Why Dave Ramsey Doesn’t Work for Everyone

By Eric Rosenberg
Reviewed by: Lauren Bringle, AFC®
Published on: 05/09/2019

Dave Ramsey is a popular money personality who has helped countless people get out of debt and fix up their finances. But do methods of the creator of the Total Money Makeover work for everyone? No. In fact, there is some Dave Ramsey criticism to be aware of before taking his investment advice.

While his methods are perfect for a large number of Americans and others around the world, Ramsey’s strategies have attracted plenty of critics and controversy as well.

If you have tried and failed with Dave Ramsey’s advice, don't be too hard on yourself. Personal finance is personal, and everyone has a unique situation when it comes to finding financial peace. Let's look at some of the best parts of Dave Ramsey's money strategies, where they make sense, and who might want to follow a different path to overhaul their finances and build wealth.

What Dave Ramsey gets right

Ramsey attracts legions of fans to arena events around the country, so he’s obviously doing something right and helping people with his money makeover ideas. In a positive atmosphere, Ramsey uses a series of “baby steps” and philosophies to help people turn around bad spending habits, reduce expenses, pay off debt and start saving. These are goals that nearly every finance expert agrees with.

When discussing Dave Ramsey baby steps, he suggests that most people should include in their personal finances:

  • A budget that helps you live within your means.
  • Paying off expensive credit card and student loan debt.
  • Saving at least 15% of your income for retirement.
  • Giving to charities if it is within your means and aligns with your beliefs.

However, some hardline views around debt and specific numbers can be a turnoff. There are many other parts of personal finance management that this financial expert gets right. But now let's take a look at what he gets wrong for a lot of people.

Pitfalls to Ramsey’s money methods

For all Ramsey gets right, his methods on how to achieve financial peace are not for everyone. For example, his hardline view on credit cards is wrong for a huge number of people. I have used credit cards for years and never paid a penny in interest. For some people, it’s important to take Ramsey’s advice with a grain of salt.

Credit cards are not evil

For some people, credit cards are a serious problem. When poorly managed, credit card debt can spiral out of control. A small purchase can take years to pay off. They make it easy to live beyond your means. These are all true of credit cards.

But when managed well, credit cards can unlock great opportunities. I personally have 14 credit card accounts. Despite spending hundreds of thousands of dollars with credit cards over the last 12 years since graduating from college, I have never paid interest. I have never paid late.

If you can always pay off your credit card balances in full each month, they are a wonderful financial tool.

In addition to helping you manage your cash flow and protect yourself with automatic purchase protections and travel insurance, credit card rewards can put cash back in your pocket or open up a world of free and discounted flights and hotels through credit card rewards. Plus, a credit card can help you build your credit score.

Not all debt is bad

If you can make it through college without student loan debt, that’s wonderful. But it isn’t realistic to think everyone can get through school without student loans. The increasing cost of college has far outpaced wage growth, making it harder and harder for the average family to pay for college without debt.

I took on $40,000 in student loans for graduate school, and I don’t regret those loans for a moment. My MBA helped me get a big raise. Over the course of a career, the benefits of a college degree are massive. The key is choosing the right college and the right degree.

If you were to go to an expensive private school and get a degree with a low paying career path, you are setting yourself up for failure. But if you take on a reasonable student debt load in the pursuit of a high paying, in-demand degree like finance, engineering, nursing, pharmacy, math or many others, you will likely have the ability to pay off your loans early and move forward with financial success.

A $1,000 starter emergency fund is arbitrary

A study by CareerBuilder found that 78% of Americans live paycheck to paycheck. Even 9% of those earning six-figures struggle and fall into the paycheck-to-paycheck cycle. Clearly, there is a problem with savings in the US and emergency savings funds are an important remedy.

Ramsey says everyone’s first move should be saving $1,000 in an emergency fund. While getting that emergency fund in place is vital, it might not always be the best first step, and the $1,000 number is not right for a lot of people.

If you are living with crushing credit card payments, for example, it’s unrealistic to think you can save that $1,000 before chipping away at some credit card debt. Further, the cost of an emergency can vary widely.

Car repairs, home repairs and emergency room are broadly different depending on the type of emergency and where you live. Depending on the size of your family, where you live and how you live, your emergency fund size may need to start at $400 or $4,000. There is no one size fits all.

His simplistic view of investment returns

Ramsey explains that most people can expect to earn 12% per year in the stock market, but that is likely not true. There have been periods of time where the stock market offered a 12% return. If you look over time, the markets offer more than 40% some years and double-digit drops are not unheard of. So what can you expect from the stock market?

