When it comes to highly-respected personal finance experts with great insight, Dave Ramsey ranks high up with the best of them. Thousands of people have gotten out of debt and attained financial freedom from his advice. His popular book The Total Money Makeover has sold over 5 million copies. In his popular book, Dave Ramsey pitches the 7 Baby Steps method to eliminate debt and achieve financial freedom.
It has worked for many thousands of people.
Still, I believe that some of Ramsey’s recommendations have become old-fashioned and need updating. Here are the five opinions where I differ with Dave Ramsey:
1. Differing View #1: You should embrace the debt snowball strategy
Dave Ramsey takes no prisoners while advocating for the snowball method. Dave’s main point is that dealing with the small debts first is a motivational strategy. He recommends that ‘It is crucial to settle your debts in a manner that will keep you highly motivated until you are done with them all.’
Being debt-free has a certain psychological advantage. According to a Kellogg School of Management study in 2012, if debtors with huge credit card debts concentrate on the cards with the least amounts first, it is highly likely that they will end up paying off the full debt. Nevertheless, from an economic standpoint, this technique makes little sense.
Gazelle Intensity
Why am I at loggerheads with Ramsey’s approach? Concerning the ‘gazelle intensity,’ not all situations are the same, and the snowball strategy can cost the additional individual thousands in interest.
Every person in debt will give you a different reason why being debt-free is so important to them. The majority of people can be termed as being gazelle intense, and they’ll do whatever it takes to get out of debt. Such people don’t need the psychological satisfaction of eliminating the least debts, and what matters to them is to see the debt eliminated.
Snowball Interest
Keep in mind that the snowball technique can make you lose thousands of dollars. For instance, we dealt with a debtor with debts of $22,000 at 3%, $40,000 at 12%, and $13,000 at 2%. By opting for the snowball method, the client could lose $12,000 in interest fees. You don’t want to lose interest, so why would you stick to a method when you are already gazelle intense.
You might still opt for a snowball and avalanche combo. Some apps like Savvy Debt Payoff App consider both avalanche and snowball methods. Additionally, these apps guide you on where to place the money monthly to save thousands in interest.
2. Differing View #2: There is no such thing as good debt
I believe that not all debts are bad debts, and here, Dave and I don’t agree.
Make sure that you take into account the contrast between your debt interest rate and your investment percentage. The article ‘Good Debt vs. Bad Debt’ showcases the distinction between student loan interest rate and real estate investment. You can expect higher returns from the real estate investment as compared to the student debt interest.
In my college days, I took a 0% deferred interest-rate loan and invested the amount in a CD with 5% returns (those were better days). I realized handsome returns on the interest and finished paying the loan immediately I finished college. That one, I can term as good debt.
Also, medical school costs an arm and a leg, and very rarely can a student manage without loans. This, I consider good debt as it furthers your career. However, in my opinion, not all college debt is good. Some courses in college lack the value that enables the student to pay off the debt comfortably.
3. Differing View #3: Save $1,000 for Your Starter Emergency Fund
In the 1990s, David Ramsey designed the Baby Steps. It is worthy to note that a $1000 emergency kitty would last more in 1990 as compared to 2020. It is possible to create a $1000 emergency fund that may not be helpful at all during a crisis, thus negating the need for the fund in the first place.
Also, you can calculate a percentage of your expenditure by taking a part of your income and taking a hard look at your spending. Every scenario is different, and it makes no sense to have an already set amount in mind.
It is very though very important to save for emergencies because you do not want to find yourself figuring out if bankruptcy is your next best option. If that is where you are at Chapter 7 and Chapter 13 Bankruptcy are great options. It is important to think if Chapter 13 is the best option for you, because some of the policies are dependent on where you are, for instance California. Finally it is important to understand your situation, for example if you have a family or are without a spouse.
4. Differing View #4: Pay off Home Early
Finishing your home payments early is indeed a fantastic idea. Still, in this case, Dave Ramsey advocates a prescriptive approach instead of offering recommendations that leaves freedom for flexibility.
The best financial advice is making minimum payments on the mortgage and putting the cash into an investment that will offer greater interest rates even after you’ve paid your taxes.
5. Differing View #5: You can receive a 12% return
There has been lots of publicity for Dave Ramsey’s 12% return idea. Besides, Ramsey’s team went further and came up with an article dealing with the 12% reality, where he utilizes the present average S&P annual returns running from 1923 to 2016, and the outcome is 12.25%.
You should take a look at Robert Berger’s well-written article ‘Why You Won’t Achieve 12 Percent Returns’. Berger is a regular for the US News & World Report, and here are four reasons why he disagrees with the 12% return.
1. The calculations are not accurate as he used an average return. Unfortunately, an average return doesn’t consider volatility, and as the volatility increases, the difference between the annual and average returns gets bigger.
2. Dave Ramsey employs this 12% number to explain an 8% withdrawal in retirement. Sad to say that if you withdraw a large amount, the funds might run out.
3. Some people take on considerable risks just because they are looking forward to a 12% return. In case the high-risk venture doesn’t work out, this can wreak havoc to your finances.
4. Robert brings forth the argument that choosing a 12% return opens up the portfolio to higher investment charges. To be on the safe side, take into account the fee that the fund requires before committing yourself.
Conclusion:
Apart from shaping some of the personal-finance opinions I hold dear to date, Dave Ramsey has been a great help to lots of people globally. However, I believe that some of his views should be reconsidered as they range from risky to individuals, highly prescriptive, and old-fashioned. What are your thoughts? Do you agree or disagree?