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My Disagreement with Dave Ramsey – Part 1

My Disagreement with Dave Ramsey – Part 1

My Disagreement with Dave Ramsey – Part 1

Photo Credit: Pixabay

Photo Credit: Pixabay

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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44 thoughts on “My Disagreement with Dave Ramsey – Part 1

  1. Traci

    I really like what you had to say. My finance teacher this semester had us study Dave Ramsey. I would get so angry because some of his philosophies didn’t make sense. My husband calmly reminds me that he makes money selling books and seminars–and those books and seminars contain material that many people find out of date or impractical, but it gets people to buy to find out! I love your emergency fund idea. Yes, if there was an earthquake tomorrow and my home and car were destroyed I would have to pay a deductible on the home and the car–totaling over $2,000 plus the cost of living expenses until insurance money came in. I also like the snow avalanche idea although on that one I do see his point that paying off a small debt can be a motivating factor for some to continue paying off debt that otherwise seemed insurmountable before.

  2. Katie

    I definitely see your points, but I’ve always been under the impression Dave Ramsey’s program was targeted toward people who were truly drowning in debt and on the verge of stripping on bankruptcy to pull themselves out of a bad situation. In those cases, $1000 is definitely better than zero, and making any dent possible in your debt is a help. HOWEVER, if you’ve been reasonably sensible with your finances in the past and you’re hoping to build your way to a stronger financial platform, saving tons and avalanching your bills is a much better option.

  3. Laurie @thefrugalfarmer

    Great post! I agree with Katie about who Dave Ramsey’s target audience is, and love his advice for them, however, I totally agree with you on your two points. An EF twice your largest deductible, at the minimum, is a super smart idea. We were going with the snowball when we first started to pay off debt, but it made me sick watching all of that interest go out the door, so we switched to the avalanche. I do think though, that if you’re having trouble with willpower, the snowball might be the way to go.

    1. Post author

      Totally! If you’re underwater and have no hope, Dave Ramsey’s plan is certainly better than doing nothing!

  4. Grayson @ Debt Roundup

    While I disagree with Dave Ramsey on things, I don’t think his advice is always bad. It works for some people. A $1,000 emergency fund is better than what most people have. I didn’t use the snowball method because I could save a lot more with the avalanche. Some people need that motivation that comes with the snowball though.

  5. Stasia

    I am kind of like you, I think Dave Ramsey has some great ideas and has helped tons of people financially… but I do have some minor critiques to his Money Makeover. I agree that the emergency fund needs to be bigger. The debt snowball I think it really depends on the person. I know some people really need those small successes early, so paying of the largest first makes sense, while others can pay off larger higher interest loans and still stick with it!

  6. Taylor Gordon

    Great piece! I totally agree with your second point. My goal is to save money at all costs so choosing to pay the low interest smaller debt wouldn’t give me a mental high. Paying off the high interest one would make me feel accomplished.

    1. Post author

      Absolutely! By using the debt avalanche method rather than the snowball, we will be saving ourselves $6,000 over the course of 2 years!

  7. Chattanooga Cheapster

    I have to give a dissenting opinion. I think the point is that you should have atleast $1,000 in cash. From there you pay off debt, and after that you invest. If you need more than $1K you can use some of the credit you paid off, or you can pull from an investment account if you’ve gotten that far. The goal is to get your money working for you. Don’t stash it out of fear.

    Also, you have a long time to pay up if you do have some sort of disaster. A couple years ago we had severe storm damage to our home and needed $12K worth of repairs. The contractor’s quote asked for 100% payment up front. I said no. He said 50%. I said no. He said 25%. I said no. These things are negotiable.

    1. Post author

      You were so right to negotiate! However, the point of an EF is to have cash available at a moment’s notice, and using credit as an EF is a dangerous and slippery slope that I myself have been down, and it is not pretty.

    2. Chattanooga Cheapster

      Not to harp on it, but I don’t think you understand.

      Let’s say you have $5K in CC debt and your budget is maxxed out. You cut your budget so you can save a few hundred bucks a month. After 3 months of saving you have your $1K EF. Now you should start paying off the debt. Don’t keep accruing REAL interest and fees so you can save up for an IMAGINARY disaster. The worst case scenario is you have to dip back into the debt that you already paid off. You’re still ahead because of the avoided interest.

