
Why or why not? Even Ramsey admits that his debt snowball method makes no sense. That’s because it retires IOUs from smallest balance to largest, without regard to interest rates. This only creates an illusion that you’re making quicker progress. In fact, you’d be better off paying down debts with the highest interest rate first.
My two cents: If you’re truly committed to getting out of debt, why squander your hard-earned money on financially-inefficient psychological gimmickry?
Step 3: Save three to six months of expenses in a money market account
Ramsey’s Reasoning: Once your non-mortgage debt is retired, it’s time to focus on building enough savings to provide a financial buffer to handle unforeseen life events.
Do I agree with Dave? Yes.
Why or why not? It’s hard to argue against the importance of a robust emergency fund to handle major financial setbacks resulting from the loss of a job, health issues, and accidents.
My two cents: I keep my emergency and rainy day savings in a high-yield account for better transaction flexibility.
Step 4: Invest 15% of household income into Roth IRAs and pre-tax retirement
Ramsey’s Reasoning: After retiring your non-mortgage debt, it’s time to focus on your long-term financial security in retirement.
Do I agree with Dave? Yes … and no.
Why or why not? Like many financial rules of thumb, Ramsey’s 15% one-size-fits-all recommendation cannot be reasonably applied across a broad spectrum of individual circumstances.
My two cents: Your retirement contribution allocation depends on when you start saving and your target retirement age.
Step 5: Save money for the kids’ college fund(s)
Ramsey’s Reasoning: I can only assume Ramsey believes parents are obligated to pay for their kids’ college educations.
Do I agree with Dave? No.
Why or why not? Simply put, your offsprings’ college degrees won’t help you during your retirement.
My two cents: My kids’ college educations are their responsibility, not mine. Yes, I’ll help them out a bit when the time comes — but only if they stay away from a college degree that’s not worth the money.
Step 6: Pay off the mortgage early
Ramsey’s Reasoning: Free-and-clear home ownership, of course.
Do I agree with Dave? No … and yes.
Why or why not? Believe it or not, there are times when it makes sense to not pay off the mortgage early — even when you have the money to do so.
My two cents: Yes, paying off the mortgage provides peace of mind. However, the declining value of the dollar means those with low-interest loans have an equally valid reason for keeping their mortgage as long as possible.
Step 7: Build wealth and give
Ramsey’s Reasoning: Build enough cash reserves for charitable contributions and inheritances.
Do I agree with Dave? Yes … and no.
Why or why not? Come on now. Who doesn’t believe that giving money to charity is a good thing? Oh, yeah; this guy doesn’t.
My two cents: Despite what Scrooge thinks, our society depends on charitable donations. On the other hand, I’m not as sold on the virtues of working to fund my kids’ inheritance.
Ramsey’s Baby Steps plan tackles debt from an emotional perspective. As a result, the plan’s initial steps are financially inefficient. Even worse, the latter four steps make assumptions that may not be in your best financial interest.
That being said, it doesn’t mean this plan won’t work. The ultimate decision, of course, is entirely up to you.
Photo Credit: Chalky Lives
I agree with what you say. However, I am glad so many folks are finding it works for them.
I’m glad people find it works for them too, nansuelee. But like I said, I suspect most of those folks would have succeeded anyway no matter what method they used since they had to be motivated to eliminate their debt in the first place. They just didn’t realize it at the time.
Len, Love your blog, and have been reading for several years. We have been involved with the Dave Ramsey program since 2008. Completed the steps in 2010. Been doing it ever since, and are trained Financial Counselors since 2011. In the hundreds of cases that we have worked with, most people have no plan and no hope. The simplicity of the program helps people get thru the noise of life to solve their debt problems. Staying on track in the early stages of this program is the most difficult. We sophisticates always try to tweak the system. But it doesnt really help in dire debt situations. Keep it up, Sincerely, John
Thank you, John!
I find these baby steps to be a bit front-loaded. It takes so long just to get through step 2. I realize this is a money plan for life, but I think some could get frustrated by the slow progress. I’ve listened to Dave for many years and I’m still technically on step 2 for 4 more months.
I think the big thing is getting committed. Until you are willing to face the mirror, admit you are the problem and make changes, nothing works.
I’m with you, Dr. Dean. “Get committed” should be “Step 0” (that’s with respect to getting out of debt, not putting yourself in a mental ward)!
In fact, I’ll submit that everyone who successfully got out of debt using the debt snowball did so only because they had already accomplished the unwritten “Step 0” before — or shortly after — they started.
I am confident that folks who set their mind to it and really embrace that step will succeed — and save money in the process — by avoiding the debt snowball method.
