11 Things Dave Ramsey Has Wrong

Now before you come at me, I want to preface this article with saying that Dave has helped out millions of people and those people are better off because of him. He’s even helped me early on in my personal finance journey.

Despite those things, he still has many things wrong.

I actually led a Financial Peace University class years ago and although it was beneficial for my class I did feel it was my duty to “unteach” and correct some things in the curriculum.

I do agree with Dave on a handful of things. I totally agree that individuals and couples need some form of a budget, a zero-based budget or reverse budget, especially early on.

I also believe that sacrifice is required to get ahead (i.e. scaling back unnecessary spending, finding ways to increase income, etc.).

However, the broader issue is that Dave is ultimately a salesman, and a great one at that. The only way you’re able to scale a business like Ramsey Solutions to that magnitude is to “generalize” as much of your product as possible, to be relatable, so it can be packaged and sold to a lot of people.

Unfortunately, generalized advice isn’t in YOUR best interest. Yes, there are general concepts and “rules” that are beneficial in getting you started and going in the right direction BUT that doesn’t mean that you should continue to live by general advice. This is actually quite dangerous to do.

General advice will get you general results.

There’s a quote by a fellow financial planner that resonates extremely well with this theme:

“Personal finance is more personal than finance.”

— Tim Maurer

Dave’s 7 Baby Steps

Here’s a refresher on Dave’s 7 Baby Steps:

1. Save $1,000 for your starter emergency fund.

2. Pay off all debt (except the mortgage) using the debt snowball.

3. Save 3-6 months of expenses in a fully funded emergency fund.

4. Invest 15% of your household income in retirement.

5. Save for your children’s college fund.

6. Pay off your home early.

7. Build wealth and give.

With all that being said, here are 11 things that Dave has wrong:

1. The “Baby Steps” Are the Only Way to Succeed

   Dave has developed an effective and repeatable system that has helped out millions of people and I agree with many of the things he includes in his curriculum. However, to say that this is the approach that everyone should take, and in this order, is flawed.

   Everyone’s circumstances are very different. What works for you may not work for the next person. But again, that is the reason why they baby steps have been so effective.

   People do better with a plan of action and Dave has basically created a formula that anyone can access, especially lower income individuals.

   If you work with a financial planner you can have a more customized plan of action that will likely serve you better.

2. Investment Approach

   Dave recommends that individuals split their investments between four different funds: growth and income, growth, aggressive growth, and international.

   This is extremely vague as these are all qualities that we want in a portfolio. He has since clarified that the funds more likely align with the size of the companies in the fund and subsequently the type of characteristics that result.

   Regardless, everyone has different goals with different timelines and different risk tolerances.

   For example, if you’re nearing retirement you likely don’t want to be fully investing in 100% equities that will result in more volatility than you’d like or need.

   Your investment approach should be unique to you and your circumstances.

3. Mutual Funds

   Dave recommends that individuals invest in mutual funds. In his class, and online, he does a great job explaining what a mutual fund is and the benefits of them.

   However, much has changed over the years, and even decades, to where mutual funds have more cons than they do pros.

   When comparing them to other investment vehicles they are inferior way to invest. My biggest beef with them is that they are tax inefficient, you can’t trade them during market hours, and they are expensive.

   A great alternative that I use with my clients are exchange traded funds (ETFs) that are the complete opposite in those areas: they are more tax efficient, you can trade them during market hours, and they are much cheaper to administer and manage.

4. Plan On Achieving 12% Investment Returns

   For the longest time Dave had broadcasted to his audience that they could plan on an average of 12% investment returns in the future.

   I could go on and on about why this is a dangerous assumption to use. But to get to the point, it could leave you with too little money in your later years should you not actually average 12% returns each year.

   I don’t know any financial professionals that use 12% returns in any of their investment projections.

   I believe Dave is using as much historical data as he can find to justify that 12%.

   However, here are the S&P 500 investment returns (with dividends reinvested) over the last few decades:

   
   • 2013 - 2023 (10 year period): 13.05% (10.24% adjusted for inflation)
   • 2003 - 2023 (20 year period): 10.20% (7.55% adjusted for inflation)
   • 1993 - 2023 (30 year period): 9.98% (7.33% adjusted for inflation)

   
   Remember, past performance doesn’t guarantee future results.
   As you can see, inflation accounts for a good portion of an investment’s positive return for a given period. For the last three decades it’s accounted for 2-3%. However, we don’t know what inflation will look like in the future and what impact that will have on future investment returns.