If you look at the S&P 500 over a long period of time, the typical average return is 10%. That isn’t too far off from what Ramsey said, but over decades the difference in your final investment value is significant.

He also suggests that you can withdraw at a rate of 8% per year. That’s likely a bit too aggressive. Many money experts prefer a 4% withdrawal rate, half of what Ramsey suggests. The true “best” answer is likely somewhere in the middle. It will again depend on your personal situation.

You should start investing while paying off debt

According to Ramsey’s baby steps, you should not think about investing anything until you have paid off all of your debt outside of a mortgage. Wrong! There are many times when it makes sense to invest while you still have debt.

For example, if you work at a company that offers 401(k) matching, you should always take 100% advantage of that 401(k) match. Even if you have credit card bills, skipping out on retirement savings when you get a match is like leaving free money on the table.

In many situations, you should hold off on investing if you have high-interest debt. But you should almost never miss out on employer matching for retirement. That can put you at a serious disadvantage in your golden years.

The Debt Snowball

If you have multiple debts, Dave Ramsey suggests that you should pay them off in order from the smallest to the largest. This helps you see and feel progress along the way to a big debt payoff. But this approach ignores the math that says this might not be the best debt repayment strategy for you.

According to the rules of math and finance, you are actually best off paying your highest interest debt first regardless of the balance. That can prevent you from seeing the quick wins possible with the debt snowball, but it will save you the most money and help you reach your final payoff date faster.

As a matter of fact, this alternate payoff style earned its own nickname: the debt avalanche. If you have debt, the numbers say you should pay off your highest interest debt first, not your lowest balance.

Not everyone can afford to buy a house with cash

According to Ramsey, a home is the only type of debt that’s “good.” He believes the best option for buying this real estate is to pay cash up front. While that’s a great option if you can afford it, many people aren’t able to shell out hundreds of thousands of dollars, or even go with Ramsey’s second recommendation – to get a 15 year fixed rate mortgage.

This is where having a positive credit history and participating in the credit system could really help. If you have excellent credit, for instance, you could save thousands of dollars per year on your mortgage interest rates, as opposed to someone who has poor credit.

Yet to have a positive credit history, you have to build your credit over time. That’s the Catch-22 of credit, if you will. You have to have it to get it, but you can’t get it unless you have it. Which means, if you try to finance a mortgage without credit or with poor credit, a house could cost you much more over time, if you can get approved at all.

Beware trusting the wrong financial advisor

Financial advisors can be a good use of your money, but they are not for everyone. And if you do decide to hire a financial advisor, it is important to choose one who will always put your best interests first. Ramsey suggests a financial advisor relationship that may not be advantageous to you.

When can you go without a financial advisor? Probably most of the time for most people. If you take the time to read a few good books on personal finance and follow blogs like this from time to time, you’ll probably have plenty of knowledge to make the best financial decisions. But if you truly feel like you need help, a financial advisor may be a valuable ally.

When hiring a financial advisor, there are two criteria most people should always follow. First, the advisor should be a fiduciary. That means they have to put your financial needs before their own. This should be the case 100% of the time. Never hire an advisor that isn’t a fiduciary.

Second, most people should hire a fee-only financial planner. This means you know exactly what you will pay your advisor regardless of your total assets and market performance. Some advisors get commissions from bad mutual fund companies that incentivize them to put your money in the wrong place for your needs. A fee-only planner eliminates that conflict of interest.

Everyone can take their own route to money success

Finally, Dave Ramsey is very firm in that everyone should follow the baby steps no matter what. He claims that if you follow these steps in the exact order, you will virtually always find success. That simply isn’t the case.

We all have unique financial opportunities and struggles. Everyone lives in a different place, has a different job, a unique income and household-specific costs. Prescribing one formula that works for a lot of people is great. But it may also leave a lot of people out.

If you tried and failed with Ramsey, don’t be too hard on yourself. Everyone has to find their own best path to money success. Keep it up and stay focused on the long-term and you should be able to navigate the sometimes complex world of personal finance.

Pick and choose what works for you

People like Dave Ramsey, Susie Orman, David Bach, and other big names in helping people with money have a lot to offer. But just as these money gurus have a huge number of fans, they also have their detractors.

For most people, following any one person’s advice word for word isn’t the best plan. Instead, try to learn from a diverse group of experts and draw your own conclusions on the best ways to master your money.

If you make sure you get a good personal finance education and follow through on what you learned, you will be putting yourself in the best position for success.

About the author

Eric Rosenberg is the creator of the Personal Profitability blog and podcast. He has both an undergraduate degree and a MBA in finance and his work has appeared in various media outlets. See Eric on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.

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Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).

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Written on May 9, 2019
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