I agree with you.However, if one is in a hole, one should stop digging.
I’m glad you wrote this post Len. I am tired of seeing everyone insist on Ramsey’s advice just because it has worked for so many people. The part about creating an emergency fund while still in debt just doesn’t make sense to me. The same thing with paying off smaller debts first. I think in the desire to help as many people as possible he just makes too many generalizations. People don’t all fit into one financial profile though. Everyone’s circumstances are different and different strategies will work with different people.
I hear ya. For a lot of folks who refuse to take Dave’s plan at face value, the generalizations in steps 4 through 7 can have more unintended long-term financial effects than steps 1 and 2. For that reason alone, I wish he would simply cut his Baby Steps to a 3-step plan.
Your tired of people insisting on Ramsey’s advice because it has worked on so many people? That’s the most ignorant thing I’ve ever herd. That’s like saying your going to walk to work because your tired of everyone saying driving is faster. Your a moron. And the reason you save a small emergency fund while your trying to get out of debt, is so when an emergency happens(and one most likely will), even if its small you don’t go into more debt!!! Did you forget your trying to get out of debt?? There’s is good and bad to both sides I agree, but your argument is just plain rediculous.
Oh and the reason it has “worked for so many people”, is because IT WORKS!!! do the math…
Before you call someone an idiot, go back to third grade English class.
Math seems to be the problem here, not English.
I’ve tried to eliminate debt without an emergency fund and it does not work. I’ve also maxed out credit cards in emergency situations (for some reason the hits just kept on coming). You have to have a cushion of savings because Murphy will visit — sometimes three or four times in a row — and he will knock you right back to square one and leave you with even more debt if you’re not planning for the unforeseen.
A monthly budget and emergency savings are the single most important things you can start off doing, because you need a base to launch attacks on your debt from.
Everyone has a different way of approaching their financial problems, and 7 Baby Steps may or may not be a one-size-fits-all solution, but I think the first 2 steps in order will work for anyone. Heck, I think $1000 is not a whole lot for an emergency fund, especially if you’re a homeowner with two cars, a spouse, and children. Seems like every problem that rears its ugly head in my life from car trouble, to replace the HVAC, to medical emergency, all cost me north of $1K. That’s assuming only one problem strikes. I remember once having a roof leak AND the HVAC go down in the same week — right after Christmas (lol). So if I were going to alter step one, I would look at the sort of things that can and will go wrong and pad my emergency fund with enough to tackle at least two of them at once. If you make less than $20K a year and your cost of living isn’t that high, I’d go with $1K instead of Dave’s recommended $500. I’d double just about every contingency fund he mentions if possible. When you get to the step where it’s time to beef up your emergency fund in case of a 3-6 month layoff of job loss, you might want to save on the high end if at all possible.
The only time I was ever laid off, it took 9 months, hundreds of job applications, and dozens of interviews to find a new job. We had my wife’s job and my unemployment check (and whatever odd job I could find), and no emergency fund. We had credit cards, though, and used them heavily during that time to make ends meet. By the time I did find a job, I found myself having to pick up an additional part time job just to pay on the stupid credit cards. Nothing was going into emergency funding, so when it was time to replace the roof due to wind damage, we didn’t have the cash. We ended up cannibalizing the insurance payment for the roof to cover other problems (health problems, death of a child). So then we lost our insurance coverage because we didn’t repair the roof. Now our mortgage lender was going to cover us under emergency insurance, so our house payment jumped from $740 a month to $1200. Meanwhile all of the credit card bills, medical bills, more roof leaks, etc, were piling up.
Sorry for the long post.
tl;dr: BEFORE YOU DO ANYTHING, GET YOUR EMERGENCY FUND ESTABLISHED ASAP, AND DO NOT USE CREDIT TO BAIL YOURSELF OUT.
Quite honestly I understand why Ramsey deals in generalities.. because he has to. He’s teaching his methods to thousands of people, and he can’t possibly tailor advice to each and every situation. Because of that he has to come up with general advice that will work for most situations – and go from there.
On the debt snowball, i think you’re right that it isn’t the best possible way to get out of debt, mathematically. On the other hand, it is pretty effective – in part because it takes into account the psychological impact of paying off smaller debts quicker. And let’s be honest, a lot of people aren’t in debt because they’re good at doing math, or finding the most efficient way for getting out of debt. They’re there because they’re not very good at doing the right thing mathematically. And for many of them the “psychological gimmickry” may be just what they need. To me, whatever method works best for actually getting people out of debt – is the most effective one. Whether the debt snowball is it – I don’t know, but have seen it work extremely well through for folks when others haven’t clicked.
