Dave Ramsey is a finance expert and radio host who has published multiple books about managing your money. And I'm not denying that he knows his stuff. He's helped a lot of people get their finances in order, but he's not right about everything. In fact, Dave Ramsey is wrong about three crucial things.
1) Dave Ramsey is Wrong About Credit Cards
Dave Ramsey is well-known for adamantly opposing credit cards. He even cuts them up in the middle of his presentations.
But credit cards are not inherently evil. They're just a tool, and you need to use them responsibly.
Now, granted, there may be circumstances where it's best to not use a credit card for a while or to leave your credit card at home. For example, if you know, you're going to a store where you will be tempted to spend more money than you actually have, then leave it at home. Or if you're already carrying a debt balance on your credit card, you want to stop using your credit card for purchases. But this isn't a necessarily a strategy for everyone for several reasons.
First of all, many mortgage lenders, car loan providers, insurance companies, cell phone companies, utility companies, and landlords will require a credit report, meaning your credit score matters. While it's possible that you may find some people who will overlook it, you're going to be narrowing your pool of potential lenders or landlords and making your life a lot more difficult if you're not creating any credit history and building a good credit score.
Second, when used properly, which means paying off your credit card in full each month, credit cards can be really useful. You can earn points that ultimately help you save money. The best credit cards will even let you learn reward miles or cashback for spending money on things you already buy.
Plus, credit cards provide an additional level of fraud protection when you make purchases.
2) Dave Ramsey is Wrong About Paying Off Debt
Dave Ramsey recommends getting rid of all non-mortgage-related debt before you save for retirement. This isn't completely wrong, but it's not completely right either.
Before you start saving for retirement, you should pay off all your high-interest rate debt, meaning any debt with an interest rate over 7%. In fact, that's a crucial step in our five-step roadmap to building wealth.
It's extremely difficult — if not impossible — to build wealth while you have high-interest rate debt, because the amount that you owe is always going to be higher than what you can make by investing or saving, so it's best to focus on paying off that debt first.
But there are a lot of different types of debt that don't qualify as high-interest, like student loans, mortgages, some car loans.
Investing offers a high-interest pay off that outweighs low-interest debt, so if you have debt with an interest rate lower than 7%, you're robbing yourself from letting compound interest working on your side. In fact, the cost of putting off saving for retirement is much higher than the cost of maintaining a low-interest rate debt.
3) Dave Ramsey is Wrong About Tough Love
Dave Ramsey has a very tough love approach with people who call in to his radio shows…emphasis is on the tough part.
To be fair, we all need someone who will call us out when we're making excuses and point us to a better path and sometimes we need a wake up call or even a push. But finance isn't just about the numbers.
Before we can manage our money well, we need to deal with the emotions around money. We need to heal our relationship to money, and Dave's approach doesn't leave a whole lot of room for that. It treats people almost like machines; if you smack 'em hard enough, they'll eventually start working right.
But people aren't machines. We aren't even rational creatures. We are emotional. It's important to dig deep and look at those underlying emotional reasons as to why you may be having money problems. What attitudes and ideas about money did you pick up for, from your parents? Or why do you feel unworthy of having wealth?
Dave Ramsey has helped a lot of people, and his approach might work for you. And if it does, use it. Use whatever works to help yourself transform your financial situation.
But if you want to learn how to take control of your finances and create your own relationship to money — one that is informed, empowered, and feels good, and isn't just applying blanket strategies that might not actually fit for you and your situation — then come watch our free training, Think Like an Investor.