The Dave Ramsey Disadvantage: 10 Ways His Advice is Holding You Back Financially

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Dave Ramsey reaches over 20 million listeners every week. Many tune in to get free financial advice to become debt-free and improve their finances.

While many succeed and get the opportunity for their ‘debt-free scream,’ could Dave’s advice hurt listeners? Here are ten examples of where Dave Ramsey gets personal finance completely wrong.

#1. All Debt is Evil

According to Dave, there is no such thing as good debt. All debt is bad debt.

On the surface, this makes sense since debt puts you in a hole that you need to climb out of. But if it weren’t for debt, most people wouldn’t be able to purchase a home or get a degree so they could become a doctor.

We all can agree that tremendous amounts of debt are bad, no matter the reason for taking out the loan. But if you take on a reasonable amount of debt to build wealth, it can make sense.

#2. Avoid Using Credit Cards

Dave encourages people to use debit cards or pay cash for everything, as credit cards only lead to trouble. While many of his listeners are digging out of debt and do not have the discipline to use credit cards, this doesn’t mean they always will be.

Credit cards offer many benefits when used responsibly, and you pay the balance in full monthly. A cash back credit card offers you an instant discount on everything you buy. A rewards credit card could cut the price you pay for your next vacation in half. Credit cards can be a great tool if you are financially stable.

#3. Delaying Saving for Retirement

Dave Ramsey’s baby steps do not have you start saving for retirement until step four. Before you are to put money aside for your golden years, pay off all debt except for your mortgage, and build 3-6 months of expenses in an emergency fund.

The problem with this strategy is it ignores the power of time. When you invest your money, it compounds over time. The more time you have to invest, the more it grows. By paying off your debt and building up an emergency fund, you could be halfway to retirement and not save a dime.

A better solution is to make getting out of debt a priority while still putting something into a 401k plan or Roth IRA every year.

#4. Ignoring Opportunity Cost

A significant oversight that Dave never seems to take into account is opportunity cost. When you do something, there is a cost, as you cannot do something else. For finance, if you spend $100, you cannot save it. Or, if you stay up late, you give up a solid night’s sleep, which could have a larger impact on you the next day.

If you follow Dave’s advice, you follow his recommendations without question. But you need to account for what you are giving up.

For example, if you have $1,000 extra at the end of the month, Dave says you should put that money towards paying off your mortgage early, assuming you paid off your other debt, have a fully-funded emergency fund, and are saving for retirement. If you do this, what are you giving up?

If the interest rate on your mortgage is 3%, you are giving up a potential 8% return by investing your money instead. Investing your money results in you having close to $600,000 more. Putting that money towards your mortgage saves you $81,000 in interest and pays off your home early. But even if you invest the difference, you are still worse off than if you invested from the start.

Related: Learn how investing in yourself is the best investment you will ever make

#5. Unrealistic Investment Returns

When it comes to investing, Dave says that you can earn 12% annually on your investments. Even after many financial experts have shown this is misleading, Dave doubles down.

Here is why this is a problem. If you invest $100 a month for 30 years at a 12% return, you would expect to end up with over $300,000. But when we use the compound annual growth rate of 8%, you end up with less than half of what you expected.

The difference is that Dave uses the average return of the stock market, not the compound annual growth rate, which is more accurate.

#6. Retirement Withdrawal Rate

Sticking with retirement, Dave also suggests you can safely withdraw 8% of your portfolio every year in retirement. The common belief is you are safe to withdraw 4% from your portfolio, as doing so will not result in your outliving your money. But what about taking out 8% every year?

If you have $1 million when you retire at age 65 and take out 8% annually, you will run out of money before you reach 95 years old. While you might not think you will live that long, do you want to find out what life is like at that age when you have nothing in the bank?

#7. Living Without Credit

Another popular suggestion Dave makes is to live your life without credit. But everything with cash.

The good news for those following this idea is that you will never be in debt. The bad news is you likely will have a low credit score. Many auto insurers and even employers look at your credit score when offering you a policy for your car or offering you a job. So while avoiding debt, you could miss out on lower auto insurance premiums or miss out on a higher-paying job.

#8. Load Funds Are Ideal

Dave pushes load mutual funds as the best investment, but are they the best investment for his listeners?

With a load mutual fund, you pay an upfront fee, or load, to invest, typically 5.75%. For every $100 you invest, $94.25 gets invested, and the other $5.75 goes to the fund. And part of that money goes to the advisor who sold the fund in the form of a commission.

The SmartVestor Pro service Dave offers connects investors with local advisors to help with investing. These advisors pay a fee to Dave to get listed, and all the advisors sell load mutual funds.

But you don’t have to pay to invest. You can invest without paying a fee. Many mutual funds are no load, and all exchange-traded funds are also no load. So instead of being in the hole 6% from the start with a load fund, choose to invest in no-load funds.

#9. Choosing Only a 15-Year Mortgage

Another recommendation from Dave is only to take out a 15-year mortgage. This makes sense when you look at it, as it allows you to be mortgage-free in half the time compared with a 30-year mortgage.

But most people cannot afford this type of mortgage. Not because they buy a home they cannot afford but because of the high prices. A $450,000 at 6% interest for 15 years has a monthly cost of $3,078. Most people cannot afford this amount, let alone save the $90,000 needed for a 20% down payment.

#10. Never Gets to the Root of Debt

The final issue with Dave’s financial advice comes back to debt. He pushes his baby steps to help listeners become debt free but overlooks a critical thing.

He never talks about understanding what got you into debt in the first place.

While it is often simply being bad with money, other times, it is something much deeper. You might be in a job you dislike or an unhappy relationship. Your outlet for feeling better could be to spend money as you pretend to live a better life. If you never address this issue, all your work to become debt free could be a waste as you quickly end up back in debt.

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