Steps 4-7, I’m inclined to agree with you a bit more on – that there are more cases where i’d be inclined to agree less with Ramsey, especially when it comes to assumptions about investing, and college funding for kids..
I completely agree with your assessment, Peter, on talking in generalities. It’s just that I don’t agree with most of Dave’s generalities. 🙂
There is no arguing that many many people have used Dave’s Baby Steps plan to get out of debt. Somewhat ironically though, I firmly believe that most of those success stories had almost nothing to do with Dave’s plan — and almost everything to do with a “Step 0” that the debtors accomplished either prior to, or shortly after becoming acquainted with Dave’s plan: truly committing themselves to get out of debt.
Great post. This is one of the best comprehensive top level overviews of Ramseys Baby Steps I’ve seen. I think your assessments are solid. I also agree that it is a shame so many people plow head first into this plan without first deciding for themselves whether or not each step is valid for them based upon their circumstances. I think the real moral of the story that you allude to but should have included for clarity is that people in debt should do a little more research on their own before committing to this plan.
I completely agree with your thoughts on college. I saved up college funds for my two kids and neither one is attending. I wish I had saved that money in my retirement fund instead. I have some friends who are practically going broke funding their kid’s educations. I worked my own way through college and so did my Mom and all of my brothers and sisters. We all have degrees and have done pretty well.
Students will have 40-50 years to earn, but their parents may only be 10-20 years from retirement. Unless parents are in a good position to pay for their kid’s college educations, they may wind up living with them when they are old.
“Students will have 40-50 years to earn, but their parents may only be 10-20 years from retirement.”
Amen, Bret. That’s a great way to look at it.
I think Dave Ramsey’s plan is far from optimal, but it works for many people. Many people need the psychological gimmick to start paying down their debt. If they were rational, financially responsible people, they wouldn’t have built up a bunch of debts.
I think saving for college is a good thing. Even if my kid doesn’t go to college, I can change the beneficiary to his cousin or something like that.
As I see it, the real issue with respect to colleges is that tuitions have gone through the roof over the past 30 years because of government-backed loans. Over the past 30 years, inflation-adjusted tuition and fees have tripled while aid has quadrupled. As long as the federal government continues to loan ever larger sums of money for school tuitions, colleges will continue to ride the gravy train and raise their rates. It’s not rocket science, folks — but we still act like it’s a big mystery. But I digress.
The cost to attend college is stupid. What else is there to say? I’ve got student loans up to my eyeballs, and a science degree that apparently isn’t “enough” to get a job. So, what are my options? Work at Home Depot, or go back to school? A Bachelor’s Degree, even in a field that isn’t fluff, just doesn’t seem to matter as much these days, and the cost to aquire one is just stupid. Meh…thanks for ruffling my feathers Len.
just being a layman in financial planning i can’t say much but it seems that we’re missing a very important step in this process, the reason.
isn’t one of the biggest reason we go this far into debt trying to “keep up with the Joneses”?
wouldn’t the first step be to take inventory and downgrade the life style we are living thus matching the life style to the income we have? this would free up additional moneys to pay off those debts.
For those who buy in to any sincere effort directed at eliminating their debt, I believe that is a tacit step, Griper.
Why the heck would anyone want to pay off a ~5% 30 year amortized mortgage. With inflation at 3-4% a year (according to the Gov.), you’re practically borrowing the money for free.
If you incorporate mortgage planning in conjunction with rental property, you have an asset class that is hard to beat.
I understand people want “peace of mind”, but the even if you own your house “free and clear” the min. you don’t pay your property taxes, you find out that you really don’t “own” the house – ha ha!. Preach on Len, people don’t realize, but the riches people in the world are also the most in debt. I doubt there are many “debt free” multi-millionaires, you need leverage to scale (just my opinion).
great post!!
AG
Most multi-millionaires are debt free. I’m not talking the sport stars or movie stars. I’m talking about the self made millionaires that are generally small business owners, living in modest homes in modest neighborhoods.
To be honest you and Dave both are dealing in generalities. Dave says the only way is to pay off the smallest debt regardless of interest rate, you say pay off highest interest rate first regardless. As a FPU grad I can relate to what you both say. I went smallest to largest, it just so happened that the smallest of my debt had one of the highest rates. My point being Dave’s plan is a guideline for lost souls. I can honestly say I had my mind made up before I started that I was going to be debt free Your baby step zero theory is absolutely correct.
What it all comes down to is motivation, and if Ramsey motivates people let him motivate.
