My Disagreement with Dave Ramsey – Part 1

Dave Ramsey is well known for his Financial Peace University, Total Money Makeover,and of course, the Debt Snowball.  I have to say, I have a bit of a disagreement with Dave Ramsey.  I do not wish to discredit the work that he has has done, as his message has helped thousands of people get out of debt and reclaim their lives.  Rather, I would like to “enhance” his first two baby steps and his stance on credit cards a bit.

Baby Step 1

$1,000 to start an Emergency Fund

An emergency fund is for those unexpected events in life that you can’t plan for: the loss of a job, an unexpected pregnancy, a faulty car transmission, and the list goes on and on. It’s not a matter of if these events will happen; it’s simply a matter of when they will happen. Learn more

Undoubtedly, the Emergency Fund (EF) is the single most powerful tool in the personal finance toolkit.  Dave Ramsey advocates for a $1,000 EF, but I disagree.  To shield yourself against the unexpected, you need to have twice your highest insurance deductible in your EF at all times.  What happens if you have a $2,000 home insurance deductible and a tornado levels your house?  I don’t know about you, but since I am still paying off debt, coming up with the extra $1,000 to cover the deductible would be challenging, to say the least.

What happens if you have 2 disasters happen within a short period of time?  This would result in 2 hefty deductibles, and a $1,000 EF would not cover it.  For peace of mind, stick with an EF twice your largest deductible.

Baby Step 2

Pay off all debt using the Debt Snowball

List your debts, excluding the house, in order. The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first. Learn more

The Debt Snowball Method is based upon the concept that paying off one small debt first gives you mental motivation to continue to pay off larger ones.  My lowest debt amount is not at the highest interest rate, and I’m guessing many Americans are in the same boat.  Pay off debt using the Debt Avalanche method (wherein you pay off the debt with the highest interest rate first) and use a loan amortization calculator to find out how much interest you are saving yourself every month when you pay extra towards the principle.  When you pay off the loan with the highest interest rate first, you save more money interest.  Money in the bank!

Let me be clear: Dave Ramsey’s Program has helped thousands regain control of their finances and I have great respect for him.  I simply believe that there are ways to make his plan more efficient.

What do you think of Dave Ramsey?  Is he a hypocrite or a hero?  Do you have any critiques of his programs?





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