I have previously written about how I was inspired by Dave Ramsey and his show to get out of debt. If there is one person who has inspired literally millions of to people get out debt in the history of America, it’s got to be Dave Ramsey. He may have not literally helped these people but his Baby Steps and his motivational rants have certainly done the job. He has done a great service to the people of America by showing them a clear path of how to get out of debt and build wealth. It’s pretty much a recipe for success and there are thousands out there who can vouch for the credibility his technique.
Ever since I started reading about personal finance one of the first people I encountered was Dave Ramsey. The Dave Ramsey show is really captivating and the concept of giving people an opportunity to celebrate their debt freedom through Debt Free Scream is truly inspiring. It’s a testimony that his method works and people are finding themselves out of debt when they follow the plan. I personally have managed to get myself out of debt using his methods. Although I didn’t follow them to the T, it helped me immensely by giving me a framework to work with. It was the tactical part of his methodology that helped me get out of debt. Thank you Dave.
As I read more about personal finance, I find a lot of people carry a certain amount of contempt for his teachings. I see this trend in a few members of the FIRE community too. Since FIRE community is basically made up of people who have chosen to take the road less traveled, it makes perfect sense for them to not “accept” everything some Financial Guru says on radio and drink the “kool-aid” that millions of others are drinking daily. I found particularly 3 things that are core to Dave Ramsey’s teachings that seems to rub people the wrong way. This really makes them distance themselves from Dave and his teachings.
1. Don’t Borrow Money For Anything
This is one of the pet peeves of people who don’t subscribe to Dave’s methodology, especially those who believe OPM (other people’s money) is the only way to build wealth and don’t view it as a risk. The fact the scriptures don’t talk highly of the borrower only adds to their agony.
A lot of them argue about borrowing money to buy a car at 0% interest is perfectly acceptable. For the average American, financing big-ticket items like a car, is an everyday affair. There is an entire industry out there ready to lend you money to ensure you walk away from a car dealership with a car payment. It’s not just the banks, there is the dealership itself that is more than willing to close that sale and you walk away with a brand new car. They will do everything in their means to sell you that car. It’s no wonder that the average car payment today in America is $523 according to this article. All of this is heavily enabling and encourages people to take on debt.
Dave Ramsey also has a rule of thumb where he recommends that the total value of all the items with wheels and motors on them should not be more than 50% of your annual income. This often pisses people off when they hear Dave Ramsey on the show telling people that they need to sell their stupid car or motorcycle. The callers of the show literally get called out on their stupid purchases often makes people wonder why Dave is against it. The callers sometimes find it hard to part with what they think is their prized possession.If you can get your car financed at 0% percent interest rate, what could possibly go wrong? Why has Dave Ramsey taken this extreme stance to never borrow money for anything? It's beyond their grasp. Click To Tweet
So is it really bad to borrow money to purchase a car? I for one feel borrowing money to purchase a depreciating asset is dumb. The real issue with purchasing a car is not that you were able to afford the car or you are not paying any interest (which might not be true since the dealership has already factored that money into the deal) but it’s the fact that you have now taken on a monthly payment and are stuck with it for the foreseeable future. It’s literally eating into your cash flow and like Dave says, “You’re paying the stupid tax!” It could have been deployed to earn you more money.
Many people who criticize Dave on this, miss the above point and find ways to justify their decision. When you try to reason with such folks, you’ve just gotten into a bitter argument which often doesn’t end well.
2. Don’t DIY your Investments
If you are on your path to FI or FIRE, you fall into a minority of the Americans who are financially literate enough that you understand enough about money. You are able to understand the rationale behind a concept like FIRE and has spent the time to read up the specifics of what it takes to get there. You’ve done your math and worked out the numbers already. You not only know how to get there but also know when you’ll get there.