One of the things I disagree with Ramsey on is cutting up ALL of you credit cards. As part of his process I did eliminate most of my cards, but I did keep one. Using your debit card in place of your credit card in all situations is a bad idea. For instance Gas stations freeze a certain amount on your card (debit or credit) every time you swipe it. you can get in trouble in a hurry there. Plus you have more charge back liablities with a Debit card.
i agree with all except for step 2! but you know i love the debt snowball.
I started using Dave’s advice but then my dad convinced me to pay down my debt the correct way. But I still credit Dave for starting me down the path of getting out of debt. Now that I’ve taken the time to listen to other POVs and do my own research, I understand all the arguments for and against.
Dave is good at getting your blood boiling about how dumb you’ve been with your finances and makes you want to make changes right away “no questions asked” this-is-the-only-way style!
But doing research outside his program on several things is enlightening, as well as talking to knowledge people, dad in your case, to lead you in a better direction. I love reading these posts where people share their experience so I can see different points of view on the matter! Good luck with your financial endeavors : )
I agree with a lot of your criticism of DR. Personally my husband and I are not following his steps as we have some different priorities, not being middle-aged homeowners, but I can appreciate that he helps a lot of people.
I have one other thought though. From what I’ve seen, doesn’t the strategy of paying off higher-interest debt first pretty well correspond with the strategy of paying off the lowest balance first? I’m thinking like, house is the largest and smallest rate probably, student loans or car is next, and credit cards are probably the smallest and highest. I don’t know if you agree that’s a general pattern?
Not necessarily.
Also, keep in mind that since the mortgage is “good” debt, some people (like me) with a low-interest rate home loan may decide that it is in their best interest to NOT pay it off as quickly as possible.
As someone who has been financially savvy most of my life, it was difficult to get my husband n board. (Even though my job is a financial educator). It wasn’t until we went to FPU with our church that I was able to get my husband on board. Dave’s style of using humor along with some frank talk about debt made my husband see the light. I believe that everyone’s situation is different, and you should take any financial advice and evaluate it to see if it makes sense for your situation.
I disagree about the college education (to a point). I can’t tell you how grateful I am to my parents for paying for my college eduction. I know that I was lucky to have so much help, and looking back on that time, I’m not sure where I would have ended up if I had to pay for it all myself.
I certainly agree that parents aren’t obligated to pay for their kids’ college education (especially with the job situation the way it is today). However, I think that there is nothing wrong with doing so. My parents did it for me, and I plan on doing so for my (future) kids when the time comes.
However, I don’t believe in an “anything goes” attitude. I think parents should put stipulations on paying for college education. For me it was living at home and going to a commuter university. I still got a great education from a highly rated school, but at a fraction of the cost. I know many parents would bend over backwards to pay for their kid to go to an out of state, expensive university when staying at home like I did would be just as rewarding to their kid’s future.
To parents paying for college eduction with no restrictions, I would say no. To parents paying for college eduction with some reasonable expectations attached, I would definitely say yes.
I’m with you on the idea of helping my kiddos with college. Simply because I want to. I’m not trying to spoil them, I am saying that I want to HELP with college, not put them through it all on my own! they need to learn to be resourceful and wise. Unfortunately I was spoiled by my older bro, he was like a dad to me, and he had a successful business when I started college so he paid it for me. He told me to focus on studying and not worry about a thing. Like an immature kid, I didn’t take advantage of this opportunity, acted stupid and didn’t get my degree. I don’t want my kids to be like that, and they already show more maturity. I feel they deserve help when the time comes if they have their heads in the right place. I don’t feel obligated to help, I want to. I want to be at the right place financially when the time comes in about 5 years for my oldest. I like what you said about putting stipulations 🙂
Dear Len, Ramsey has a “baby step 0” which is to destroy and cancel all one’s credit cards. A person following the Ramsey plan MUST save up the thousand dollar emergency fund, because he / she has no credit cards. This actually is helpful to a lot of people who would find many more low level “emergencies” and use the plastic when not really necessary. By having no credit cards, and the thousand dollar emergency fund, it’s more likely that non emergencies would not be looked at as real emergencies. A person who has accomplished baby step one is more likely to hang on to the cash as it seems “real” vs use plastic which doesn’t seem real to a lot of people who tend to spend more with plastic than currency. Len, you have more self discipline than a lot of recently reformed or want to reform over spenders. The Ramsey plan is a crutch whih has helped many people climb out of debt. It may not be the “best” plan to experts, but it does work for thousands of people. If they all end up with no debt, a paid in full house, large emergency fund, then Dave Ramsey has performed miracles for the multitude. Down south when you get to the ginn with your cotton, they don’t ask, “What route did you use to get here?”, they say, “How good is your cotton?” It’s the result which counts!
