I was planning on talking about buying a scooter to save on gas costs today, but I got an interesting comment yesterday that I felt warranted discussion.
The comment was left on my post about earning more than $400 in free cash back using my credit card. I said in the post that I think Dave Ramsey is flat out wrong for his anti-credit stance. Here’s the comment:
Nice try trashing Dave Ramsey for no reasons. I sincerely request to think twice before you trash him again. He is not preaching to cut plastic or get out of debt for normal people like me and you who manage debt prudently. His target audience is way over the head in credit card debt and their finance charges for one month is greater than your annual cash back from Amex Blue. For people like these it makes perfect sense to not use credit card. Think about it before you cash in your rebate check next time – Amex/Discover charge about 3% for gas station operator, you are paid 5% rebate for charge the gas expense to their card – guess what – the rest of 2% is paid to you from the 29% interest rate and insane finance charges and cruel penalties these credit card companies charge to people who are already in deep trouble. Pick up the documentary “In debt we trust†from the local library and open your eyes.
For starters, I’m glad this person commented on the blog. It opens up the discussion, and heck, I love getting opinions that challenge my own. So I am not writing about this to just rip this person’s argument apart or anything. I just disagree.
Dave Ramsey is a big name author and radio personality in the personal finance world. He went through very hard financial times in the 1980′s and has bounced back to make millions of dollars. He has written several popular books, and always tells his listener’s to stick with his “Baby Steps” to financial freedom.
Here are those baby steps:
- $1,000 to start an emergency fund
- Pay off all debt using the debt snowball
- Save up 3-6 months of expenses
- Invest 15% of your income into Roth IRAs and other pre-tax retirement vehicles
- College funding for children
- Pay off home early
- Build wealth and give; invest in mutual funds and real estate
Now that all seems well and good on the surface. And I agree with the commentor’s point — Ramsey’s system is not designed to be used by me. I have a handle on our finances. His system is the life buoy thrown from the coast guard ship to the people on the sinking vessel who don’t know how to get out of their situation. I buy that.
And I am also not arguing against the point that his system gets people out of debt. It does. But, like any system, it has flaws and could be improved. I have three major beefs with his system.
First, Dave wants you to pay off all of your debt with the debt snowball. For those that are not familiar this is where he tells you to pay the minimum payments on all of your debt, and any extra money you earn or find gets applied to the debt with the lowest balance first. He claims that finance is 80% psychology, 20% money or something like that. Paying off a few small bills give you a psychological boost to tackle the big debt.
While that may be true, it is mathematically flawed and ends up costing you money. A simple example: you have two credit cards with balances of $1,000 and 3,000. Card A ($1,000) has an interest rate of 9.99% and Card B ($3,000) has an interest 23%. Dave wants me to keep paying 23% interest while I knock out the first card. That makes absolutely no sense and is costing me money along the way.
My second beef with Ramsey is that he wants you to do steps 5 and 6 before step 7. This isn’t a major concern of mine, but I don’t think children’s education should come before retirement. For some people, saving 15% will set them up for life when they retire. For others, not so much. You can’t borrow for your retirement. You can borrow for your kid’s education. Remember that.
The third concern I have with Ramsey is his anti-credit card stance. This is my largest issue with the Dave Ramsey system.
I understand that there are people out there in the world that simply cannot manage a credit card safely. For those folks, I have no problem saying you should use cash and debit cards for the rest of your life.
However, I don’t understand why Dave’s system starts with getting out of debt and stopping the use of credit, and ends with building wealth… but continues the theme of not using credit. If his system was there to truly rehabilitate people, he would train them how to safely use credit.
This may seem minor to some people. So you’re missing out on $400 of free money per year. Big whoop, I can deal with that. But there are many extra benefits to using credit cards and if the person following his system is truly following it to a T, then it applies just as well to credit cards as it does to cash and debit cards.
The bottom line for me is just because I have a credit card, I don’t have to use it to buy things on credit. Technically, yes, I do. But I have the money sitting in my bank account waiting to pay the bill. So use your credit card like a debit card or a wad of cash. It’s all the same. It’s a representation of money. Again, I’m not saying every person on his plan could handle it. Obviously many can’t in our country. However, I think one of the final steps should be to reintroduce people to credit in a safe manner.
There are so many benefits to credit cards it just seems silly. I’ve talked about them in the past. It helps automate our finances. I pay most of our normal bills with the credit card (electronically), and pay one bill to the credit card company (electronically) at the end of the month. I’m not sending ten envelopes with checks to various companies, trying to time them correctly so I don’t overdraw my checking account. I get security when I travel or buy things online. If my card is stolen, no big deal. American Express steps up to the plate and takes care of me. If I’m on my honeymoon in Mexico and someone steals all of my cash… well, that’s a different story.
Dave Ramsey is a Great Guy
Let me finish by saying I like Dave Ramsey. He’s a Christian influence in the personal finance world. He’s a huge Tennessee Vols fan. We have a lot in common. But I do think that his system — like any system! — has it’s flaws.
What do you think? Is Ramsey a nut case, financial genius, or something in between?
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Kevin,
Since every system has flaws, where are the flaws in your system?
Great question.
I would have to say the greatest flaw of my system is the level of detail I go into on a regular basis. The budget we use for our finances is 54 lines. That’s a lot of things to track, but it works flawlessly because we have money set aside for a lot of things that a simple 10 line budget doesn’t have.
But people don’t like to fill out 54 lines.
In truth my system is similar to Dave’s. I just disagree on the credit issue. His plan is definitely good, but I would change that specifically.
That’s funny. I just went and counted and I have 51 virtual envelopes in our budget as well. You could call them lines or categories or whatever. I’m sure the concept is the same.
