First, let me say that we think Dave Ramsey is an American Treasure and if you follow his advice you will probably retire early. We have family members that did follow his advice, and they did retire early. If you follow his baby steps, you will retire early also. The part we find scary is his steps should be treated as guidelines and not used in a cult-like fashion.
1. Your credit score isn’t important. Life without a credit score is hard, trust us we know from experience. Renting a house is almost impossible. Having to buy everything cash is a good idea but we would not attempt to buy a house with manual underwriting. We are pretty sure most mortgage brokers wouldn’t even know how to do manual underwriting. Now we think Dave Ramsey has a great distaste for the amount of information and power that the credit bureaus have on us and we couldn’t agree with him more.
We agree with Dave Ramsey one should pay for most items with savings. We bought all our cars even the brand new ones with savings. Still, one can have credit cards and pay them off every month. There is no need to carry debt on those cards. I agree having them for airline points is well pointless. In fact, those airline points are a trick to get you to use those cards more, he is right about that. If you are following your budget don’t get rid of those credit cards. If you can’t follow your budget its’s time to use a debit card.
2. When you buy a house, you should put down 20% and have a 15-year loan. Let’s face it with the bad central planning of the Federal Reserve housing prices are at all-time highs. If you can go with a smaller house and do a 15-year loan than do it. His method would also work in lower-cost areas also but the problem is there are no lower-cost areas. His guideline for keeping the monthly payment under 25% of your earnings is a good idea and he is not the only financial coach we have heard say this. We also feel that you should keep the house payment near what you are paying for rent now. If you end up paying more in a house payment than you would for rent it’s not a smart idea to buy.
3. Dave Ramsey suggests front-loaded mutual funds. Now days people have moved away from mutual funds and mostly use ETF index funds. The costs of a front-loaded mutual fund can cut up to 5% of your nest egg. The average cost of most index funds is closer to .01. There is quite a bit of saving there and it does not put pressure on the mutual fund to perform. We suggest instead of using a financial advisor you use a Financial Planner and even better yet a Certified Financial Planner that has fiduciary responsibilities to you. The one caveat we give to this is we feel the people that must worry about retirement are not those that use Financial Advisers versus a Financial Planner. It’s the ones that aren’t saving for retirement at all and Dave has said this, and we absolutely agree.
5. Buy only term life insurance and invest the rest. As term life insurance is the cheapest life insurance out there, there are some interesting life insurance products that are whole life and Indexed Universal Life Insurance that pay a decent percentage and you can take loans from these insurance vehicles and pay yourself back with interest. We feel that some of these whole life and indexed universal life insurance products could help you with Baby Step 2 and 3. We will go in-depth with this in future articles. Either way, you should have enough life insurance to cover your debt if you were to pass.
6 . The only way to repair your credit is with time. This is not true as we have repaired people’s credit ourselves and made their lives easier. Dave Ramsey is right when he says there are less reputable credit repair institutions out there. Find one that explains what you need to do to have good credit and how they use the factual disputing methodology to clean your credit. Still, we believe you should address your debt situation before cleaning your credit and really the only reason to clean your credit is for buying a house or investing in real estate!
7. We agree with Dave Ramsey’s 3 to 6 months of expenses for an emergency fund. Still, if you need to buy a car it’s okay to raid it as long as you pay it back. Once again this is why we like whole life and indexed universal life policies it’s for using them as a self lending option so you don’t have to raid your emergency fund. Also, make sure that the emergency fund is in a high-interest bank account as we recommend in this article.
8. Baby-step 5 saving for your children’s college is kind of controversial for us as we paid for our own college via National Guard tuition assistance, GI Bill, and employer tuition assistance. We think paying off your house is more important so Dave’s Baby Step 5 should be Baby Step 6. Still, with the price of college today, it might be wise to help your children out. Helping them pay is not as important as getting them into a school they can afford and ensuring they do not load up on student loans. Also ensuring they pick a degree they would enjoy and is profitable. We also feel the more skin in the game a child has in their schooling the wiser decisions they will make. One last note most kids are not ready to pick a career at age 17 or 18, sometimes starting at that local community college is a better idea to waste less money and a lot of community colleges tie to state universities.
9. Don’t use home equity to get rid of credit card debt. We feel paying less loan shark type interest is the quickest way to get rid of debt. A HELOC on your home can take that 27% APR debt and push it down to 6.5%. In addition to that guess what that interest becomes tax-deductible. Still, he probably warns that because if something bad happened you can’t just stop paying a HELOC like you can credit cards and yes you could lose your home if you did. So only use the HELOC method if you and your spouse’s jobs are steady. If you think you are not disciplined enough not to load those credit cards up again then stick with Dave’s Ramsey’s debt snowball.
10. Not using loans or leverage for real estate investments. We really feel one should not invest in real estate in a bubble nor should they invest in real estate that will not appreciate or does not cash flow. Still, house hacking with buying a fourplex or smaller with a VA or FHA loan could be a good investment if you are properly educated. We recommend you check out BiggerPockets.com for this education.
11. The debt snowball is the best way to pay off debt. We believe you should pay off your highest APR debt first. This is called the debt avalanche. This will cut back on the high-interest payments. Here is the deal whether you do our way or Dave’s debt snowball we still think it is good to get rid of all debt (especially credit cards) is the way to go.
This was our top 11 of what we disagree with him. Notice on some of them we said our way or his way is fine. We think in our current culture you can disagree with parts of someone’s message and agree with the greater message and we agree with Dave’s greater message to minimize debt.
I am a term life, infinity banking concept, indexed universal life insurance, and annuities advisor. I am looking to give Utahans a choice in life insurance as an independent advisor. I represent over 25 different insurance carriers on your behalf so we can find which one will approve you for the best policy. I started this company (Wasatch Smart Finance) so people like you could finally get honest answers & advice from advisors who have a comprehensive knowledge of finance and estate issues. Also as a Veteran, I want to assist other Veterans in their financial journeys.