Dave Ramsey
What is your opinion on Dave Ramsey's baby steps? Too conservative or common sense?
Baby Step 1 – $1,000 to start an Emergency Fund.
Baby Step 2 – Pay off all debt using the Debt Snowball.
Baby Step 3 – 3 to 6 months of expenses in savings.
Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement.
Baby Step 5 – College funding for children.
Baby Step 6 – Pay off home early.
Baby Step 7 – Build wealth and give!
He’s doing good things for America. I will say that some of us on here are in a much better position than the people his advice is oriented towards.
He says no debt on real estate which I disagree with.
Dave Ramsey is a financial guru for people with zero financial understanding. That's not an insult, but it is a reality.
His anti-credit card approach is a perfect example of this. For people who do not understand how credit cards work or don't have the personal restraint to use them responsibly, just avoiding them entirely may make sense...but the rest of us know that you can very easily game the system to get tremendous value (both financial and quality of life) out of credit cards and their respective rewards systems, not to mention the boost to your credit score and the protection from fraud you get by using them versus a debit card.
Also, on a personal note, he has given interviews where he perpetuates the boomer "work your way through school" myth, which hasn't applied since the 1980's. My dad may be have been able to pay for his college working part time, but you can bet your ass my part time job didn't even come close to covering tuition.
Teaching the financial illiterate financial responsibility? Great, especially since our schools fail so miserably at it. Acting as some know it all guru for everyone in every situation? Less great.
I agree.
Moreover he is bald. That should be the first red flag.
On credit cards, we only get points/value because someone else loses value. Ie, Amex will give you $5 of points if they can charge someone else $8 for interest/late payment.
Idk about the college thing, but I do agree it all comes down to school selection. The cheapest way to go to college is 2 years of community college then transfer. Not saying I would want to do that, but I would take that over no college/huge debt.
This isn't how it works. I don't get points because someone else doesn't make their payments on time.
You could credibly argue that the points system is meant to sucker in more customers, many of whom will not pay their debt on time and thus incur steep fees/penalties, but that is not the same as what you are saying
We get 5$ in points value because Amex/Visa/MC usually gets >5$ in value from the merchant for processing their transaction... that's how it works. The merchant is not losing that value, all consumers are in the form of higher prices whether you pay cash or not. Don’t leave your money on the table.
Amex, as well as Visa, Mastercard, and Discover, charge all merchants a processing fee per transaction. I think it's 2-4% of the transaction amount. Amex and Discover charge at the higher end of the range, which is why they're not accepted at all places. And they turn around give their cardholders roughly 1% back. Also, if you redeem the 1% in-kind (e.g. airfare, instead of cash), the card issuer has price bargaining power.
Don't forget the many cards, especially Amex come with hefty annual fees. But given the demographic that Amex targets, it probably doesn't earn as much in interest as you would think. With charge cards, you're not suppose to carry a balance anyway.
Financial literacy is one thing, financial discipline is another thing.
Lots of people in the industry (finance) that lack both - amazing as it sounds.
The finance industry sure does make it hard to be literate with all the acryonms and disciplined (I have one credit card with $100,000 limit...). Thankfully I always pay off my balance in full by the time it reaches $85,000 for the month. Wouldn't be where I am today if it weren't for my Havard MBA (was a Baker Scholar, no big deal).
I have some disagreements but overall, they're minor. He's developed a system that is easy to understand and follow, and that's why it's been effective for a lot of people. You see this in weightlifting all the time - someone finds a system and follows it, and ends up getting stronger than if he followed an arguably better-designed but more complex system. Same in nutrition. Same in a lot of arenas where truth is complicated.
I don't have an emotional response to debt, so I don't categorically agree with paying off all debt, and I certainly don't agree with paying off a home early. It should depend on the interest rates of the debt, your available investing opportunities, and your personal debt service coverage ratio. I managed to refinance my mortgage to ~3%, and if I could make interest-only payments and never make another dollar of principal payment, I would.
A lot of good answers in this thread, but this is the correct answer and the correct opinion.
My best friend was a financial degenerate for much of his life and he ruined himself financially despite having made far more money than his peers. He finally came to the Dave Ramsey method and turned his life around. An imperfect plan is so much better than no plan. The Ramsey method is very digestible.