My system is also similar to Dave’s. It’s a virtual envelope system. I prefer debit cards over cash envelopes. I have written in detail why here: https://inzolo.com/blog/why-the-cash-envelope-system-didnt-work-for-us.php
Also, I have to admit that I do use an AMEX gold for my business and I just ordered an AMEX to use at Costco for groceries and gas. Why? 1. Because I get more cash back using it; 2. American Express has a nice OFX server that allows me to download transactions quick & easy in Inzolo; 3. Using Inzolo, I hardly even know I’m using a credit card.
We specifically went with a pre-paid tuition plan to keep our son from BORROWING…it seems backwards to me that I would want to be out of debt but should have no problem allowing my son go through the same financial headaches. The cost of tuition increases dramatically every year and he is ten years away from attending college. Given that the minimum wage increases are fought every single time they are mentioned, I can only assume that minimum wage will rise, maybe, a paltry two dollars in those ten years. So against what seems like every financial planners or get out of debt guru/pundits better judgement we fund our retirement plans (me:15.8%, wife:10% , tuition plan ($553/month), our sons savings account ($50/month), his investment account ($50/month), investment account ($150), savings (5% net from each of our paychecks). Even though the software program I use debtinator (http://www.bassetsoftware.com) tells me that the prepaid tuition is 14.07% of our debt load I need only look at the number of lines we have for debt, 21, and see that 10 of them are student loans totaling ~107k. Doing calculations for meal plans + room and board for a state university tells us that it could cost 69K in ten years for a four year stay. Personally, I want to break the middle-class cycle of retiring broke (which I hope we are on the correct path) but more important to me is the middle-class cycle of burdening our children with loans and debt and if that means I can’t save 20+% for retirement for another 7 years, so be it.
Glad that you are able to tell it like it is. I recently wrote out a piece detailing the 2 areas where Dave Ramsey is absolutely dead wrong and here is proof: http://www.creditcardchaser.com/dave-ramsey-credit-cards-i-love-ya-dave-but-you-are-dead-wrong/ Overall though, I still very much agree with 90% + of what he says.
Let me suggest that before you critique someone’s philosophy you learn what they believe. I don’t know if you just glossed over his baby steps or simply skimmed through one of his books, but whichever it is, you are not understanding what Dave Ramsey suggests people do with their money. I have been listening to Dave’s radio show for a decade and his tv show for a couple years. Your first beef is legitimate, however, Dave Ramsey does not preach that you always pay off your debt smallest to largest. He agrees with you, that if there is a LARGE discrepency in the interest rate, And if the larger interest rate balance is SIGNIFICANTLY higher, then yes, you should attack that first. While this does happen, this is less than 10 percent of the cases out there. Second, 15% is not a rule for retirmement but a rule of thumb. So your point again is noted. However, to say that you would borrow on your children’s education is not something Dave would subscribe to. There’s ALWAYS a way to get a kid to school with cash or some other avenue without taking out a loan. You must have a plan. If you are taking out loans it probably means you didn’t have a plan when your kid went to college. Hence, you needed to borrow the money. Your third beef just doesn’t make any sense. Dave Ramsey is giving advice to people as a whole. You may say that you can handle credit card payments and pay them off every month, but so does 99 percent of everyone!!! And the simple fact is that almost everyone who says they can wind up carrying a balance at some point, be it credit cards, a new car, etc. THe point Dave is making is that although there are people who may be able to handle it, the RISK is not worth the reward. Because once you start putting $500 dollars on a card for small things which you pay off, this can quickly turn into $1000 or $2000 and eventually that nice new car you always wanted. The reason 100 percent of the people who are in debt right now are in debt, is because they took thata first step on that slippery slope and now can’t get back up the hill! So while there are a few who can manage to handle this, 99 percent of people cannot, and that is the cruz of the entire debt problem. You can’t simply say, “Everyone who can handle making monthly payments go ahead and use your credit card or finance a car”! Why, because even most of them who can encounter untimely tragedies, which you are fortunate enough not to have encountered! So don’t think you are simply smart enough to handle debt, it’s more likely you have simply been mucky enough to escape the risk and bad luck
Medical emergencies, and other emergencies, loss of a job, anything can cause devestation and push you to the bottom of the hill if you’ve taken that first step. My house was destroyed by water and the insurance company decided they didn’t want to pay. I owed close to $300,000. I was able to make payments, but now I had a house with close to $200,000 in damages and wasn’t worth anything! I could handle my debt, right?!! Nope. It may be a one in a million circumstance, but they happen to people every day. I had to file bankruptcy. if you have no debt, you will never be in debt to anyone. Is your $400 a year worth the risk? You may say yes. But those of us faced with the realities of life say different.
Dan, you rambled. I’m going to try and hit some of your points, but you’re all over the place.
You are like every other Dave fanatic. That’s fine, but you’re following him like only pure truth and genius come from his mouth.
Dave’s a great guy (I’ve said this before), but he isn’t God. He makes mistakes, too. His plan is not perfect.
His system is designed to get you out of debt. Yes. But it is also designed to make him money.
I don’t have any kids so your “you must not have had a plan to get them through college” doesn’t make sense. Then again maybe you were speaking in generalities, at which point I would agree. Planning is a key to financial success. But that having been said there are dumb parents out there that would sacrifice retirement to pay for college — that is the mistake I am pointing out.
I think it is a stretch to go from using a credit card like a debit card by paying it off every month (Dave loves debit cards) to suddenly buying a new car with financing. That’s a huge jump.
Yes, 100% of people in debt are there because they took the first step. But I still think you’re stretching. It isn’t the first step — it is the first uneducated step where people assume it is free money.
