Have you cut your credit cards up yet?
Do you love hearing the “Debt Free Scream”?
Have you attended “Financial Peace University”?
If you listen to Dave Ramsey, you know exactly what I’m talking about. Ramsey has become one the most popular (and most polarizing) financial advisor’s in popular culture.
He’s up there with Suze Orman and Jim Cramer (don’t get me started with Jim, although I love his enthusiasm.) They are ultimately “entertainers”, and Ramsey is no exception. His humor makes him likable and brings people back to watching/listening to him.
Dave Ramsey is a decent resource for getting out of debt, but he is a lousy “financial advisor” once you are out of debt and have cash to invest.
I have read his most popular book, “The Total Money Makeover” and do listen to his podcast from time to time, which is how is how I have become familiar enough with his methods to be able to critique them. This isn’t a blind and uninformed perspective. He is not ALL bad, either. My point here is to point out his flaws, so blind obedience is not followed by those who are just getting started.
Dave Ramsey is excellent for people in debt, because promotes decreasing ones spending and tackling debt. Yet he lacks financial prowess to grow wealth. A more sophisticated investor/advisor in the public realm would be Ric Edelman. Although Ric doesn’t rely so much on humor/entertainment to prove his point — he is a much better money manager.
I listen to his podcast as I prepare meals or I’m in the car. I find the part where callers phone in and he sets them straight quite amusing. I likely secretly desire to compare myself with others, financially. A common theme is someone will call in and explain that they’re tremendously in debt, and Ramsey will bash them around a bit about the poor decisions they’ve made. These people need a wakeup call, and Ramsey is happy to pick up the phone and give it to them.
I will outline, with facts — why you should not follow Dave Ramsey’s financial advice if you want to grow your wealth.
Point 1: When tackling debt obligations, he picks the smallest one first, as opposed to the debt with the highest interest. Huge mistake.
To outline the point, say you have 2 loans. You don’t know which one to pay down first.
A $5,000 loan with a 5% interest, and a $10,000 loan with a 10% interest.
By using Ramsey’s method, he encourages his devout followers to start paying off the “smallest sum loan” first, not the “largest interest loan”. This is to get a “mental win”.
While you are paying off your smallest dollar amount loan, you are allowing your larger interest loan to run rampant and the interest continues to grow.
In this scenario after one year, if you were to start paying off the $5,000 debt, your $10,000 loan would continue growing more rapidly in interest, ultimately costing you more money in the long run. It is mathematically more prudent to pay off your largest interest loan, first.
Point 2: Cutting Up Credit Cards = No Credit Score
If you follow this advice, you won’t be able to get a low rate on a mortgage.
Banks use your credit rating and credit history to prove to them that you are a reliable “borrower” and you are to be trusted. If you don’t have a track record of borrowing/lending, why would a bank trust you to pay them back and not default and also get a low interest rate.
You will be able to get a mortgage. You will NOT be able to get a low rate on a mortgage.
Ramsey has even addressed this point directly on his podcast when asked. He says that if you cut up all your credit cards you don’t have a BAD credit score or a low credit score — you will literally not have a credit score at all. Zero does not equal non-existent.
If you plan to rent your entire life, then cut up your credit cards. But if you someday want to get a mortgage, or trust a financial institution to lend you money at a reasonable rate — you’re going to need to prove to them that you are a trustworthy borrower.
The other component here is that you don’t get any credit card rewards. And Ramsey also acknowledges this point directly by stating “No millionaire ever got rich on airline miles.” Solid point honestly. But I pay my credit card off in full every month, and I have literally made over $500 cash back this calendar year by using my credit card.
Side note: I use the Fidelity Rewards Visa Card, which provides 2% cash back which is deposited right into my Fidelity Brokerage account as cash each month.
How can it be argued that this is a bad idea?
Point 3: He pushes Mutual Funds, not ETF’s on his listeners. He lacks risk.
Mutual Funds are extremely popular with 40+ year olds.
While they function similarly to Exchange Traded Funds (ETF’s), they come with much higher fees and expense ratios. They are also at times front or back loaded, meaning you have to just pay a fee to get into or out of them.
They also frequently require a minimum investment of several thousand dollars.
While an ETF can be bought for $10 and they trade every second of the trading day, while Mutual Funds trade at a NAV price and trade only once per day.
ETF’s are the newer/better version of the Mutual Fund — but Ramsey doesn’t seem to acknowledge this. Swap out the Mutual Fund for an ETF and thank me later.
Point 4: His Deeply Religious Angle
Now I am not one to bash on someone for their beliefs.
I just don’t think that religion and money have a tremendous amount in common. There are rich atheists, and poor Christians (and any combination of the 2). I don’t believe there’s a correlation between theology and financial intelligence.
But I think Ramsey takes it over the top with his religious ideologies which he bakes into the show. He frequently reads Bible quotes and references metaphors for people that call in.
What if a non-Christian or an Atheist wants to budget and get ahold of their financial future. Should they listen to the Bible for financial advice? This is an attribute of his that is impossible to break from the financial advice he provides.
I personally don’t think your personal finance has a strong tie to stories in the Bible, so it’s not crazy to see that it’s off-putting to a large group of people.
Ramsey would reach more people if here removed the Bible from his financial advice.
Point 5: Hatred of Alternative Investment Forms and Digital Currencies
This is likely my most controversial take on Ramsey.
As a younger person, I can take on a tremendous amount of risk with my investment portfolio. Ramsey is extremely anti-Bitcoin. I personally think it is wise to hold between 1–5% of one’s net worth in Bitcoin and Ethereum (no other block chains have a proven track record to merit putting your hard earned cash in.)
I think Ramsey plays it too safe when it comes to investing.
Warren Buffett has ironically called Bitcoin “rat poison”. Jamie Dimon (CEO of JP Morgan Chase) has famously stated that all Bitcoin holders are going to “get burned eventually” — although he has recently come around to it, apparently. Other famous financial advisors, Ric Edelman, most notable — are huge advocates of Bitcoin, which has been the best performing asset class of the past decade. They understand the risk of the asset and invest into it.
Ramsey is just a bit too old school with his investment allocation, which is why I don’t listen to him for any investment or wealth building advice.
Once you get from a negative net worth up to zero, switch your financial modeling away from Ramsey into something a bit more sophisticated.
I do like his hard hitting attitude, his no nonsense responses, and his motivational drive for people to get away from the herd and “stop spending like Congress.” As a nation, we have a spending problem, which has turned into a debt problem.