   Would you rather err on the side of having too much money or not enough money because of the rate of return that you used?

   Again, by working with a financial planner they can adjust return assumptions over time to more accurately fit any long-term “trends”.

   Dave has since started using a 10-12% range when talking about investment returns (at least on the website). I'm guessing because of all the scrutiny he’s received.

5. Only Work With a Commision-Based Advisor or One of His “Smart Vestor Pros”

   As I mentioned above, Dave has built a massive empire because he’s a great salesman. He started off with monetizing his seminars, classes, and books. He’s since moved to monetizing his brand through his network of “preferred providers” that includes professionals across the following areas: investment management, tax, legal/estate planning, insurance, mortgage lending, and real estate agents.

   Dave loves to recommend his “Smart Vestor Pros” which tend to be commission-based advisors that pay a hefty monthly fee to be a part of his network.

   This is a huge conflict of interest because these professionals may not be giving advice that’s in your best interest but he’s recommending them because they have paid a fee to be one of his providers.

   Are these the best financial professionals to serve you? Likely not. But they likely are going to aligned in many of Dave’s recommended investing concepts, even some of the above, which I’ve spoke out against. This arrangement is distasteful.

   Instead, you should find a fee-only, fiduciary financial planner. XY Planning Network has their own find an advisor tool and is a great place to start or check out the Christian Financial Advisors Network for Christian advisors that fit the aforementioned requirements.

   I also recommend checking out this list of questions when looking for an advisor.

6. Debt Snowball > Debt Avalanche

   Dave has long recommended that his audience use the “debt snowball” when paying down debt.

   To review, the debt snowball is a debt elimination strategy where you target your lowest debt balances first and work your way up to the highest balance debts.

   For example, let’s assume you have 3 different debts: $5,000 in credit card debt, a $10,000 car note, and $20,000 in student loans. Let’s also say your minimum payments equate to $500. The debt snowball says you would make all minimum payments towards your various debts with any extra payments being applied to your smallest debt (the credit card debt in this example).

   You would do this until you pay off your smallest debt THEN rollover that amount as an extra payment on your next smallest debt (car note in this example) and so on and so forth. As you can see the payments continue to “snowball” and get bigger as you pay off a specific debt.

   This method is great for keeping people motivated with more frequent victories early on.

   However, there is another debt elimination strategy and it’s called the “debt avalanche”. Instead of focusing on paying off the lowest balance debt(s) first, it’s premise is to pay off the highest interest rate debt first and work your way down. This method results in the least interest paid total over the life of your debts. Often times both strategies may recommend the same debt be paid down first (e.g.  credit card debt).

   The point is that both methods can serve people well for different reasons. It just depends on what would be best for YOU. However, we shouldn’t assume that one method is the best for everybody.

7. Pay Off All Debt Before Investing

   Dave has always recommended pausing all investing before your non-mortgage debt is paid off. This is very problematic.

   By this reasoning it could be 10, 20, or 30 years before someone with student loans could invest for the future.

   Another flaw is that many individuals receive a matching contribution from their employer when they contribute to their 401(k), or other employer sponsored plan. If you don’t contribute you don’t receive the matching contribution.

   If you pause all investing to pay down debt you miss out on free money from your employer AND the compounded growth from that money.

   But, but, but….the interest accruing, the burden of debt, the freedom. I get it.

   If you’re disciplined enough to be “gazelle” focused then you will find opportunities to get out of debt ahead of schedule. However, you can’t get more time for your investments to compound.

   There is something to be said about putting all your effort behind one thing instead of many. But this isn’t it and is actually causing financial damage for those that delay investing.

8. You Don’t Need a Credit Score and Credit Cards Are Bad

   It’s safe to say that Dave abhors debt. I get it. However, he’s gone too far in saying that you don’t need a credit score and that credit cards are bad and you shouldn’t have one.

   Your credit score is one way a company gauges how “risky” you are when it comes to your finances and other aspects of your life. And I must say that it does have a correlation.

   If there was a better way out there then I’m sure it would be used. However, simply not using credit at all and allowing your credit score to “dwindle until it’s completely extinct”, in Dave’s words, is foolish.