If 99% of people can’t handle using a credit card like a debit card… that sounds like the perfect market to have an education product to help people get over that hump. My major beef is that instead of teaching this uneducated market that could use his help, Dave teaches them fear. Don’t use credit, it’s bad, it’s evil, etc.
If you have a solid financial plan in place including a nice emergency fund, proper insurance, etc. AND you use your credit card like a debit card.. there is no added risk.
You say I am lucky. I say I am working a smart financial plan and I am prepared. Big difference there. But since you are a Dave fanatic who fears credit I can see how you would think I am just lucky.
You mention your insurance company not paying for damages. $200,000 is a large amount of money for them to not cover. What was the cause of the damage? Why didn’t you sue them? Did your policy prohibit coverage for the type of damage?
I sure as hell would sue if it was covered and I lost $200,000. To do otherwise would be foolish.
Is $400 worth the (no additional just like a debit card) risk? Absolutely. Because it isn’t a risk.
Dan -
From Dave’s site:
“Myth: I should pay off the debt with the highest interest rate first to get out of debt quickly. Truth: You should pay off the smallest debt first to create the greatest momentum in your debt snowball.â€
For me, the issue with Dave is that he makes statements as though they are gospel. The above statement can be modified to get his point across:
“Your math is right, but my experience is that knocking off the first few small debts offers a moral victory and increases your chance of success.”
See? I can concede that life is not about numbers 100%. But Dave can’t choose his words to imply anything short of Papal infallibility. So I get emails telling me that I’m wrong, that “pay high rate first” is wrong, per Dave.
Dan, you owe $4000 @ 5% and $5000 @ 24%. That’s all your debt. Which do you pay first?
On a lighter note, two people in $400K homes. Joe owes $450K and has $450K in his 401(k), Dan owes nothing, just paid it off, owes zero. A flood wipes out both homes, insurance won’t pay a cent. Whom would you rather be?
(Ironic that floods are acts of God, no?)
Your lighter note… is that a trick question? Maybe I’m missing something, but I’d rather have my home paid off. At least that way I am at ground zero after the damagers. If I were in debt I would continue to have to pay on a home that was destroyed. I would have a hard time affording another home with those kind of payments. The 401K obviously wouldn’t cover the bill be the government would take half of it.
You are a better man than I am. (this is a sincere complement)
Me, I’d walk away from the mortgage, and rent for the 7 years it would take to fall off my credit report. Mortgages are non-recourse loans in most states, the bank won’t go after you, just take over the property. And I’d still have a full up retirement account.
What about the earlier part of my reply?
Yeah, I wouldn’t feel good about just walking away from something I have signed my name too. Either way it would hurt. I would rather have the hurt of losing the house than walking away from a debt.
I think Dan already addressed the first part of your reply:
“Dave Ramsey does not preach that you always pay off your debt smallest to largest. He agrees with you, that if there is a LARGE discrepency in the interest rate, And if the larger interest rate balance is SIGNIFICANTLY higher, then yes, you should attack that first.”
At one point I had owned about $4000 on a car at %4 and about $11,000 on a credit card at 9.5%. I got a tax refund of $4000. That was the real test to see which way I would go. I decided to take Dave’s advice and pay off the smallest amount. I really do think it was helpful to know a whole debt off my list. It’s all paid off now.
But, like I said, I don’t follow everything. I have an AMEX gold card for my business. I use it to pay bills I pay anyway. I generally use the points to get Home Depot gift cards as we are always remodeling. Every $2500 I spend is $25 off at Home Depot.
I spent four years paying off debt and building an emergency fund. I’m not going back into debt. But with my budget system, I can easily handle using credit cards as tools.
Yes, you quote Dan, but I quoted the Master Himself. I’ve never seen a quote from Dave offering what Dan suggested. Of course, I’d also concede that as the rates are closer, it makes less difference, but I’ve not seen Dave qualify his advice based on rate spread. Lowest Balance first is all I’ll seen and all I find on his site.
I don’t think I have seen it in print, but I have heard him say it on the radio.
On a side note, I have also heard him suggest to people that they surf for cards with lower rates or zero interest for a year while they are paying them down, but you’d probably have a hard time finding that in print too.
I actually did that. After paying off my car, that $11,000 credit card debt was later moved to a zero interest for a year card and I had it paid off before I paid any further interest on it. I guess I had my cake and got to eat it too.
Really, of all the financial gurus out there, I think most people with get the greatest mileage by following Dave Ramsey. Guys like Ric Edelman & Suze Orman really screwed me up with their bad advice.
Kevin,
I had being managing debt for the last 5 years. I own a Real Estate and Mortgage Company in Miami Florida.
Business now is how can I pay my bills ? where should I invest my money? I help my clients for free so they come back or refer me people.
I agree with you 100% one Dave.
I love the use credit cards us a tool. Creating a 5000 emergency budget paying 20% on Credit card balance/ interest equal $1000 wasted a year. That in morgages under 200,000 is 7 years of more payments.
Debt is the best investment we can do. we just need to read, learn and do it do it do it.
You may say that you can handle credit card payments and pay them off every month, but so does 99 percent of everyone!!! And the simple fact is that almost everyone who says they can wind up carrying a balance at some point, be it credit cards, a new car, etc.
Finance -
“Approximately 74.9 percent of the U.S. families surveyed in 2004 had credit cards, and 58 percent of those families carried a balance. In 2001, 76.2 percent of families had credit cards, and 55 percent of those families carried a balance. (Source: Federal Reserve Bulletin, February 2006)”
More than 40% of cardholders do not carry a balance. With out a doubt, credit card debt is a ‘bad thing’ for those that carry it. However, in the world of personal finance blogs, numbers have meaning and 99% is not quite right. When 40% are using cards for convenience, fewer ATM trips, fewer checks, fewer bills each month, and whatever reward/cashback they get, Dave’s sweeping statements about “no responsible use” of credit cards is simply wrong.
