5 Ways I Don’t Follow the Dave Ramsey Method (and Why You Shouldn’t Either)

Google almost anything related to personal finance, and Dave Ramsey is likely the first article to pop up. The Dave Ramsey method, aka his 7 baby steps, have helped millions of people get out of debt and begin to build wealth.

However, you can do some quick math and realize that the Dave Ramsey method may not always be the most efficient way to manage your personal finances.

Don’t get me wrong, Dave has a lot of great advice. But his method takes a “one size fits all” approach, which isn’t always the best route. If you don’t always agree with him, you’re not alone!

In my opinion, everyone should have a different amount saved in their emergency fund, decide whether to pay off debt or invest based on their interest rates and risk tolerance, or decide if they are responsible enough to use credit cards.

Plus, his investing advice is just plain wrong!

Papa Dave has a big job: giving financial advice to literally everyone. He can’t tell one person to do something, and then advise the next person to do the opposite. He’s got great baseline advice for getting out of debt, but you’ve got to look at your own personal finances and take it a step further at some point.

Here are 5 reasons why I don’t follow the Dave Ramsey Baby Step method and what you should consider instead!

The Dave Ramsey Baby Steps Explained

Just in case you haven’t heard of the Dave Ramsey method, here’s a quick explanation. Dave Ramsey is one of the most popular financial gurus out there with a hit radio show where people call in for money advice.

The “7 Baby Steps” is Dave’s financial plan that he teaches in Financial Peace University.

The Dave Ramsey method aims to get people out of debt ASAP before they start building wealth.

Baby steps 1-3 have to be done in order with no exceptions. Steps 4-6 can be done simultaneously, and then you arrive at Dave Ramsey’s pinnacle of personal finance: baby step 7.

Baby Step #1: Save a $1000 starter emergency fund

Baby Step #2: Pay off all non-mortgage debt

Baby Step #3: Save a fully-funded 3-6 month emergency fund

Baby Step #4: Begin investing 15% of your gross annual income for retirement

Baby Step #5: Save for your kids’ college funds

Baby Step #6: Pay off your home

Baby Step #7: Live and give “like no one else”

All in all, the Dave Ramsey baby steps method really isn’t a bad plan. He takes the psychology and emotional side of money into account, not just the math. His method caters to the average person that doesn’t have much discipline.

I would actually recommend this plan to an average-income earner that needs help actually following through a basic personal financial plan.

However, once you’re past the basics and start running some numbers, you’ll likely run into some hang ups with the Dave Ramsey plan (I definitely did!)

Here are 5 parts of the Dave Ramsey method that I personally don’t follow, and what I recommend instead!

5 Ways I Don’t Follow the Dave Ramsey Method

1. $1000 “Starter” Emergency Fund

First off, the infamous $1000 emergency fund in baby step 1 is simply not enough. Unless your monthly expenses are around $300 per month, $1000 is not enough!

The average US household expenses total to over $5000 a month. $1000 in savings isn’t going to get you very far if you miss even one paycheck. A good rule of thumb is keeping at least 3-months’ worth of expenses in savings.

Dave recommends this in baby step 3, after you pay off all of your debt except the mortgage.

I 100% believe that you need a solid 3-month emergency fund before you start aggressively paying off debt. An emergency fund ensures that you won’t go back into debt while you’re trying to get out of debt.

Related: How Big Should Your Emergency Fund Be?

2. No 401k Match While Paying Off Debt

Another thing that drives me crazy about the Dave Ramsey plan is that he tells people to not get their 401k match while paying off low-interest debt. A 401k match is a 100% guaranteed return on your money.

Let’s say you’re working on paying off a 5% interest student loan and you get a 5% 401k match. That’s a 100% return – 5% interest on your loan = a 95% return altogether if you contribute that 5% of your salary to your 401k instead of your student loan.

95% is pretty dang good! And that simple formula ignores all the growth from the stock market as well!

It totally makes sense to pay off any credit card or high interest debt before investing significantly. You’ll have to weigh the potential returns in the market vs. your interest rate when making the decision to invest more or pay off debt faster.

Please pay off your 20% interest credit card before you start investing for a 10% return in the market.

There are a lot of upsides (math-wise) to investing more while paying down low-interest debt. The more you contribute to your retirement accounts early on, the less heavy lifting you’ll have to do in the future.

Do yourself a favor and get your 401k match as you pay off debt. It won’t affect your payoff timeline that much, and you’ll have a little bit in retirement when you become debt-free!

3. Only Invest in Actively-Managed Mutual Funds with a Financial Advisor

I have 3 major pain points with Dave Ramsey’s investing strategy:

Getting a Dave-Approved Financial Advisor to Manage Your Portfolio

If you call Dave Ramsey and ask about how to get started investing, he immediately recommends that you go to his website and find a Dave-approved financial advisor to manage your investments for you.

These financial advisors supposedly agree with the Dave Ramsey method and are “vetted” to make sure they’re a good fit. But the financial advisor pays a fee to Ramsey Solutions in order to be featured on his website as a way to get clients.

I find it a bit fishy that he’s recommending financial advisors that pay him to be recommended on his show.

While I’m not totally against getting a financial advisor to learn, it is totally possible to learn how to invest and manage your own portfolio.

