Dave Ramsey is a financial guru with a radio show that reaches millions of listeners, but that doesn’t mean everyone should put his advice into practice.
“Most of what he recommends is good info and what I call ‘grandma economics,'” said Sam Price, owner of Assurance Financial Solutions. “It’s managing your money the way our grandmas would have, meaning that we don’t buy things we can’t afford and delayed gratification.”
Price and others warned that not all of Ramsey’s advice is a fit for everyone. “His main objectives are to increase his brand and sell advertising for the radio stations he’s on,” Price added.
To help you decide whether to follow Ramsey’s wisdom, we’ve asked experts to weigh in on suggestions they find problematic.
6 Dave Ramsey tips you should reconsider
While there’s nothing wrong with following Ramsey’s advice, it’s important to remember that the suggestions he makes are tailored to a wide audience and not your personal situation. That’s why it’s important to consider different perspectives on the tips Ramsey gives for handling your finances.
1. Start with a small emergency fund
Ramsey advises saving $1,000 in an emergency fund before focusing on debt repayment. But some financial experts think a $1,000 starter fund isn’t enough.
“[It] is typically insufficient,” said Kevin Clark, a certified financial planner at Comprehensive Wealth Partners. “One minor accident and your emergency fund is gone.” Clark instead recommended saving three to six months’ worth of living expenses before paying extra on debt.
Having a bigger emergency fund could save you from catastrophic financial disasters such as foreclosure or bankruptcy. Take your personal financial situation into account to determine how much money you should save.
2. Use the debt snowball method
Ramsey suggests using the debt snowball method to tackle debt. Using this method, you pay off debt with the lowest balance first, regardless of interest rates. While Ramsey argues this approach keeps you motivated, simple math shows it’s a bad idea to pay off low-interest debt before costlier loans.
“There may be psychological benefits to Ramsey’s snowball method, but from a money perspective, you should be paying off debt with the highest interest rate first,” advised Matt Hylland, a registered investment adviser at Hylland Capital Management.
Even the psychological benefits don’t always materialize. “With student loans, even a small loan can take years to pay off with extra payments,” student loan expert Mark Kantrowitz pointed out. “There are no quick wins. The psychological boost is nonexistent.”
3. Stop using credit cards
One of Ramsey’s most controversial pieces of advice is to close all your credit cards. The wisdom of this approach is questionable.
“This can have devastating impacts to your personal credit, and result in you paying a higher interest rate on future loans,” Hylland warned. “It’s unrealistic to think you’ll never need a line of credit again. Destroying your credit history for no good reason will end up costing you more in the long run.”
Mark Lancia, an author of “Money for Meaning,” also spoke against this Ramsey advice. “Cutting up all credit cards makes as much sense as killing all doctors to eliminate malpractice lawsuits,” Lancia said. “Responsible use of credit can be a big win for most of us.”
Lancia argued that credit card rewards can be worthwhile, and using cards helps build credit. Furthermore, while Ramsey suggests getting a mortgage from a lender who will look beyond your credit score, Lancia explained these lenders often charge higher rates.
4. Pay off all your debt
The centerpiece of Ramsey’s financial plan involves becoming debt-free. For example, in his “baby steps,” he recommends paying off your mortgage early.
But Lawrence Sorace, managing member and co-founder of Mulberry Lane Advisors, listed many reasons why early mortgage repayment could be bad advice.
For example, you could miss out on the mortgage interest tax deduction. Sorace also pointed out that equity in your home isn’t a liquid asset.
“If you lose your job and need money, you’d have to go back to the bank and ask for a loan to access the equity,” he said. “How likely are you to get a loan from the bank if you have no job?”
Certified financial planner Rob Schultz of NWF Advisory Group also said Ramsey overemphasizes the importance of becoming debt-free.
“Debt’s bad is the theme, but I would clarify that high-interest debt is bad,” he said. “I see no problem with taking a 1.00% rate on a car loan when you can get 3.00% in municipal bonds if you have the discipline to invest the difference.”
5. Invest in mutual funds
Ramsey suggests investing in a 401(k) and Roth individual retirement account (Roth IRA) and putting invested funds into four different kinds of mutual funds: growth, aggressive growth, growth and income, and international.
This is an approach Clark referred to as “extremely flawed” because it’s a one-size-fits-all approach. It would leave you 100% invested in stocks.
Further, the fund classifications Ramsey recommends aren’t distinguishable from one another. “Studies have routinely shown this to have higher risk and lower long-term return than a diversified mix of stock, bonds, cash, and alternatives,” Clark warned.
Hylland also questioned Ramsey’s investment advice, pointing out that exchange-traded funds (ETFs) are often better investments. He also warned that Ramsey’s recommendation to invest in a Roth IRA won’t always be the right approach.
“Blindly putting all of your nest egg in one particular tax-advantaged account may not be the best course of action if tax laws or your income change unexpectedly,” he said.
Ramsey may be overestimating returns from mutual funds, besides disregarding the benefits of ETFs.
“Dave has said for years that a person investing in growth mutual funds can consistently receive 12% returns,” Price explained. “When you compare the returns for many growth mutual funds over the past 20 years, the actual rate of return falls below the 12% mark.”
6. Wait until you’re 60 to buy long-term care insurance
Finally, Ramsey advises waiting until you’re in your 60s to buy long-term care insurance. But Price believes there may be problems in waiting to pick up this type of insurance.
“The insurance becomes cost prohibitive when a person hits their 60s, especially for women who are much more likely to need the coverage,” Price explained.
Furthermore, many people in their 60s are no longer healthy enough to qualify for affordable coverage. Instead, Price recommended getting covered when you’re around 45 or 50 when premiums are more affordable.
Take online advice with a grain of salt
While these experts call some of Ramsey’s advice into question, that doesn’t mean you should ignore what he has to say.
You should consider all financial advice through the lens of your personal situation. At times, you may find Ramsey’s advice is spot on. Other times, you may find yourself disagreeing, and that’s OK.
Be sure to take advantage of resources available to you. There are lots of places to find free financial advice, so do your research to get informed about the important decisions affecting your money.
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