Before you jump to the wrong conclusion, let me state that the purpose of this post is not to trash Dave Ramsey. Just check my “About" page to read how Dave, his teachings and his books have turned my life around. You will also read that I am a Dave Ramsey certified counselor. I drank the kool-aid and followed Dave’s Baby Steps to dig myself out of debt, build my emergency fund and pay off my house. I will readily attest that Dave’s teachings work.
However, months of exposure to the personal finance blogging community have helped me realize that Dave’s “one size fit’s all" message doesn’t apply in every case to every person. My point is not to fault Dave; it is to encourage people to think beyond the Dave Ramsey formula and clearly understand why they are doing what they are doing.
This is one I have seen debated ad nauseam in the blog sphere. Nearly everyone agrees that a debt snowball is a good idea; but disagrees on how to structure it. Dave says lowest debt to highest debt, stressing the importance of those early victories that fuel the debt free fire. Dave is famous for his observation that personal finance is 80% behavior and 20% math. Others say highest interest rate to lowest interest rate. Still others have a hybrid plan…I recommend reading Matt Jabs’ post “Pay Off Debt – The Hybrid Debt Snowball Fight" for a great explanation of his hybrid plan and (more importantly) the thinking behind it.
My point is this: debt needs to be attacked with a vengeance, but not everyone is motivated in the same way. Some people (usually the math nerds) are MORE motivated by getting that high interest debt paid off first, even if they don’t get that quick victory that Dave’s method achieves. Others, like Matt Jabs, will be highly motivated by devising a plan that works for his family. My thought: attack your debt in a way that will keep you motivated and on track for however long it takes.
Here we go. Dave, of course, is adamant about the many evils of credit cards. Yes, credit cards get lots of people into lots of trouble, but the debate reminds me of the gun ownership debate: do guns kill people or do people kill people? My wife and I have not owned credit cards for years and have not missed them one iota. But I have met too people who use credit cards responsibly (and who do extremely well financially) to believe that Dave’s “No Credit Card" rule should apply to everyone.
Don’t worry about your FICO score
Dave is absolutely correct in challenging people not to “worship at the FICO altar". Too many people get way too freaked out about their credit scores, and Dave is on target teaching people not to go into debt in order to build their credit scores. In fairness to Dave, I have never heard him tell people to trash their FICO scores, but he is quite proud to proclaim that his is zero because he hasn’t borrowed money in many years. The inference is that FICO scores are irrelevant, but they aren’t. Insurance companies regularly use credit scores to determine insurance premiums and a good score helps with a home loan if manual underwriting is not available. A recommended read on the topic is FICO Scores Matter: Sorry, Dave Ramsey at Money Help for Christians.
Always get a 15 year fixed rate home mortgage
Fixed rate? Definitely. 15 year? Hmmmm. Are there times when stretching the loan farther makes sense or should all home buyers in all circumstances always get 15 year mortgages? Dave’s criteria are to be out of debt, have a 3-6 month emergency fund in place and set your price range by buying a home on a 15 year note that will keep your payments at 25% or less of your take home pay. Great guidelines, but what if there are no safe neighborhoods in your price range within driving distance of work? Or what if one of the incomes in a two income family is fragile? Or if one spouse is contemplating becoming a stay at home parent? Would there not be some wisdom in giving some cushion by stretching the loan to a 20 or even a 30 year time. To dig a little deeper in how the interest rate itself affects the comparison of loan terms, read Joe Taxpayer’s A Thought on 15 vs 30 Year Mortgages.
I know. Reverse mortgages are more debt and a terrible financial product. I agree. My point is to push the envelope enough to ask, “Are they always wrong?" I recently wrote a four part series on reverse mortgages, arriving at the conclusion that no one should get one without trying every other conceivable option. But I could see that if a senior was emotionally attached to the family home, leaving an inheritance was a non issue and he could use some extra cash flow, a reverse mortgage could be a positive option.
Dave Ramsey is a financial guru. He has probably helped more people escape financial bondage than any individual alive. His books are full of clear and well articulated advice. I don’t think anyone would go wrong by simply doing what he says. It works. But my challenge in this post is to make people understand why they do what they do. By doing so, they will usually discover that what Dave teaches is what they should do. But, because one size doesn’t always fit all, they may be able to streamline their finances to better meet their individual circumstances.
After all, isn’t that what makes personal finance personal?
Readers: What other exceptions can you think of for Dave Ramsey “one size fits all” advice?
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