    3. Chattanooga Cheapster

      Also, when it comes to credit cards you’re not just paying interest, you’re often also paying fees. That’s why the snowball method works out mathematically. When you knock out a credit card you’re not just knocking out the accruing interest, you’re getting rid of a monthly fee that is unrelated to the interest rate.

      It’s important to do the math on these things. Don’t do yourself a disservice.

  8. Nichole @BudgetLovingMilitaryWife

    I could probably describe myself as a “hard core” Dave Ramsey fan. The $1000 emergency fund is more of a guide. As stated above, it’s a lot better than a lot of people currently have and Ramsey would probably recommend those people who don’t have the EF of more than $1000, to not have that high of deductibles.

    But it also is for those people who have $20,000 in the bank and have $50,000 in debt. It may sound silly to be in that situation, but we were. So in that instance, Dave Ramsey wants you to use some of your emergency fund to pay off some of your debts. We never went below $10,000 in our EF (we own an older home, so we didn’t feel comfortable going below that point).

    As far as debt snowball vs. avalanche it really depends on your personal finance situation. Our highest interest debt was my student loans at 6.75% ($38,000) and we had two car loans one at 2.9% and one at ~6% ($6000 and $4000 respectively).

    We went with the snowball because if we would have started at the student loan, the $38,000 mountain would have been very disheartening. Plus, we were able to knock out the auto loans within the first 2 months. So, interest wise it wasn’t going to make that much impact and the triumphant feeling of getting rid of those two small loans is what we needed to tackle the monstrous student loan.

    1. Post author

      What you did makes total sense – especially with the Emergency Fund. I think that at the end of the day, what it comes down to is your personal situation. For me, it’s all about the numbers, so I couldn’t bear to be paying more interest than I absolutely had to. Are you debt-free now, or still on your journey?

  9. Jill

    I agree and disagree with some of your points.

    1. $1,000 Emergency fund. I also think it should be more. However, I don’t feel like it should be the hardcore focus of your finances to go over $1,000. Let’s be realistic though. Our brand new health insurance has a $2,500 deductible for each person in the house. HELLO! My husband has been in the hospital every year he has been here (3 years) for something. It would be wise to have $2,500 in savings.

    With that being said, we are going to start with $1,000. Then I am going to budget in more money a month to slowly continue to build it while knocking out debt.

    Bottom line: Dave Ramsey doesn’t know every situation in every household in the world, but his general guidelines help a lot of people change their way of thinking.

    2. I also think which method you chose depends on your individual situation. I NEED that joy of knowing I paid off 2 bills in 2 months, even if I only paid off $25.00. It lets me know I am getting somewhere and seeing progress. Would you rather stand on a scale for 1 every day for a year and see a 50 pound weight loss all at once or 2-3 pounds a week? Which do you think would keep you more motivated?

    Additionally, if you want to pick the numbers apart let me give you an example from my own life. Right now, I am mailing out 19 checks a month. 19 stamps per month. 19 envelopes per month. If I continued to make minimum payments for the amount of time it would take to pay off the big debt first, in one year I would pay over $100.00 JUST IN STAMPS. (No, those bills cannot be paid online.) I would pay about another $100.00 a year in checks and another $30.00 or more in envelopes. Not to mention the amount of time it takes for me to keep records and write out ALL those checks!

    P.S. As an insurance agent, I can tell you there are some companies out there who don’t double charge deductibles if your home and vehicle are damaged in the same event, they only charge the higher of the two deductibles one time.

    1. Post author

      Wow! I never thought to do the math on all of the stamps….really they’re getting pretty expensive, so great point there! Also, I did not realize that about the deductibles, but I do have a question, What if you had 2 different insurance providers for your home and car. In that situation is there a chance that you would only be charged one deductible, or would you definitely be charged both? We have the same insurer for both car and home, but I am just curious :-)

      1. Jill

        Hmmm, I thought I already responded to this, but I guess I didn’t submit!

        If you have different providers, you will likely have to pay both dedutibles!

  10. Dani

    We were hardcore Dave followers for years…and never really made any headway other than getting out of the cycle of disconnect notices. I was even a member on his forums and seeing everyday how his system was working for people in all sorts of situations. But why wasn’t it working for us?! Well, because the debt snowball method doesn’t exactly work when you have all your debt in collections, not open debt. And yes, the small EF bit us in the butt a few times with deductibles and such. We’re finally making headway working with a different finance mentor (Belinda at Own Your Money). I think DR’s program is meant to be a one-size-fits-all sort of thing…and well, it doesn’t always!

