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?
{ 7 trackbacks }
{ 130 comments… read them below or add one }
← Previous Comments
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.”
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.
← Previous Comments