Some firms can be really sketchy and charge a huge fee to manage your money the same way you could with a bit of time and effort.

That 1-2% advisor fee is a direct hit to your investment gains and adds up A LOT over time. Be really careful with someone managing your wealth without you understanding what’s going on. Good investing isn’t complicated, and spending a few dollars on a course or two to learn how to do it will be immensely cheaper than having a financial advisor your whole life.

Actively-Managed Mutual Funds

Dave’s plan recommends that you only invest in actively-managed mutual funds.

What he doesn’t talk about are the huge fees that go along with actively managed funds (these are separate than a financial advisor’s fees).

His reasoning is that you find a fund that “beats the market” to compensate for the higher fees. There are a ton of mutual funds out there that claim to beat the market index, and don’t.

I would highly consider investing in low-cost, US index funds. All funds have fees/expense ratios to cover management and overhead costs. There are actively-managed funds (what Dave recommends) with high fees and passively-managed funds with low fees (you’ll often hear the term “low-cost index funds”).

Consider two funds that have an average annual return of 10% (similar to the S&P 500 historic return). One fund is passively-managed and has an expense ratio of .03% (meaning that you only pay $.30 per $1000 invested in fees. The other actively-managed fund has a .85% expense ratio.

Using this mutual fund calculator, you plug in the numbers and figure out the difference between a .85% fee vs. a .03% fee over time.

Assuming a $6000 annual contribution, the .03% fee leaves you with $1.77 million dollars in 35 years. It has also costed you about $12,700 in fees over that entire time period. The .85% fee mutual fund under the same conditions costs you a whopping $327,000 and leaves you with $1.46 million. The difference in fees costs you over $300,000 from your nest egg!

High-fee mutual funds attempt to justify themselves by saying that they get a better return than the market index. But, actively managed fund behavior is actually very unpredictable.

I’m sticking with low-cost index funds. They aren’t sexy and exciting, but they get the job done!

Related: The Ultimate List of Investing Terms Every Beginner Investor Needs to Know

25% International Allocation

The Dave Ramsey method also recommends that you put 25% of your portfolio into international funds, which have historically done a lot worse than the US stock market.

I know people are really divided on this, but hear me out. International funds usually have higher fees, more risk, and don’t do as well as the US. As the largest economy in the world, I assume that the rest of the world wouldn’t do well if the US also didn’t do well.

I’m not saying to never invest in international markets, but you have to be a lot more picky about the international funds you do choose to invest in. I also think a 25% allocation to international is too much.

Make sure you know what you’re doing before investing in international funds. I think Dave is wrong here by telling everyone to allocate 25% of their portfolio to international right off the bat.

4. No Credit Cards or Credit Score

The Dave Ramsey method preaches absolutely no credit cards whatsoever, ever for any reason. He talks like it’s one of the deadly sins!

Credit cards can be dangerous, so definitely cut them up if you struggle with impulse spending or overspending. If you currently have a balance on a credit card, I’d also recommend you stop using it until you get it paid off.

However, credit cards can be a great tool to manage your cash flow along with earning some cash back or travel rewards. As long as you are responsible, never carry a balance, and keep your utilization low, credit cards can be great!

Dave Ramsey also teaches that a credit score isn’t necessary (blog post about credit score myths linked here). I don’t think a credit score matters as much as society leads you to believe. But, it is a good idea to maintain a good score.

Lots of apartment complexes will give you a lower security deposit if you have good credit. You’ll also get a lower mortgage interest rate with a 700+ credit score.

Credit scores aren’t everything, but a using a credit card (and paying it off every month) can be a wise way to stay out of debt while maintaining a decent score. Do not go and finance a car just to “build credit” or carry a balance on your credit card. Carrying a balance does not increase your credit score!

I have 1 credit card that I never carry a balance on, and my credit score is 740+. I also made over $600 in cash back and referral awards from my credit card last year!

Credit card points won’t make you rich, but $600 is $600. I’ll take making $600 per year doing nothing any day!

5. Only Getting a 15-Year Mortgage

Dave Ramsey insists on only getting a 15-year, fixed- rate mortgage that is 25% or less of your monthly take-home pay.

A fixed-rate mortgage that is 25% or less of your take-home pay is great advice!

However, the 15-year mortgage term may not always be the best option. Yes, a 15-year mortgage will get you a lower interest rate, but it’s often a fraction of a percentage point lower.

Your payments will be higher as well.

Consider a 15-year mortgage with a 2.4% interest rate vs. a 30-year mortgage with a 2.8% rate. The following graph shows you the amount paid over the entire life of the loan.

The grey shaded area above the dark blue is the excess money paid on the mortgage due to the higher payments of the shorter loan term. A 15-year mortgage doesn’t start saving you money until year 21!

With interest rates being so low right now, it might make sense to get a 30-year mortgage and invest more in the stock market with your extra cash. The lower monthly payment gives you more flexibility in how you choose to invest, save, or enjoy your money.

You can always pay off a 30-year mortgage early too!

I’m not totally against a 15-year mortgage, but I don’t necessarily think that’s the only way to go.

All in all, I think Dave has great entry-level financial advice to help people get on the right track with their personal finances. Once you get the basics down, it’s important to go a step further and do what makes sense in your situation.

-Megan

This post was all about the ways I don’t follow the Dave Ramsey method.

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