If Ramsey’s method is the only way folks can get out of debt, then great.
However, Dave is doing a disservice to those folks who do possess the fortitude and determination to get out of debt but blindly follow his plan simply because they don’t know any better.
It may not be the only way, but it’s more about a lifestyle change then just getting out of debt. Dave presents a different way of looking at debt. If people could do math then most wouldn’t be in the debt they are in. If Dave can get people to change their habits they likely won’t go back in debt, ever.
I just think it is all much simpler depending on when people wake up about their situation. I overheard my father in law talking to his oldest son about why son was always so broke, “Simple Norm, you either don’t make enough money or you spend too much”. Also, and I’ve mentioned this before on this site, live within your means, follow a budget, have a plan, and get your house paid off asap. Debt is debt, pure financial servitude. Credit card for emergencies, but then define what an emergency is and it sure isn’t a vacation or dinner out. Anyway, I’ve always been a modest wage earner and paid off my house by age 40 and retired at 57. Now have a home with lots of property and also helped my kids with post secondary and down payments on their own homes. A rental pays all taxes and insurance for us and I charge about 50% of the going rate because I can afford to help out a family friend who is just starting out and wants to buy her own home asap.
Stay out of debt, never buy a car on time unless a business write off, and pay cash for everything. If your house is paid for you will never have to worry about security. I have a friend who is 74. He rents my son’s 2nd home which is now for sale. Friend has too much stuff and now has to move before the house sells. Nightmare, as his new place is smaller but more than they can afford because of rent escalation. Eats out all the time, but is worried about a place to live. Pays rent and storage fees for stuff they don’t need. Crazy.
Great summary, Paul. I, too, have always wondered show so many people are willing to pay rent to store stuff they clearly have little or no use for!
Agree with “Save three to six months of expenses in a money market account.”
It makes sense to have some money put away for the ‘what if?’ situations. Wherever it’s kept it needs to be earning interest, as low as the rates are right now, and be easily accessible.
I like your honest breakdown of Dave Ramsey’s baby steps. I love listening to the show on iTunes and on the radio, but when I was completely uneducated about money, I used the steps as a guideline. Just to get me started in the right direction. Then I still mixed in some of my own smarts (or dumbs if the they were mistakes..lol). I didn’t just blindly follow his advice, since it’s very general. I like to figure things out for myself, and find out if something really works for me or not. DR’s steps are a good starting place, but by no means a hard-fast set of rules for everyone.
I agree. Dave’s advice, in general, worked fantastically for my wife and me, but I also have acquired a certain amount of gold and silver (to which Dave is vehemently opposed). Don’t tell Dave – he might send his FPU Goon squad to beat some sense into me, lol.
I give Len a lot of the credit for helping me to decide to get some precious metals, which goes to show that all of your financial education need not come from just one source. Thanks, Len – you’re a pretty smart cookie!
Thanks for the kind words, Matt. You won’t regret buying a little wealth insurance.
If you pay off your house, there are too many people who can steal it from you. The IRS can attach it, you can lose it to taxes, you can have a law suit as deep pockets. NEVER pay off your morgage. As long as you and the bank own it, only the bank can take it.
The IRS can place a lien with or without a mortgage balance. Your tax bracket dictates the % of interest you can deduct on taxes…..losing proposition.
Efforts to become debt free are well worth the exercise. Until you are debt free you can’t relate.
I believe there are financial tools to help cover for your exposure, high limits on insurance policies, having an umbrella policy, remember that with Dave’s steps you have between 3-6 months worth of living expenses saved up and your retirement accounts are getting no less than 15% of your income as well. That should give you some padding in case of a mishap. Why would the IRS come after your home if you do your taxes right? Serious question, I’m not a home owner and I’ve always filed simple taxes.
While I agree logically with a lot of the comments you have made, I think you have somewhat failed to see the value of what DR is doing. As the CFO of my household, I struggled for years trying to get my husband on board with a debt reduction plan and to sit down with me and be engaged about the budget. Neither of us are incredibly disciplined, and I felt lost when it came to the bigger picture of personal finance.
DR got my husband on board and gave me a sense of empowerment. Do I follow the plan perfectly? No, because as you have pointed out, it needs to be tailored to individual circumstances. I am now meticulous about our money. I faithfully follow your blog and others. I would not say I am “gazelle intense”, but I have clearly defined goals and a plan to achieve them. I finally have a realistic and working budget, a sense of hope, and a whole lot more knowledge than when I started.