I agree with Joe, if you blog, you know how to handle Credit cards. I’m a Financial Coach,
I meet with families every week I see the 40 % with 30,000 available on credit and they are nor running to the Mall to see how to use it. And yes today many are with financial problems because they didn’t lower they expenses and the money was not coming in as before. So we charge it.
My biggest issue with Cash systems is that if I have a balance of $5,000. at 25 % is $1,250 that I will pay in interest every year. Till I get the $ 5000 to pay off this credit card.
That is a extra-mortgage payment that is 9 years off your 30 year mortgage .
12 x 1250 x 9 = $135,000 dollars Tax Free that I’m giving to the bank???? No Way
Before I do Baby STEPS I will do Adult Steps and run my expenses through my credit card with a budget. This is what I mean:
1) Week 1 get Salary put the many on credit cards Group A
2) week 2 get Salary put the many on credit card Group B and use Group A credit card to cover living Expenses.
3) Week 3 get Salary put the many on credit cards Group C and use Group B credit card to cover living Expenses.
5)) Week 4 get Salary put the many on credit cards Group D and use Group C credit card to cover living Expenses.
If your expenses are $ 5,000.00 you will pay 0 Interest on your credit card. So let’s say you were paying $250 a month on Credit cards, then in 20 months you will be DEBT FREE on this one.
Besides all the Rewards and Cash back you will be earning. You will also build your credit and will be able to fight credit cards to lower your interest.
They key is your full payment of 250 will go to principal no $240 to interest and $ 10.00 to principal. You will be Cancelling interest with Cashflow.
I will say, good for anybody that is giving financial information, and making families think.
All these money experts its amazing how many. I work for banks on foreclosures I’m the guy that comes and changes the locks and cleans up the mess from all levels of income. Walk away if you have any brains the banks have no heart or morals so why should you. I hear all sorts of reasons why the people lose their home so I say to all you experts you can think you can read the future but only god knows for sure what the next second brings so plan all you want with your money it won’t really do you any good. And Dave Ramsey should be ashamed of himself he says he’s a man of god trying to help people. He’s getting rich off people who are worried about the future of money. Let me remind all of you he got debt free in bankruptcy court not off his line of bull. He now talks smart because he has a bunch of christians thinking he’s doing gods work. Talk about sad.
I’ll admit that I haven’t read every message here, however, I think some things need to be said.
1. Dave’s plan is not a “one-sizie-fit-all plan.” It is a great plan for the average person. Dave doesn’t say anything he wouldn’t do himself, except when he “allows” people to take out a mortgage. Although Dave is a multi-millionaire, he wouldn’t borrow money to buy anything. He bought and paid for his building in cash. I believe that was either $5m or $6m.
2. I’ve never heard Dave advocate anything about paying off anything but the smallest debt first, regardless of the interest rate. While you bring up the flaw in his method that you would pay out more money on his plan with your example above, the math isn’t what we’re worried about here. We’re trying to make a lifestyle change. We’re changing our bad habits and getting out of debt. And if we were trying use proper math, we wouldn’t have spent more than we had in the first place.
3. Credit card companies suck! Just as I will never give a dime to a democrat, I will never give a dime to a credit card company (ever again). They are horrible people who have nothing more in mind but getting rich off the stupid little people. My last debt was with Bank of America on my house. After paying off my house in 8 years, I have vowed never to get in debt again. I past up a fantastic deal on a van recently because I didn’t have enough cash to pay for it and keep enough in my emergency fund. I could have borrowed but it goes completely against my principles. It may, in the long run, cost me more money but it won’t worry me. If I lose my job tommorw, I’ll still have more than 10 months worth of money to live on, instead of a nice van and 2 months of cash to live on. If I lost my job, I’d take about a $80k hit if I had to start over. It’s not worth the risk.
4. To the idiot who thinks Dave is some sort of hypocrit. You don’t know what you’re talking about. Yes, Dave did file bankruptcy, however, he stil paid everyone back. What you suggest about just walking away and having no heart or morals because the banks don’t is ridiculous. At what point do you say NO? I won’t walk away. I will pay my bills. I say that everyday. I was given nothing and I work hard, pay my bills, and true, GOD only knows what’s going to happen next. However, I still have my own free will and I choose to do the right thing. Let me ask you this: Do you work for free? Then why should Dave. He still puts in his time and effort and he should be paid for it. When he was unknown and only on the radio in Nashville, and typing on his little typewriter at home, and selling his books out of the trunk of his car, did you gripe about him back then? Did you care that he was helping people learn how money works and how to get on a plan to help themselves? Then don’t worry about him now. You continue to do your work and let Dave continue to do his. Hopefully, someday he’ll put you out of business. That won’t be sad!
5. To Kevin, the author of this blog. Fantastic blog. I really mean it. You are passionate, sincere, caring, genuine, usually right, and sometimes wrong.:-) But it’s ok. When you’ve found to be wrong, you’ve admitted it. When there’s a difference in philosophy, you’ve given the other person their due and just agreed to disagree. You never belittle and that’s a good thing.
Buddy,
Dave Ramsey preaches common sense…spend less than you make!!! if you need to pay someone money to hear that, then you got problems….
Thanks for the blog. I still side with Dave Ramsey on all of those points. My favorite argument Dave makes in regard to paying off your smallest debts first instead of the one’s with highest interest is that if one was good at doing math he/she wouldn’t have borrowed money anyway. Who in their right mind would borrow money at 24% plus? Someone who has a bunch of debts with high interest payments was not thinking through the math to begin with.
