Is Dave Ramsey a scam?

At Dave’s Studio in Franklin, TN.

Shane, Myself, and Tag with Dave in the early 2000’s

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SUMMARY

Since 2002 (22 years at the time of this post) I’ve been doing the general Dave Ramey philosophy = investing 15% of your income and staying out of debt. Yes, it works without a doubt and Dave is not a scammer in my opinion.

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MY EARLY YEARS

I’ll never forget in the summer of 1998, one night I was at my friend Corey Doshier’s house and we started talking about money and he suggested I open a Roth IRA because that will grow tax free. Sounded good to me! So the next day I went to Compass Bank and had one of their financial folks set me up with one. At the time, I had no idea what I was doing (violating one of the primary investing tenants - “Don’t put your money into things you don’t understand”) and I was put into a growth fund with a mutual fund company that had “loads” (high fees) of 5%.

Fast forward a couple years to 2000 and I was getting out of graduate school with my Master’s degree and making “the big bucks”. A lot of friends were buying luxury cars with their new found high paying jobs and I was going to do the same because I deserved that new BMW after all the hard work and sacrifice over the past 2 years.

It was around this time my mom introduced me to the Dave Ramsey show on the radio. I started listening every day at work and picked up a lot of good information. Shortly after that, sometime around 2002 I decided to cut up my credit cards and only use cash or debit cards. I didn’t get back a credit card again until 2023, 21 years later. More on that in a bit.

In the early 2000’s our video production business was growing like crazy and we actually worked a small deal with Dave at the time for his Financial Peace Wedding Bundle’s and gave those away for a number of years to our wedding clients as a gift. I was able to attend a couple of the small business seminar’s he used to give at his office when it was behind the Cool Springs Mall and have toured the old studio and then newer studio. I’ve also been to his live events twice. So I’m no stranger to the DR principles and techniques for debt reduction and investing.

Meanwhile, in the early 2000’s we also had the dot-com bubble burst and that severely affected my Roth IRA and at the time I didn’t fully understand the notion of “Buy and Hold”. All I saw was my initial $2000 investment was now worth about $900. WHAT?! I thought investing was supposed to make you money! The guy who had set up my account but I was introduced to his replacement and she was a big help in getting my portfolio realigned and a little bit safer, by adding in an “income” portion to balance the growth part.

Fast Forward a few years after I had learned more about investing and I decided to move my account to an online broker so I could manage it on my own. Over the years, I’ve opened up other accounts too. Without Dave’s daily guidance, I would not have been able to take control of my investing on my own most likely. He keeps it simple and that’s where I think 99% of people need to be. Simple.

Pros of the Dave Ramsey Method

1. Simplicity and Clarity

Dave Ramsey's approach is straightforward and easy to understand, making it accessible to people with varying levels of financial literacy. His "Baby Steps" provide a clear roadmap for achieving financial stability, starting with building an emergency fund of $1000 and progressing through debt payoff, retirement savings, and wealth building. This simplicity can be particularly beneficial for those who feel overwhelmed by complex financial strategies.

2. Strong Focus on Debt Elimination

Ramsey's method places a heavy emphasis on becoming debt-free, which can be transformative for many people struggling with financial burdens. The "debt snowball" method he advocates, where debts are paid off from smallest to largest, can provide psychological wins that keep people motivated throughout the debt payoff journey. This approach has helped numerous individuals break free from the cycle of debt and achieve financial freedom. I prefer this method myself over the “debt avalanche” which has you tackling highest interest first and moving down that way.

3. Emphasis on Behavioral Change

Ramsey's teachings go beyond just numbers, focusing on changing financial behaviors and mindsets. He encourages developing habits like budgeting, living below one's means, and avoiding new debt. This holistic approach can lead to long-term financial success by addressing the root causes of financial problems rather than just treating the symptoms.

Cons of the Dave Ramsey Method

1. Oversimplified Investment Advice

Ramsey's investment recommendations are often criticized for being overly simplistic and potentially unrealistic. He frequently cites a 12% average annual return on investments, which many financial experts consider optimistic. This oversimplification may lead to unrealistic expectations and inadequate retirement planning for some followers.

I often see online, people saying, “I can’t find funds with a 12% annual return” But I’ve found both Fidelity and Vanguard have a number of mutual funds and ETFs with a 10+ track record of 12%. For example, below is a list of Fidelity funds with over 12% 10-year returns. I own the NASDAQ and S&P500 as they are broad indexes and “reliable” plus have low expense ratios. Note the yellow one is a popular one right now.

2. Inflexible Approach to Debt

While Ramsey's debt snowball method can be motivationally effective, it's not always the most financially optimal approach. The alternative "debt avalanche" method, which prioritizes high-interest debts, can result in less interest paid overall. Ramsey's blanket advice against all forms of debt, including potentially beneficial low-interest loans, may not be suitable for everyone's financial situation.

Indeed, for many, living debt free in these current economic times can be challenging. But, I still encourage everyone to sacrifice and work extra jobs for a short time to build up emergency cash and pay off everything as soon as possible and try at all costs to avoid debt because it is a wealth killer.

3. Limited Perspective on Credit

Ramsey's stance on credit is extremely conservative, advocating for a complete avoidance of credit cards and dismissing the importance of credit scores. While this approach can protect against overspending, it may also limit opportunities that require a good credit history, such as favorable mortgage rates or certain job prospects. In today's financial landscape, responsible credit use can be a valuable tool for building wealth and financial flexibility

In 2023, I got back into credit cards after being out of them for 20 years. I am a very disciplined spender. I focus on investing first through direct deposits straight from my paycheck so I never see that money until it hits my investment account. The money that goes into my local checking account is just enough to live on. I realized I was leaving free money on the table from paying my utility bills, buying gas and groceries, and going on vacations. My bank card pays back up to 5% cash back, and on average I’m getting back about $100/mo in cash for buying things I always buy to live. That $100 gets put into my investment account where it buys more cash paying assets.

When I didn’t have a credit card, I had no problems buying plane tickets, getting rental cars, or buying a house with a good rate. So I’m not sure I believe it when people say that it can negatively affect those things. I personally never experienced that in 20 years of not having a credit card.

CONCLUSION

In conclusion, Dave Ramsey's method offers a clear, motivating path to financial stability that has undoubtedly helped many people, including me. However, its one-size-fits-all approach and oversimplified investment advice may not be optimal for everyone, particularly those with more complex financial situations or goals. As with any financial strategy, it's important to consider individual circumstances and potentially combine Ramsey's teachings with other financial advice to create a well-rounded approach to personal finance.

NEXT STEPS

Check out my next article where I’ll break down how I invest and learn my methodology!