To your comparison to weightlifting, I eat dessert first because I know how my brain works--if sweet foods are the last thing in my mouth I will think about more sweet foods until I get them. So I may have my ice cream first, followed by tuna to "wash" the sweet away. Is this the world's best diet method? Nope. But it works for my brain.
I looked into it a little more closely, because I was unfamiliar with the mechanics of the "debt snowball." That strategy is a nightmare from a mathematical sense and fascinating from a psychological sense.
The concept is to order debts from smallest dollar amount to largest, and pay them off in that order, regardless of interest rate. This is crazy. Obviously, if you have a consistent amount of cash available per month, you're better off paying down the debts from highest to lowest interest rates, regardless of current balance.
I think the assumption behind this strategy is that there's a psychology element that gets people to change their payment habits when there's a tangible goal (like eliminating a certain debt) within reach. If it's close, then people are more likely to stretch to save that next dollar to pay down that debt. And once some debt has been extinguished, the idea is to roll those payments into the next source of debt, "snowballing" the size of the payment as you extinguish more sources.
I don't like the implications of ignoring interest rates, but I see where the concept comes from, and if financially illiterate people find success from it, then that's better than them failing to adhere to a mathematically superior approach.
How nice would interest only be when the inflation ensues...
I love it. The 7 baby steps are key.
Are they all key though?
Why is the "snowball method" universally better than the "avalanche method" for paying off debt?
Why should you pay off your home early if you have comically low interest rates locked in?
anyone who has a basic understanding of finance should choose the avalanche method over the snowball method
Dude relax. Like you said it's great for most people. Not everybody. I like it personally but I didn't say everybody should. I'm not going to argue the math behind the baby steps.
Think about it like how some people work. Some like to get up and do the hardest thing first, knowing they got it out of the way (avlanche).
Others like to start with simple things first, almost like a warm up (snowball).
Why would ppl pay off all debt (including student loan debt) before saving up 3-6 months expenses in savings?
I've always wondered this myself. It seems rather risky to aggressively tackle debt with only $1k in your Emergency Fund. You're literally one bad event away from being financially crippled.
Yea, it makes no sense. I have student loan debt and I can assure you I am happy I saved up ~1.5 years of living expenses before focusing on paying it down, especially in this economic environment.
Basically he's saying why hold assets when you have liabilities.
That makes sense for some who understand it, but not for the average/"his people".
The 1K is just for slightly emergencies, I.e the dishwasher breaks, you need a tire, not for a full medical procedure.
Ultra conservatively any debt with an interest rate under 4% you should make minimum payments (house, car), conservatively under 6% (student loans) and less conservatively under 8% (some student loans). The only debt you should definitively be paying off in full is a credit card. Market returns 8%+ annually long term, commercial real estate done correctly in the right area is 20-40% cash on cash return. Over 40 years, that 2-4% spread in an index fund is a big opportunity cost. If you’re capable of renting out a multi family apartment complex it’s a massive opportunity cost.
Dave Ramsey is great for the average American but that’s not much to aspire for.
Smaller US cities. 7% cap rate, 20% down/5x leverage. 10% down/10% seller financing/10x leverage.
Dave Ramsey would not approve.
I get to see a lot of lending documentation, financials, and shit for stuff because of my job. I would say that 5-10% cap rates are not uncommon. The ROI I estimate for developers and property owners make me want to go into CRE. Now that I mention it, I think I'm going to start paying closer attention to this stuff and gathering data, for my employers benefit of course...
As the person you're replying to mentioned, go outside of the big cities. Think smaller cities and think of places that people are moving to to get out of the bigger cities. Doesn't just have to be RE. Send me a few names of smaller or even "rural" cities within a 3 hour drive from you and I can send you some ideas. Really, take me up on this.
My sample set may be skewed.
I would put Dave Ramsey and Susan Orman in the category.
Agree with the opinions presented in this thread...plus it's obviously not mindbreaking material.
Plus his baby steps regarding emergency/debt are comically terrible. Low interest debt outside of credit cards should NOT be paid in full unless you have nothing better to do with your money. Emergency Funds don't survive events such as COVID 19 (I know dual-income households who have $30,000 in emergency funds with kids...they are screwed if one of those becomes unemployed.