Kevin – my comment of Jan 12 is worth a re-read.
Your quote here, for me doesn’t follow. People get into trouble for various reasons. The smartest guy in the room can get into credit card trouble no matter how big his emergency fund was, even if he were debt free prior. But that’s all speculation.
My issue is that Dave has a way of dismissing the better math, making assumptions that may not be true.
I owe $5000 @ 8%, and $5000 @ 24% which do I pay first?
According to Dave, if the $5000 is spread $1000 over 5 cards each, you pay those first. In my experience, cards with lower rates have always had a bit lower credit line. So when I was young and stupid, this example wasn’t made up, it was exactly how my card rate/limits looked.
Dave does say stop using credit cards and for good reasons. Most Americans abuse them and have too much debt on them. Credit card debt and auto loans are why most Americans are BROKE.
If Ramsey is such a great guy how come he is making millions off of other folks pain.
Let’s take his entire platform into account here.
#1. Stop using your credit cards
(but come to my financial peace university , opps I will only need your creidt card for the deposit )
#2. Let’s watch his video on how to get a car with cash (opps he skips about three steps here that are massive and does not explain how we leap frog over them when money is soooooooooo very tight)
#3.My emergency fund of $1,000 (opps ther fridg, just broke as well as the air conditioning and the car needs brakes plus money is tight)
So given that I am working three jobs have sold off all my clutter to the point that my home looks like no one lives there. I can’t make my HOA fees any longer , so I feel certain to be out on the street soon.
And oh by the way none of this stuff works when income levels are at best for a working couple at $28 for her $48 for him two to three kids cost an average of at the lowest $30K per year just to feed and cloth them not to mention the etc…. Bare bones budget that we came up with for two adults is $60K add the children and the numbers never add up no matter how many tricks or tips you try to Baby Step
Well Jenna, it sounds you have a few issues with Dave. You sound angry for his success and that’s silly. If you are having a hard time, don’t blame Dave.
Dave makes millions from everything he has built. He did all of that without government assistance. He worked his tail off and paid back all of his debts from his previous bankruptcy. So yes, he makes a whole lot of money, unapologetically, from people too stupid to know how to handle money. This is something with half a brain should know how to do. Of course, if you don’t make much money then things are different.
To your points:
#1 If you use your credit card on his site, then you are being dishonest, not him. If you read his disclaimer here —> http://www.daveramsey.com/store/faq/cFAQ-p1.html#debitcardpolicy.
#2 I don’t see any issue with the video of buying a car for cash. Recent statistics show that one-third of car buyers sign up for a six-year loan at an average interest rate of 9.6%. Among these buyers, the average price of the car is just over $26,000. This means that one-third of the cars you see on the road are dragging a $475 payment behind them!!! So, if you save your money up for 10 months, you’ll have $4,750 to buy a car. Then, you save up again for another 10 months. You sell that first car for, say, $3,500 and then add the $4,750 you just saved and you can buy a better car for $8,250, and so on. The numbers will be a little off for different things, but you should be able to understand the concept.
#3. The minimum you should have in your emergency fund should be $1,000. If 2 or more bad things happen financially, then you’ll have to make payments. That’s just life.
And you’re right, this won’t work if you’re not making enough money. I don’t want to be critical of you personally but it has been my experience that when people are making very low wages, even when working 3 jobs, it goes back to choices they made in their past. You actually sound like a friend of mine. She’s going to suffer financially by having a house she can barely afford because she doesn’t want to live in an apartment she can afford. The people are “gross and nasty” and “scummy.” But you can only afford what you can afford. Life isn’t fair and you do the best you can for your family.
In all honesty, I really hope you do better in life so you can live like no one else. His plan has worked wonders for us.
John, going after Jenny tells others that you are not living in the real world. There are people in bad situations out there who didn’t do a thing to deserve it. And by you saying that it must have been because of past choices shows that you have no clue and you were probably born with a silver spoon in your mouth. I understand that some things she said could have been better researched, but you can have done the same.
Brandon, I was only “going after” Jenny because she made the comment. You don’t know Jenny so you have no idea what you’re talking about. Think about some of the people you know in your life who are in “bad situations.” Why are they in those situations? Why have they decided to stay in those situations? Why can’t they make $30/hr? What from their past has lead them down the path they’re on? Why are they destined to work at McDonald’s for the rest of their lives or to live paycheck to paycheck? If they are honest with themselves, they will admit that they made a choice that lead them astray. I will say, however, that there are exceptions. But I will also say that they are VERY RARE.
By the way, don’t pretend to know me. If I didn’t give a crap about Jenny, I never would have written her back and wished her a better life. I’m hoping she will realize that Dave isn’t the reason she’s broke and it does no good to bash him for making money. By the way, whether one is born with a “silver spoon” in one’s mouth has no bearing on how one will turn out in life. That shouldn’t need to be said. You know, it was once said by a wise man, “It is better to keep your mouth shut and let people think you’re a fool than to open it and leave no doubt.” Don’t pass judgments on people. You really do sound foolish.
John,
As a Financial Planner, I can tell you are the type that has about 10,000 in an IRA, and think youare financially independent….trust me, if you listen to DAVE RAMSEY, you are a moron, and will end up with problems down the road…good luck to you and your family john…You will need it!!
K-state,
That’s really sad. You have no idea what you’re even talking about. How about I go ahead and tell you about my financial situation, like it’s your business, and you tell me what kind of problems I’ll be having.