    1. Post author

      you are exactly right! Ramsey’s system doesn’t fit everyone…I am really glad you found something that is working for you! Good look on your debt repayment journey!

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  12. Maria

    I agree about the emergency fund. $1,000 seems to me to be too little of an amount. My emergency fund is close to $5,000.00. Also, I never let my checking go under $1,000.00! I’m doing the debt snowball method right now. Paying off my smallest loan first (student loan) and then tackling my car. Soon to be debt free! yay!

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  14. danielle

    I understand why he gives a low number for an emergancy fund. Most of my family would give up and say it was impossible if they thought they had to save $2,000. We did the Dave Ramsey program and the dept snowball worked really well for us. I understand that paying off the highest interest rate makes more sense but paying off a credit card was a huge motivator! I felt like we could do this after every victory.

  15. Stephanie @ Six Figures Under

    We are in the middle paying off six figures of student loan debt, so we have opted for a bigger emergency fund. Between health insurance deductibles, three young kids, a business in the beginning stages, and debt that will take longer than 18 months to pay off, we feel much safer with a slightly larger emergency fund.

    The only debt we’ve ever had is student loan debt. We have no minimum payment because we’re on income-based repayment and we don’t make enough (with our family size) to have to pay yet (though they are still accruing interest), but we are determined to wipe them out asap. We weren’t worried about psychological benefits, so we paid off the 7.9% interest ones first and then onto the 6.8% ones.

    1. Post author

      That’s good thinking! Your financial perspective really changes when you have kids, doesn’t it?

  16. Emily

    My husband and I have read Total Money Makeover. I agree he has helped thousands of people and I respect him very much. We do however, have a few disagreements with him as well. The only debt we have is our mortgage and student loans. Both of which are at incredibly low interest levels and since they aren’t considered “bad debt” we aren’t worried about paying them off at a super accelerated rate. However, our mortgage used to be higher but has continued to flex lower, we never reduced the amount we pay, so we are actually putting more towards it each month than the minimum. We also felt that we wanted 6 months of salary in an easily accessible bank account. Should my husband loose his job (our only real income) I know I could cut expenses and make it last for 9-12 months before we would have to incur any debt. We do also have about $2k set aside if something unexpected comes up, like a big car payment or deductible so that if we ever needed to we could get to that quick also.

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  18. Sharon

    I agree with your thoughts about an EF. My husband and I are currently in this step and he wishes to stop since we have exceeded Dave Ramsey’s advice, but I wish to add just a little bit more before moving onto step 2.

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  20. Frank Moreau

    Dave Ramsey is certainly great for those with crippling debt who cannot control themselves around plastic and need someone to guide them. Sadly, there are too many people in this category.

    The reality is we do not really require these financial guru’s to tell us what to do. Their advice usually boils down to 4 key points 1) Income 2) Budget 3) Eliminate Debt 4) Save and grow money. People like Dave Ramsey simply add their own flavours and twists to the formula.

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  22. Nels

    For me, knowing we only had $1k in the bank while paying off debt was MORE motivating to pay off the debt. (We had half of Baby Step 3 done before starting Dave’s plan.) I knew that, if an emergency happened before Step 2 was done, we’d have to hit the credit cards. Psychologically, we were more motivated AND, luckily, had no emergencies over $1k while attacking Step 2 for 2.5 years. That said, if people are going to take longer than 1-3 years to complete Step 2 (which is not having Dave’s recommended ‘gazelle intensity’), then a larger ‘starter’ emergency fund makes more sense. You’re right, if people choose to do Dave’s plan in an ‘a la carte’ manner, then Dave’s plan won’t work – HE EVEN SAYS SO often on his radio show!

      1. Nels

        Yes, I’m 37 and work in accounting also. My wife is 32 and stays at home with our 1-year-old twins. We became debt-free (except for our house) late last year and will be done with our 3-month’s-of-expenses emergency fund at the end of this month! Woo hoo! In the meantime, though, we have been putting 8% of our income into the Roth 401k so that we don’t miss out on the matching. Saving for a ‘new’ car, though, is not fun… Best of luck to you!

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