I think some people just need someone to throw them a rope and tell them they can do it. I am thankful that DR did that for us. I’m also thankful for your emails in my inbox that help keep me motivated and learning!
I agree with some of the criticism regarding the snowball, but if you start with the smaller debts and cap them off quickly, then it adds to the amount you can use for the higher debt amounts. If you start with the highest interest rate, regardless of dollar amount, it could be a significant time before you are able to make more than a minimum payment on the highest rate whereas paying off the lower balance frees up more cash quicker. Hence, the snowball.
To each their own, but my wife and I paid off her car, one of my student loans and 2 of my personal loans (a grand total of about $34k) in 2 years when if I’d started with my $18k loan with the 14.99 rate, I would still be paying my $350 minimum payments because at the time, I couldn’t afford to pay more.
I am aware that this is an older article, but I don’t see much of a reason to lambast the order on step #2. I did some basic amortizations comparing DR’s debt snowball method and your recommended highest interest first method. It was essentially a wash, though the DR method had a very slight edge. This looked at 3 credit cards with different balances and rates, two auto loans with different balances and rates, a no-interest medical bill, a student loan and a mortgage. I would be glad to send you the excel sheet if you would like.
It all depends on the individual, Mark. The math ensures that DR’s method leads to more interest paid over time. The longer it takes to pay off the loans, the higher the balances, and the wider the interest disparities, the greater the impact will be.
I like your respectful disagreeing with Dave’s method, remember though that Dave is pushing people to go “scorched Earth/Blitzkrieg” on paying those debts. If one takes that mentality and discipline to getting those debts paid, then the interest accumulated during the “short” amount of time it takes to pay the debts shouldn’t matter much, and the motivation of seeing the debts disappear can be worth the price of that extra interest.
Here’s my review of your review of Dave Ramsey:
>From a purely financial perspective, as long as you still have available credit to tap in an emergency, youd be better off immediately paying down high-interest credit card debt than taking time to build an emergency fund.
You’re saying I should pay off debt … but be willing to get more debt in an emergency? Not smart. Relying too much on debt is what gets people into excessive debt to begin with, so Ramsey’s recommendation is based on the idea of NOT looking at debt as the solution to every financial crisis.
> Even Ramsey admits that his debt snowball method makes no sense when it comes to paying off your debts as efficiently and quickly as possible.
Ramsey admits that his debt snowball method makes no sense FROM THE TRADITIONAL FINANCIAL/MATHEMATICAL PERSPECTIVE. You’re missing or ignoring his point entirely: he argues that behavior is generally more important than knowledge. Quickly paying off a small debt scores someone major psychological victory points and keeps them motivated.
>Like many financial rules of thumb, Ramseys 15-percent one-size-fits-all recommendation cannot be reasonably applied across a broad spectrum of individual circumstances.
On his radio show, Ramsey commonly recommends that older people consider investing more. But he bases the 15% recommendation on research showing that that the first wave of retirees who relied on 401ks and IRAs but saved less than 10-15% were usually in big financial trouble. So the 15% recommendation is good advice for most people.
>I can only assume Ramsey believes parents are obligated to pay for their kids college educations.
He believes no such thing. He places this item on his list AFTER saving for retirement for a good reason: lots of people practically bankrupt themselves to put their kids through college. Ramsey wants to see those people take care of themselves first and THEN save for college IF THEY CAN AFFORD IT so they’re not deeply in debt as they approach retirement. In fact, Ramsey constantly rails against high tuition, student loans and urges people to attend cheaper state schools.
>Simply put, my kids college degrees wont help me during my retirement.
Don’t be so sure. They might shove you in a cheap nursing home because (a) you go into retirement with debt because you think it’s clever to keep a mortgage, and your net wealth is nil; (b) they can’t afford to send you to a quality nursing home because they trouble keeping up with their student loan payments because you cleverly advised them to not pay off their debts as quickly as possible.
>Believe it or not, there are times when it makes sense to not pay off the mortgage early even when you have the money to do so.
Ramsey has discussed his reasons for making this recommendation on his show on numerous occasions. If you think it’s a good idea to keep your mortgage as long as possible, maybe you should listen and hear some clever, wealthy guy on the verge of tears because he’s approaching retirement with a mortgage and his clever financial plan has backfired and he’s facing foreclosure in his late 50s. As Ramsey says all the time, clever plans like yours typically fail to account for risk, and 100% of foreclosed homes have a mortgage.
Here’s my comments to your review of my review, CC:
1. Yes, that is what I am saying. If you are committed to getting out of debt, then why would you waste time paying down the debt (especially at 29% interest) by building a $1000 emergency fund first? Let’s face it, if you already suffer from a large debt burden, what’s the big deal about going in debt for another $1000? Also, consider that most people rarely tap their emergency fund in the first place — which is another good reason to start paying down your existing debt and reducing those interest payments ASAP.