I’m a married 45 year-old man with a net worth of $675,000. My $155,000 house is paid for. I have 2 paid-off vehicles and no debt. My 8 year old has $26,000 in his college fund and my 6 year old has $12,000 in hers. Every paycheck we put $900 in total into retirement and college funding (11 paychecks so far this year equals $9,900!). My company puts in $2.25 for every dollar I put in. We’re in the Texas County District and Retirement System (Harris County). You can look it up if you’d like. We have to put in 7% and they match with 2.25 times that amount. Each year we are guaranteed to make 7% on the money (in addition to the matching funds). Last year, with overtime, I made in excess of $140,000. My wife is a housewife. Dave’s plan has helped me to get this far this quickly.
I don’t know. I think we’re in pretty good shape. Tell me where the pitfalls are? Where is the danger? Tell me about those “problems down the road.”
Funny how you tried to turn it around on me but failed John. Basically, I didn’t pretend to know you. I knew you based on the crap spewing out of your mouth. I used to be one of those people who failed miserably. The fact is that even the people in the worst situations can get out of it with gained knowledge. It is a life journey to get there and some simply never do. Yes a silver spoon does make a difference. It is usually the rich kids that are taught about money at a young age and are ready to go it on their own when they make their own. That’s why so many of them commit suicide at the first signs that they go bankrupt. The rare breed you speak of are the new millionaires that get added to the list daily.
Now you’re just boring me, Brandon. Suffice it to say, you should take responsibility for your own life and not blame others for your issues. if you’re intelligent enough to learn how to get food stamps from the US Government, you’re smart enough to educate yourself about money and how to get a good job. Or is that too much work?
I’m done with you loser. I actually teach people rather than talk down to them. Thank GOD you don’t teach anybody anything. You just talk crap. Oh and by the way… food stamps and assistance is thrown at poor people heavily. It is viral marketing behind it. Learning about money is something you have to seek out. Stupid. Bye bye now.
Mr K-State,
First off, thanks for the insult. I’m surprised that someone as “professional” (and apparently psychic) as you would call people morons who happen to disagree with you. But I’m curious, what is so moronic about getting out of debt, living within your means, and investing for the future?
I hope you don’t treat your potential clients like you treat people on this forum.
There’s an odd phenomenon on the net that lets us shoot insults when we get emotional about an issue. Unfortunately, it diverts the topic’s focus.
For me, I can only learn from those smarter (at least on the topic at hand) and if I sense they think me a moron, I find someone as smart as they are but with people skills.
Dave fits a niche. In one post I point out the shortcoming of the debt snowball, and link to a sheet spelling out in dollars and cents the delta. I also question the “no good use of cards.” Then it occurred to me. That no card thing, it’s like telling an alcoholic they should never drink again. And me walking in saying I have a beer with my dinner and have no issues. For his audience, the “never use a card” message is right for 99% of them.
So. Dave’s method’s regarding debt reduction are a positive for those who need him. Any reference he makes to an 8% withdrawal rate at retirement or 12% expected growth rate while investing are misguided and dangerous. We can quibble over the “correct” value of those two numbers, but growth at 8-10 (tops) and withdrawal at 4% give or take is closer to reality. People who disagree with me aren’t morons, but are welcome to show me why I may be wrong. (I have a wife, I know I’ve been wrong before)
You are dead on, Joe. That’s exactly right. Have an intelligent conversation with someone without the name caling furthers your cause by far.
I agree about the numbers. Before this down time we’re having, every 10 year period had some positive growth in the stock market and the same could be said for 98% of any 5 year period. Not so anymore. The 10 year rule is gone. Unfortunately, you have some people out there with an agenda using this down time to exploit their thoughts and opinions, and it’s not based on facts. If they would do some research and compare apples to apples with Dave to contrast his numbers, maybe I would agree with someone else. However, I haven’t seen the apples to apples research. People are going have half cocked saying that Dave is a moron with no proof or research to back them up. Show me the numbers and the money!
I usually don’t link back to my site, I’m here for the discussion, not to divert readers to me.
http://www.joetaxpayer.com/a-change-of-plans/
Is a quick article I wrote. What I did was to to pull the S&P chart from 1980 – 2000 and extend that line. 20 years of a beautiful growth line. Remember, the Yahoo charts are semi-log, so a straight line represents a steady year on year growth number. “10 more years” of the same or slightly lower growth and I’ve have been able to check out by now.
Regardless of the prior 10 or even 20 years, I’d never assume such growth rates.
I’m glad calmer heads have come out here. Thanks Joe for stepping in.
Generally speaking I try not to moderate comments too heavily, but I don’t like letting people throw insults around.
So good job, Joe.
Regarding Dave’s numbers, I’m not sure if you are inferring that I should provide additional data regarding his stock market estimates. With the last 10 years the stock market has returned almost 0%. (Of course that is assuming you were 100% invested in 2000 and didn’t add additional funds throughout the decade.)
Seeing activity here again, and just saw your comment above.
I’m not defending Dave. Just providing context. In the last few years of 1990′s, you had a 20 year run of 18%. So, I won’t guess what he was thinking, but 12% may have seemed reasonable. To me, the 8% I plugged in seemed good.
Oh your right! Every book I have ever read about or every person that I have talked to that is rich has always said that their credit card points and bonus helped make them rich!
WRONG!
So what did the books say? Did the books say it was the fear of credit that made them rich? I highly doubt that.
Again this ignores my main point on credit vs. debit. If you could earn $400 in free money per year and not change your spending habits one bit, why wouldn’t you?
These rich people you are talking about wouldn’t turn down a free $400, and they wouldn’t miss a payment and run into interest charges or fees. Just like me. It won’t make you rich, but I’d love to see why anyone would turn away a free $400.
OK look, Its not that a “rich” person would turn down $400 but they know that $400 is not going to make them weathly and furthermore the reason that Dave talks this way about Credit cards is that what happens if you have even small balances on this credit cards and you loose your job or something happens to your health and your not able to make that one payment and you miss it? This is the typical scenario that causes some people to get into trouble with credit cards. If you never use credit cards and from a habit of paying for everything in cash and saving and having a emergency fund which is a separate account from your everyday checking account that you would use for any surprising expense you might face.