Now onto actual financial advice - I am a big fan of Radical Personal Finance - Joshua Sheats. Excellent information on various topics. Highly recommend his podcasts.
Agree with everything you said except your sentiment on Emergency Funds. I would still stress that a nest egg is very important to have. Not everyone has passive income (i.e. real estate) to withstand a job loss.
Keeping me honest - I should have clarified my issue is with his take on emergency funds, not emergency funds themselves.
As a recession child, I am extremely aware of what happens with no nest egg
At OP, you're on a finance forum asking if a certain system is best. That's like going on a fitness forum and asking if some mass produced workout plan is the best. Everyone is going to pick it apart to sound smart, (Which hopefully, we all should be doing) and have their own way of doing it. However, it could be a good starting point if you have no idea the difference between a squat or deadlift.
I've listened to some of his stuff, namely bc some of my family members have gotten into it and I wanted to make sure its not a hood wink. Good not great, good starting point, but more motivation. I've never read his books, but apparently it has ~30 pages on how to save $1k, and about 3 pages on investing.
It's like most stuff though, it comes down to motivation (which he provides) and discipline. Sometimes you just have to start, but people are scared to. This gives them a starting point.
Do I think its bad for the average person who knows nothing about finance, no, its actually pretty good for them. I mean, we live in a world where people will buy the 1/4 burger over the 1/3 burger bc they think it has more meat. Finance is fire, you can cook with it, or you can burn down your house. Most people would be better off just paying off if they only paid for things they could afford in cash, but everything thinks they're smarter, and thats how peopel lose their shirt.
Dave Ramsey's advice isn't perfect (and is -EV for a lot of financially literate / higher-earning people), but the vast majority of people in below the top ~2 deciles of wealth -- whose average financial decision-making is pretty poor -- it's marginally a huge step up.
While I recognize his approach and steps work for more for the financial illiterate he is someone who has built vast wealth on the weakest kind that could get similar advisement from a financial counselor that is typically available through their employers benefits.
I mean his cash for everything is just absurd (again, on EVERYTHING). I have paid cash for my last (2) cars but it took a while for that and I had a mortgage on my home for just under 11 years before paying it off. I will never be convinced any of that was bad debt or a bad financial decision.
BUT, now how loyal clan that preach his gospel 24/7?!?!? Grrrrrrr....+
Step 5 - college funding
Never ceases to amaze me how 4 years of college has become such a presence in a person's life that it has its own step in a life plan to financial freedom. Totally amazing when you think about what college actually is. Some marketing genius managed to take a 4-year education . . probably the least valuable 4 years of education, after you've learned all the real skills in K-12 . . and turn into this life-defining thing in people's minds. Its almost the first thing out of someone's mouth when you tell them you're having a kid . . "better start saving for college." I'm just blown away by it.
My wife and I have discussed this at length. We aren't convinced our kids will go to college, or anything like college in its current form, when it's their turn to go.
Expand on this.
I agree.
Unless your kids are teenagers I agree
You work at a hedge fund? Would you have gotten the opportunity to work at a hedge fund if not for college? Disparity in life outcomes between those who do and don't go to college is pretty clear. Call it marketing or whatever you want but as long as that's true then parents will prioritize college for their children seeing as they want their kids to be successful.
You're saying college is necessary for success, thus people will always pay for it.
That's true only as long as that system remains in place.
Don't get me wrong, there will be something in the future to cull the herd down to the smarter and luckier few who get the best career opportunities. I just think it will be far more efficient than the system we have today, where college pretends to serve as an education but actually serves as a cartel.
In terms of total money spent across society, the total college investment including everything done to get into the top college . . i.e. the grand total money society invests in the idea that a brand name college is a ticket to success . . is to me easily the most lavish and inefficient investment our society makes. Nothing comes close in my mind (happy to hear other ideas of what's more wasteful at that scale).
So I don't have the solutions, but I'm fairly certain it will change massively. How exactly, not sure. I think the overall pie . . the College Industrial Complex including all the ancillary services . . will shrink quite a lot. Society isn't going to keep bending over backward to this same degree to buy a piece of paper. That box-checking myth is a relic of a time when our high GDP growth dictated that anyone with a fancy degree was set for life. Those days are over.
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