Critiquing Dave Ramsey’s Total Money Makeover – Episode #48

Financial self-help guru Dave Ramsey has a great “get out of debt” program called “Financial Peace University.” His “Total Money Makeover” is a straight-forward 7-step program that helps individuals take “baby steps” towards getting out of debt and obtaining financial freedom. It’s a program that has proven to work for many people, and has helped countless people (including me) make their financial lives better.

However, with that said, I think Davy Ramsey’s philosophy of money management has some flaws, and could use some revision. And not only could it use some revision, but I believe those who’ve gone through his program could use a bit of a detox. Saying such may immediately put some of you on the defensive, especially if you are a hardcore devotee to Dave Ramsey. You may want to launch some Dave Ramsey style attacks at me that you’ve heard him launch against anyone who critiques his system.

If that’s your style, I have nothing more to say to you than the following. I assume you are an adult capable of independent, critical, and constructive thinking. I’m not interested in creating and maintaining a cult of Kool-aid drinkers who blindly defend some product, program, or personality. I think overall, Dave Ramsey’s program is strong, but it has some areas of weakness that could be better refined. So, if you can’t stand to hear something thoughtful about Dave’s program, especially coming from someone who has listened to hundreds of hours of Dave Ramsey and read a lot of his books, you would probably do well just to stop reading this blog post or listen to my podcast.

My “Authority” To Critique Dave Ramsey

First of all, in case you were wondering…

I believe I have a legitimate perspective to critique Dave Ramsey from, and to offer my personal opinion (my opinion on this issue is mine alone, and not that of my employer). I’ve followed Dave Ramsey for years, have read Total Money Makeover, have listened to a number of his audio CD’s, and have listened to his radio/podcast program for years. I’ve followed much of his advice in many areas of my life. I’ve also consumed numerous other personal finance books, blogs, and podcasts.

I am a financial professional (I don’t just play one on TV), working at one of the biggest banks in the nation as a mortgage underwriter, and have been doing such for nearly a decade. I have years of experience analyzing folks income, reading credit reports, and assessing the financial health of thousands of individuals. I’ve also spent several years helping people with bad credit and who were in danger of foreclosure. I also have in depth knowledge of assessing real estate. So needless to say, I know a thing or two about personal finance.

Additionally, I also have been to Bible college and seminary with a formal background in theology.

I also am a pretty successful individual financially, with a household income over 6 figures, and am free from consumer debt. I’m not just some blogger/podcast living in their mom’s basement.

Dave Ramsey’s “Biblical Principles” Aren’t So Biblical

Dave Ramsey claims a lot of his financial teachings are based on principles in the Bible. And there is some truth to this. But what Dave doesn’t tell you is that some of his teachings are actually contrary to the Bible. Unfortunately many of us as American Christians have such a warped perspective on wealth, many cannot even begin to tell you where Dave Ramsey is wrong about money. Many pastors don’t even recognize it, because they are just as caught up in American consumerism and greed as the rest of the culture.

To be blunt, Dave Ramsey makes no bones about it: He wants you to be rich, and his program is ultimately designed to help you become such. Dave wants you to “live like nobody else so you can later live like nobody else.” And while in part he means living a life free from the crushing burden of debt and keeping up with the Joneses, his teaching on the matter doesn’t just stop at debt. He wants you to build massive amounts of wealth so that you can live the American dream, give to your church, and then pass on your wealth to future generations.

Such a perspective is actually rubs directly against the teachings of the Scriptures, especially in the New Testament.

And while there is certainly nothing wrong in and of itself with being rich, as I talked about in a prior podcast (To Hell with the Rich! – Episode #3), the New Testament has a less favorable view of wealth and getting rich than many would care to admit. The idea that money and wealth is merely a neutral tool to be used for good or evil is an idea you don’t find much support for in the Scriptures.

Jesus said it’s easier for a camel to fit through the eye of a needle than for a rich man enter the kingdom of God (Matthew 19:24). Jesus also warned the rich that their wealth was a sign they’ve possible received their eternal comfort in full in the present life, and not the ages to come, and warned them of future damnation (Luke 6;24). The apostles taught us to flee from even the consideration of trying to become rich, and that such was a dangerous path that could ruin us spiritually, and that the love of money was the root of all evil (1 Timothy 6:9-11).

In light of such things, I would like to heavily caution Christians about using Dave Ramsey material in their churches. His teachings are actually at times contrary to sound Biblical teaching. If you use Dave Ramsey’s material to help people get out of debt, that’s fine. But I would immediately put everyone who takes his Financial Peace University class at a church to enroll in a Dave Ramsey detox class afterwards. There’s a lot of danger in Dave Ramsey’s teachings, and they should not be used for anything beyond paying off your debts.

You Need A Good Credit Score

Dave Ramsey laughs at the idea of having a credit score. He’s got some cute little sayings about it too. But this is where Dave is just being dumb. And yes, I’ll say that again, this is just where Dave is just being dumb (see how two can play this game Dave). Dave Ramsey might not ever have to worry about having a good credit score since he’s made more money than he’ll ever know what to do with. But you sure as heck better have one, as you aren’t likely to get rich off telling others how to get rich like Dave did.

The truth is, not having a credit score, or having a bad credit score is something that will negatively impact you one way or the other. Yes, banks and financial institutions can always do “manual underwriting” if you have zero score, but such manual underwriting often comes in exchange for higher expenses that are passed on to you by the financial institution in order to pay a team of underwriters for having to manually calculate your financial history. They don’t do this simply for free. And if your score is below 620, you will not qualify for most conventional loan products, regardless of the type of underwriting that is done, including those done by Dave’s favorite sponsor, Church Hill mortgage.