2. And I’m arguing that commitment is a precursor to behavior. Once you’ve made the commitment to get out of debt, everything else is moot.
3. Okay, but rules of thumb are just that, and often do more harm than good.
4. I’m glad to hear that.
5. Cute, CC. I appreciate your zeal to pay off all debt; I used to think like you too. Of course, being debt free is noble. However, financially savvy individuals who are in control of their finances and spend far less than they earn (folks like me), understand that it’s usually financially advantageous to carry low-interest debt — especially when it is amortized over many years.
6. Yes, the best laid plans of mice and men can go awry, CC; but I’m an engineer — almost every decision I make includes a pragmatic assessment of the risks. I also understand how to hedge those risks. Most people who carry low-interest debt have a back-up plan or two in place to cover their, um, assets. I suspect most people Mr. Ramsey features neither properly assess those risks, or hedge them.
Thanks for taking the time to make your case and defend Dave’s snowball.
I disagree with Dave Ramsey, for the sole purpose, how is one going to tell someone to budget themselves but lives in a million dollar estate. So he is telling you to cut down on your expenses but he himself lives lavish. Now does that make sense? He is telling you, save your money but buy my books, cds and pay to come to my convention. I believe one can become debt free on their own accord if they have self confidence and dedication. One becomes in debt because that is the life they chose and insisted on allowed themselves to enter in debt. No one can tell another how to become debt free because everyone’s financial statue is different. He has hit bankruptcy twice but is giving financial advice?? Yes he is a self made millionaire, with all those who buy his stuff gave him that assistance he needed to purchase that big house he lives in. I myself was in debt and managed to become debt free with my own methods and never once listen to Dave’s so called advice. With that being said, I leave you to obtaining your own financial stability how you want, but I will personally not be taking his advice
I followed Dave’s advice, and got out from under 70 grand worth of debt in just over two years. The only money he got from me was the $12.00 I spent on his book because it was half-price in my school’s faculty room, lol.
IDK– I think the “debt snowball” is to
a. free up the money you pay monthly toward the lowest debt, so you can pay even more on the next one, and
b. much more quickly clean up your credit report.
No? It has value, although many do say to order your debt repay by interest rate instead.
Ramsey does very heavily rely on all his… er… followers(?) having a very similar mindset and very similar circumstances. For example, of course, he would never tell ppl to use a credit card for emergencies bc he is telling them to get rid of the scourge of credit cards! Which, actually if your emergency fund is earning you interest in a savings act rather than costing you interest paying back a CC, that is a good thing– he has a point!
About the only thing I can add, is that I hope the Ramsey followers will use his plan as a gateway drug to really digging deeper into personal finance. Maybe his plan wil open the door to them discovering this site and others like Control Your Cash or Mr. Money Mustache.
I have not read his work, but have seen it referenced enough to almost know it by heart.
What he preaches should be taught in 7th or 8th grade before kids get themselves into debt. But he knows very little about stocks and his math is horrible. He is also dead wrong on VA loans if you are a disabled vet, you don’t pay the funding fee’s or other fee’s, he’s just talking out of his ass.
Len,
Not a big fan of Dave Ramsey. He says gold/silver are a waste of money and have no return on investment. I think he is one of millions with their heads in the sand on what’s coming down the pipe!
Jared
I agree, Jared. His views on precious metals are flat out wrong and, sadly, will end up costing his followers dearly. Actually, his ignorance on gold and silver will end up costing him dearly too.
Thanks for the information. I am now regular visitor of your website and bookmarked it.
The debt snowball is down-right harmful. Most of Dave’s clients would save hundreds if not thousands if they just put the highest interest payments first. Dispensing bad financial advise because “muh reverse psychology” is still bad advice. As Dave would say, you don’t get a pass on math. Math teachers don’t just check that the calculations are correct, they are making sure you answered the problem correctly! That means taking all the values at hand into consideration for the problem at hand.
Dave’s mortgage payoff is another one where math is applied haphazardly without any sort of analysis on factors that might alter one’s ability to make a well informed decision on payments. Inflation and taxes are real, and a mortgage takes advantage of both to make the real cost of interest much lower than what’s on the amortization charts. If you are using an amortization table without an inflation column, your are missing a huge chunk if the story!