   In fact did you know that your credit report and score can be used in the following ways:

   • Lenders may use your credit report information to decide whether you can get a loan and the terms you get for the loan (e.g. the interest rate)

   • Insurance companies may use the information to decide whether you can get insurance AND set the rates you will pay

   • Employers may use your credit report, if you give them permission to do so, to decide whether to hire you

   • Telephone and utility companies may use information in your credit report to decide whether to provide services to you

   • Landlords may use the information to determine whether to rent an apartment to you

   A missing, incomplete, or non-existent credit report, or score, can be grounds for not moving forward in a specific process. Remember, most competent and responsible companies are going to err on the side of being too conservative rather than too aggressive. So if they can’t evaluate you then you may be denied.

   You may be the most responsible person at paying off your debt but if you don’t have a standard way to communicate that (e.g. your credit report or credit score) then they can’t possibly know that.

   Finally, even if you are able to get service without a credit score you can be assured that you’re paying the most expensive rate to compensate for your perceived “risk”.

   I’m not saying to carry debt just to carry debt. No. Just find ways that will communicate that you’re a responsible borrower.

   When it comes to credit cards, use it responsibly and pay it off each month. That’s it.

9. You Need 10x Your Annual Income in Life Insurance

   Dave recommends that individuals get 10x their annual income in life insurance. In fact, many insurance agents and brokers recommend this too. Why? Because it’s an easy way to determine how much you need with very little work involved.

   However, this method is rarely accurate for most. It’s more likely that you’ll be over or underinsured following this method.

   By this method, stay at home parents would have $0 in life insurance despite providing an invaluable service to their household.

   So how much do you need? It depends. I take my clients through a “capital needs analysis” and plot out exactly how much they need in life insurance across the next 30 years (most of my clients are younger) to fund various different goals. The reality is that as you age, build your net worth and pay down your debt that you’ll need less and less life insurance.

   I recommend you talk to your financial advisor or insurance agent to determine how much term life insurance is appropriate for you.

10. 8% Safe Withdrawal Rate

    A safe withdrawal rate is the amount of money someone can withdraw from their investment portfolio without running out of money prior to their death.

    Dave Ramsey touts that an 8% safe withdrawal rate is what individuals can plan on. He likely teaches this figure because he also teaches point #4 above (12% investment returns) in which the math “works”. However, because a 12% annual growth rate is too high to use in the financial planning process, an 8% safe withdrawal rate is also too high to use. Doing so can result in you running out of money too soon. Again, I encourage you to find any financial planner, that works directly with individuals, using a 12% investment return in their calculations and recommending a 8% safe withdrawal rate. You won’t be able to find any that are worth their weight in salt.

11. The Goal of Financial Wellness

    One of Dave’s iconic quotes is “If you live like no one else now, later you can live like no one else”. This idea is that by sacrificing and putting the work in now your reward will be that you can live better than others later. It’s a quote that is meant to motivate and inspire hope for the future because of the grueling work today.

    Dave is known for incorporating his faith and scripture into his process, albeit I feel it’s getting smaller and smaller as he has gone more mainstream, but I believe this totally misses the point of stewardship.

    For Christians, the tone of this message, the Dave Ramsey community, and the baby steps (and underlying concepts) can be damaging to our faith. The danger of money is talked about frequently in the BIble. Jesus talked about it directly and it’s even communicated through parables.

     “But those who desire to be rich fall into temptation, into a snare, into many senseless and harmful desires that plunge people into ruin and destruction.  For the love of money is a root of all kinds of evils.  It is through this craving that some have wandered away from the faith and pierced themselves with many pangs.”  -1 Timothy 6:9-10 ESV

    Instead, Christians should focus their attention to what it means to be a good steward of what God’s given us. If we look at spiritual wellness we typically see that surrender, dependence, repentance, humility, and grace are all things that are involved.

    Financial wellness is no different.

    I’ve written a few blog posts on stewardship:

    • What is Biblical Stewardship?

    • Why is Biblical Stewardship Important?

    • Symptoms of Faithful Stewardship

    In conclusion, I appreciate that Dave has helped millions of people in various different ways. I have no doubt that there is less debt in existence because of him and even more intentional spending. My advice is that you keep all of the above points in mind and guard your heart when taking in his information, and anyone else’s information, when it comes to your finances. And as always be prayerful in all you do.