One of the most common trends I see with people on the FIRE path is they are all DIY investors. They love to work with a low-cost brokerage firm like Vanguard and believe in Index funds. They are familiar with the 3 fund portfolio and often view investing as a DIY activity and don’t want to pay someone to manage their investments. For people like them, an investment advisor is literally someone who is out there to make money off of them by charging heavy commissions. This also means he is going to bring down the actual return on their investments with active management and other administrative fees.When you have investment options with literally zero expense ratio, why would you pay an investment advisor to put you in a fund that has close to a 5.75% front-end load fee? It's just beyond ridiculous. Click To Tweet
So when Dave Ramsey comes on the show and recommends his listeners to work with an investment advisor, these people dawn on their nerd hat and get ready to trash him. Dave Ramsey recommends working with investment advisors who give you advice consistent with his teachings and it’s offered through his SmartVestor program. It’s basically a network of investment advisors who have been vetted by Dave Ramsey’s team and follow Dave’s principles to help you manage your investments. Before you jump in and call it a way Dave makes money, I want you to realize that people work with an investment advisor for not just lack of knowledge but other reasons too. Some of them may be too busy to focus on investing and just want to outsource this seemingly daunting task. People who DIY their investments is a real minority in America. The vast majority of people out there still work with some investment management firm to handle their investments. To that end, Dave’s recommendation is not wrong at all.I don't do my taxes since I find it too daunting and I feel I might make some mistakes. I work with my CPA to file my taxes. Now does it make my CPA a crook? Absolutely not. He is just being compensated for the expertise he is… Click To Tweet
While I myself am a DIY investor, I do feel the investment advisers have their own place. The entire FIRE community is a very small percentage of the overall American population. What Dave Ramsey is talking make sense when you look at the avergae American who is having a hard time managing the basics of personal finance like budgeting or staying away from debt, let alone go through investment options and manage their own portfolios.
I definitely feel people need to spend time educating themselves on how to choose a financial advisor and what are some of the gotchas and how to avoid them. They need to stop painting every financial advisor with the same broad brush and look at them as mere agents who work for a commission. I feel the financial community needs to revamp their image and look for adding value and not just find new clients and up their commission.
3. Ditch The Credit Cards
This is one advice from Dave that I have literally taken to the heart. When I first heard it from Dave, I wasn’t sure how switching from a credit card to a debit card or even cash can help me. I have never carried
At the time of beginning my debt free journey, I carried 8 different credit cards. I have written about how I eventually chose to simplify my finances for the good. I firmly believed these credit cards provided me with “options” to cover any unforeseen of my expenses. In a lot of ways, these credit cards were my emergency fund. How cute isn’t it? So the thought of parting with them didn’t seem wise to me. After all, what would I do if I ran into an emergency? How would I cover that expense?
But as I understood Dave’s Baby Steps further I realized that credit cards didn’t really provide me the safety net they often claim to provide. They, in fact, made me spend more than normal. It is this argument that Dave had been putting forth, while I was busy arguing in my head, “But I pay off my credit cards in full. So they can’t be bad.” This is exactly the same argument that most “responsible” credit card users often put forth to defend themselves. I feel Dave is right when you view it from the perspective – “You wouldn’t have spent this money in the first place. Forget about paying it off.”I am yet to meet a millionaire who said he became a millionaire because he earned cash back on his credit cards. – Dave Ramsey Click To Tweet
When they hear Dave say this, I often find people throw in the Travel Rewards and Cashback Rewards argument and claim it makes them some extra money. If I can make some extra money by using a credit for a purchase that I would have done it anyway, why not? I know a lot of people who have earned enough travel rewards to basically get an entire trip paid for using just the rewards points. But what they miss is that it tricks their brain to believe this script – “Spending using this card is really good. I get to earn some credit card rewards. Over a period of time, you rationalize your purchases with the cashback rewards or travel rewards.”
My personal experience has been that once I chopped 7/8 credit cards, my spending really went down. I began to look at my purchases with a fresh perspective since I had to part with my money immediately. There is something about that “immediate” exchange of money that makes you rethink every purchase. I feel many people
Is there anything about Dave Ramsey that rubbed you the wrong way? Please share your thoughts in the comments. I would love to hear from you.