I actually like Dave’s relatively smaller rule-of-thumb on the 3-6 months savings. Its the only part of his plan where I can find data supporting a time value for the savings rate (that being the average turn-around time between jobs). Saving too much means too much of your money isn’t working for you, saving too little means you are exposed to the risk of running out of money if things go south. I don’t know how Dave hit on his of 3-6 months rule of thumb but out of the big financial gurus, his advice on the savings time is closer to a measurable real world value.
Dave Ramsey’s advice is really helpful. I started saving an e-fund and then my journey to financial freedom continued up until now. It’s just that some of his advice seems unreachable, but I had to do adjustment to make it fit,specific, and personalized for my situation.
Back in 1987, my husband and I sat down and wrote out each of our debts on a poster with colored markers and made a chart to pay them off, smallest to largest, with the exception of one that had much greater interest than the rest. We tackled that one first., then progressively added our payments to the next debt.
On the top of the poster the title was: Debt Snowball Plan
Aw, man-I should’ve gone on the radio!
I’ve enjoyed listening to Dave over the years and I think much of his wisdom is sound. Effectively teaching the least savvy people requires simplicity and ironclad rules to work. I found his radio shows to be funny and motivating. Listening to him sparked my interest in all things personal finance. I have since found many sources of information and motivation-like Len Penzo- and I learn from all.
I have since adapted advice from all of them to have a good financial plan that has kept us out of unmanageable debt, yet maintained a good credit score. Despite Dave’s belief that credit scores don’t matter-they do.
The biggest problem I have so far with the Ramsey Baby Steps program is actually step 1. I feel that its a good idea on paper but I feel like Ive evaluated it after experiencing it and I think Dave needs to be a little flexible AND adopt some of his reasoning from other steps TO step 1.
Awesome to hear! Glad it helped. nice post for debt.
Think Dave could remarket his idea with the “Sophisticated snowball” and then instead of buying funds he would say buy gold. Welll. Every time I call he stiil wont tell me where I can buy those 12% return mutual funds. Funny thing is his show will be like Andy Griffith, Seinfeld etc…when he is gone his reruns will still make money. Somehow he reached FIRE and by passed Penzonia. Enough for now…
Oh … ya got me, Duke! Although Mr. Ramsey is not retired by any means.
By the way, as I am sure you know, Ramsey sees no value in gold; he thinks only suckers hold it. Of course, that’s because he doesn’t understand macroeconomics. That’s okay though; he’s entitled to his opinion, just like I’m entitled to mine. Eventually, Ramsey will figure out exactly why everyone should hold physical gold and/or silver in their portfolios. Unfortunately for him — and, sadly, his listeners who follow him unquestionably — that won’t happen until it’s too late.
There is no right and wrong on the answers. The question is how to be a practical person to pay all debts?
Wow… There is a lot of common sense wisdom in this very long thread. I can tell you, the biggest thing that Dave Ramsey is promoting is Financial Peace. He is coming at this from a behavior focus, not a financial focus. As he says, “If this was a math problem, nobody would be buried in so much debt. It is a behavior issue. He builds the emergency fund so that people can “cut the cord” of the credit cards and never use them again. Credit Cards are a like a financial drug, I can get a high now by buying a new thing and worry about paying for it later.
All of the financial experts that are commenting here have some good ideas, but for the average person who has little to no financial education and has just jumped into borrowing, this is a cold turkey plan and it works for many people. It has worked for me.
If you are really good with finances, more power to you. You may not have ever ended up where some of these folks are, underwater financially with no hope of ever getting our of debt. Keep in mind where these comments are being posted. How many people would not even have a clue that this site is here?
Dave offers a vision and a path forward. Do what works for you, but make sure you have the discipline to stick to your plan if you are keeping the credit open. Most people cannot keep a credit card open and not use it if they are still trying to get out of debt.
Just my personal observations, and as they say: “Your mileage may vary”
Roger
I just found your blog and really appreciate it and your advice. My brain understands only a 1-step plan – which I call, ‘Baby Step Infinity’ (Pat pending lol).
Here it is: spend 80% or less of your income.
Thank you very much, tip your waitress.
My best piece of advice is to make a debt payment every Friday. That way you ate making progress on your debt Snowball/Avalanche every week when you look at your balances. It also reduces the number of days compounding that interest on the larger balances. Pay it down as much as you can every week and keep track. Soon you will have your debt slayed. Those who have to “spend”, need that adrenaline rush. So get that rush paying down debt weekly. Or even twice weekly as you get money in the account.
I know that there are parts of the plan that don’t make good sense. However, if people were using good sense, many of them would not be in that situation.
Len, is that a photo of you crawling home after a Frat party?
Someone cover that baby’s bottom with a fruitcake.
I know, right? 🤣 🤣