Believe me that if you got trapped into the above scenario you would think it was silly that you got a few hundred bucks for using the credit card that now has you trapped. You will have plenty of money if you budget and save and make your money work!
Try reading the book, ” The Millionaire Next Door” its a great read.
I’m trying to decipher what you’re saying here.
1. You have small balances on your credit card, lose your job, and you miss the payment.
2. If you don’t use credit cards you will use cash, save an emergency fund, and be able to take care of any unexpected expenses.
3. If you use credit cards and start with small balances, you will get trapped. “Most” people get trapped this way. How many is most? Do you have data to back up that claim?
You’re assuming person #1 will use credit cards but not save an emergency fund. Why are these mutually exclusive?
Additionally if person #1 has small balances, why wouldn’t they be able to pay the card off out of their cash reserves? From what you’ve said it sounds like you’re assuming anyone who uses a credit card will automatically spend every penny they have and go into debt. I strongly disagree.
Again, my point is this: if you treat your credit card like a debit card then the above is not an issue.
For example: swipe your card at the gas station for $30 worth of charges. You go home. You adjust your budget and set aside the $30 specifically in your account to pay off the credit card.
You come home, make the adjustment, then lose your job. You take that $30 that was in your budget and pay off the card. It’s just like you had used cash or a debit card. You already have the money set aside for each charge. Otherwise, just like with cash/debit, you don’t swipe the card.
Hi Kevin,
I haven’t researched it much myself, but according to Dave, “most” people who use credit cards spend more (12% or something like that) than those who only pay cash at the same department store, restaurant, retail, etc. Again, that number could be wrong I did no research myself.
If a person only uses their credit card to pay other bills and pay off the balance every month, getting $400 to do so is a great bonus. I guess according to Dave, “most” people spend more than the reward thus losing money.
Having said all of that, I did use Dave’s plan to get out of debt and pay off my house, save for retirement and so on. I used a credit card the entire time and still have one. I too enjoy the reward I get just for paying my other regular bills using the card (I use mine just like you (Kevin) do.)
NADD –
‘“most” people who use credit cards spend more (12% or something like that)’
As a student of the scientific method, I’d love to understand the data that supports this claim. Is there an actual study you can cite?
It’s funny to me that while the idea that one spends more on CC than with cash is almost intuitive, it ‘feels’ like a fair statement, there is never data to support the claim.
I charge nearly all expenses. Pulling out the business charges that we are reimbursed, it’s still nearly $4000/mo. When I analyze the bill, I see groceries – are we gaining weight, eating 12% more than with cash? I see gas – I know we don’t drive more or less for the fact that we charged the gas. Tickets for our next vacation. Would a check have changed that purchase?
This prompts one question – even if there a bit of truth in the “more on CC” belief, what would we find by separating the population into two groups, (a) the pay in full group and (b) the carry debt month to month group. Does the first group have the same issue? Mind you – I’m not saying the initial claim is false, only that I have never seen any data to support it. A quote with zero support is strange to me.
Hi Joe,
“Is there an actual study you can cite?”
Nope, that’s why I stated twice that I did no research myself. Just recalling what I heard on Dave’s show. The 12% is probably wrong as well.
“When I analyze the bill, I see groceries – are we gaining weight”
I don’t know if you are gaining weight or not, but I do believe the point to be a valid one. Ignoring gas stations or vacation tickets, I think the only places where one could overspend would be retail stores, as mentioned in my original post. After analyzing your grocery bill, do you analyze the items purchased? Are you the shopper in your family? If not then just looking at a bill is not a good way to see how much “impulse buying” took place. I think that’s Dave’s point. If you had a planned shopping list and only enough cash (with a cushion) to purchase those items, it probably would cut down on impulse buying.
Who knows? I was merely trying to point out another reason why Dave is opposed to Credit Cards. I know personally I impulse at the grocery store sometimes and I always do it with my credit card.
Maybe someone has data to support Dave’s claims, I have never bothered to look.
Sorry, I know you said that.
Until the claim is substantiated in a study that’s applicable to the real world, I dismiss it as non-scientific.
Now, I don’t dismiss the premise itself, I just repeat that Dave addresses a certain audience, one for whom a credit card is analogous to a drink for an alcoholic. Those with such a track record of bad spending are very likely to spend more on cards that with cash if only because the unlimited credit is removed.
But it’s also intuitive to me that one who pays 100% in full each month is not his target audience, and far less likely to be a “spend more on cards” person.
I can go on all day, but let me give one example. The concept of shopping with a list. First it presumes a level of organization that many simply don’t possess. I am the shopper. I go into Costco and see a demo’d item that I buy, of course it wasn’t on the list. Does the controlled experiment say “got ya” claiming that’s counted as more spent on credit, or does it see that I just spent $10 on dinner when the Mrs would otherwise have dragged me to a restaurant that night? $65 saved?
When I grab some (needed, say TP) item that’s half price and stock up, it’s an unexpected expense, but as used over the next few months, a bottom line savings.
I see the claim over and over. It’s intuitive, I agree. I just would like to see how it plays out in the real world, I suspect it doesn’t.
Well said. Any study can twist any data it wants to form an expected conclusion. I too stock up when TP/Diapers/Baby Wipes are on sale which winds up lowering our grocery budget next month or longer. Budgeting with cash would not allow me to do so. In the long run I win, but according to the study I am a horrible impulse shopper.
The “problem” with that is if you’re doing a zero based budget, there isn’t money available to pay for those things. Even if you put them on a credit card and pay off and the end of the month, you still will have not enough money.
I’m not saying what you’re doing is wrong mind you, but I believe it has to do with the person or family. For example, I’m in a financial position where I can’t get any more than what I budget for because the money just isn’t there. Now if you have extra (I don’t intend this to sound snobby) laying around to spend on extra essential non perishable items to save you money in the future, I don’t see anything wrong with that.
I’m teaching an FPU class this fall and really, it’s wonderful helping these people get out of debt (of course, I’m still in debt with student loans) and one way to get them out of debt is to stop them from impulse buying with a zero based budget, and also stop them from using credit cards because it can lead to…I don’t want to say impulse buying because I don’t want it taken the wrong way…buying extra essential items when they can’t really afford to pay for them that month.
I hope that makes sense. Everything that’s been written makes sense to me and I thought I would add more own two cents.
I believe this is the study to which Dave is referring…
http://web.mit.edu/simester/Public/Papers/Alwaysleavehome.pdf
I need to give it a full, slow read, but I see it’s a lab experiment. Done with students.
What if I worked backwards, asking people to budget by category, and then observed how they performed with or without cards? I am still open to the fact that the “more on card” theorem may be true, but I don’t see that a lab experiment can be considered supporting evidence.
I have my own – J2 (As in Jane 2.0, my daughter) will clearly treat a card different than cash. She’ll pull out the Starbuck’s card and buy us both a drink, but isn’t as likely to do that with cash from her purse. Two groups, one handed a $100 card or voucher, the other $100 in $10 bills, will spend it very differently.
I can also tell you that when I was young and stupid, I charged like it wasn’t real money. But, as an adult paying the card in full each month, the spending looks very different.
Two things:
1) That was a really interesting study. Although study 1 showed that it does increase spending, study 2 I believe showed it didn’t matter. It was very interesting to read though.
2) This is really the first supporting evidence of this idea I’ve read. I realize it’s only one study and being a science teacher, I know that this is just a lab experiment and once it’s “proven” in the lab setting, it should be also proven the “real-world” setting.
But still, interesting read and all here should read it.
The credit card “issue” is NOT flawed. Research shows that those with credit cards spend 12-18% more when using a credit card vs cash. And sadly, the VAST majority of Americans do NOT pay off their balances by the end of each month. Dave’s program works and his success is warranted. My FPU class of 33 students (mostly couples) paid off $35,000 in debt by the end of the last week of class. That is AMAZING! I STILL get those who run up to me to say “thank you” for the course. My ex and I paid off $18,000 in debt after reading all of Dave’s books on tape and then taking the class. The debt snowball is about attitude. People who see the small debts going away are more likely to feel good and continue paying off debts; we are an instant gratification society and Dave understands that how we “feel” affects our success (or failure). Dave’s success is proven. When you each come up with a BETTER plan for the average joe (and have the stats showing your success), THAN feel free to complain about Dave’s plan:)
FLN – you repeat the same statistic, cite a study that doesn’t exist. I find it curious that when such things are repeated often enough, they become accepted as fact, going unquestioned. Just like the Einstein quotes about interest or taxes.
I’m not complaining about Dave, only about the lack of supporting sources for this quote whether uttered by Dave or you.
I listened to my FPU CDs again and the specific study Dave refers to is a study by Dun and Bradstreet. After researching it myself, just via Google searches and their website, I could not find any such study. I did find a blogger that supposedly contacted Dun and Bradstreet with no results either.
http://www.getrichslowly.org/blog/2010/04/27/money-myths-and-the-importance-of-thinking-for-yourself/
Someone did post an interesting Carnegie Mellon study in the comments of this post about cash vs. credit purchasing that does somewhat support the claim.
http://server1.tepper.cmu.edu/Seminars/docs/CreditCardStudy%2009.10.01.pdf
I really can not believe that Dave Ramsey would just make something completely up and site a bogus study to support his teachings. I would imagine such a thing would leave him open to a lawsuit. It would just be nice if he would post all his referenced studies on his website to help with his skeptics.
Interesting. The study concludes there is no significant difference.
I don’t feel it supports my position however, as the study was based on lunch costs. For a moment, let’s consider the conclusion if the data clearly showed a 40% higher spending on cards. Can that be used to extrapolate overspending on day to day purchases?
I don’t hold Dave liable for such claims, when a statistic is quoted enough, it takes on a life of its own. And no, I don’t expect him to fact check this type of quote, it’s nothing that would lead to a suit.
On the other hand, the claim is quaint, and appropriate for his audience. His following (in general) is the portion of the population that should stay away from debt, period. For them, avoiding the huge risk of falling into high interest debt is worth the tradeoff. I gain the 2% kickback, extended warranty, and a bit of convenience.
Still as a closet statistician I look forward to any more papers on this topic.
I would like to point out, with all the comments about who his audience is supposed to be, that this isn’t just aimed at the terribly in debt. Yes, this portion of his whole class curriculum is, but it’s also aimed at everyone.
For example, he teaches about how to create a zero-based budget. He teaches about how to invest wisely. He teaches about having an emergency fund, which I think everyone should have.
So while this one lesson is for more in debt people, say people with 40k or more of debt including some credit card debt, he is also aimed at all other people as well.
I have to disagree with you on how Dave does the snowball debt. if you know anything about the people of this country, we have a high frustration level when we don’t see results. That is why the martial arts adopted the colored belt system for Americans. You see progress and you continue (baby steps). The only advantage to a credit card is if you buy using one and the product is a lemon or doesn’t arrive you can disputed the charge, other than that most people don’t have the discipline to use, then pay without running it up. Finally a lot more places are giving cah discounts for not using a card that they have to pay 3% to 6% for taking your card.
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