In case you aren’t aware, banks and financial institutions judge people based on whether or not they fit neatly into a box. Credit scores help them determine which box you fit in. If you lack a credit score, or have a bad one, you require more effort on their part to figure you out, and you also present to them more risk. More effort and more risk means more expenses and more fees, fees that they ultimately pass onto you.

So, if you ever plan on carrying a mortgage, insurance, or any number of other financial products, do the smart thing, not the dumb thing, and simply establish a good credit score. Such isn’t very hard to do, and the troubles you’ll inevitably face as a result of not having a good credit score far outweigh the benefits. Dave Ramsey saying otherwise is just misleading.

And I say this as someone who has been a mortgage underwriter at a big bank for a long time. Take my advice over Dave’s here. In my personal opinion, Dave either simply doesn’t know what he’s talking about, is being willfully ignorant, or he’s being deliberately deceitful. And knowing how much he knows about financial stuff, I would be surprised that he somehow doesn’t know this stuff.

Baby Step 1: The $1,000 Emergency Fund

Dave’s been preaching baby step #1 for a long time. Before paying off your debts, he wants you to establish a $1,000 cash emergency fund so that you can create a cushion between you and “Murphy’s Law.” It’s inevitable that while you are trying to pay down your debts that an emergency will come up that will tempt you to pay the emergency off with a credit card. So you should keep a $1,000 emergency fund in cash so that you can keep you from making this mistake, and racking up new credit card debt.

Makes sense, right? Yes, it absolutely does. The only problem is, Dave’s been giving this advice since the 90’s, when $1,000 used to be worth a lot more than it is today. It’s now 2020, and a 2-3% annual inflation rate means $1,000 isn’t what it used to be. According to an inflation calculator I used, $1,000 in 1990 would be $1,980.57 in today’s dollars. Which means if I were to take $1,000 today and go back to 1990, the same stuff I would buy for $1,000 today would only require $489.10 to purchase.

Life is more expensive today. $1,000 ain’t what it used to be! To follow the 1990 Dave Ramsey advice, you would need to revise this baby step #1 figure to roughly $2,000 in today’s dollars. Strangely, Dave Ramsey hasn’t revised this figure to account for inflation, and I believe having only $1,000 on hand to act as a financial buffer is going to be woefully inadequate for most people attempting to pay down their debts.

Like Dave Ramsey says, Murphy’s Law is going to strike. But I believe that $1,000 is simply not going to be adequate for most emergencies. And to be honest, $2,000 isn’t probably going to cover it for a lot of people. YOU will ultimately have to figure out works best for you.

Personally speaking, from my life experience, before you start trying to pay off a heavy amount of debt, you should probably look to have at least 1 month’s of living expenses on hand. For most middle class Americans, this will probably be anywhere from $3,000-$6,000. Last year my wife and I had a very expensive summer, where out of nowhere we had a couple grand worth of auto repairs that were required, and a woodpecker decided to punch a bunch of holes in the side of our house, which required another grand worth of repairs. Life gets expensive quick, and $1,000 simply isn’t going to cut it.

Consider setting aside at least a couple grand before paying off debt, and honestly, you should probably continue to save some money while paying off your debt during baby step #2.

Auto Loans Are Okay (Sorta)

I’m not a big fan of consumer debt. I think it should be generally avoided, unless you have a really exceptional reason to use it. This is especially true with credit cards. However, unlike Dave Ramsey, I think auto loans aren’t such a bad deal, and while they should be generally avoided, sometimes they make sense.

First, I think unless you are very affluent with lots of cash to burn, you should never ever buy a brand new car. In this I completely agree with Dave Ramsey. New cars just depreciate in value too quickly. The average new car loses 20-30% of its value the moment you drive it off the lot. So, if you buy a $35,000 Honda Accord, you might as well have just set $10,500 on fire. Because the moment you drive it off the lot, that’s essentially what you’ve done. So, unless you can afford to set $10,500 on fire and wouldn’t miss it, then you should never buy a new car. Always buy a used car.

So when you go to buy a reasonably used 2-5 year old car, should you use an auto loan to finance it? Well, that answer is a little more complicated. If you have the cash, you should buy the car in cash. But only if you can do such without touching your emergency savings.

For in depleting your emergency funds, you are taking on a significant risk should an actual emergency arise. And the odds that a $300 a month auto payment is going to ruin you financially (especially if you have emergency savings on hand) is pretty low. And while paying interest on a depreciating asset is generally not a good idea, with interest rates for auto loans presently hovering around 3-4%, the amount of money you are paying in interest over 3-5 years for a used auto loan is pretty low.

You might spend $1,000 on interest payments over 5 years, which works out to less than $20 a month (see calculator here). Such is a pretty small amount of money to pay for a reliable form of transportation, one that you are likely using to get to work every day. That is significantly less than you’ll spend maintaining an old beater on its last leg.

So, if you have the monthly cash flow and can afford an auto loan on a nice used car, and if you absolutely need one, my recommendation would be to put at least 20% of a down payment on a used car. Make sure you get a loan that is no more than 3-5 years in length, keep the loan under $15,000. Then as soon as possible, pay off your auto loan. The earlier the better.

Be sure to buy a car that has a good track record, like a used Honda Accord, and then drive it for as many years as you can. An auto loan might not be the best financial decision you’ll ever make, but not having reliable transportation to get you to and from work is a worse situation. And depleting your emergency savings to buy a junky “Dave car” isn’t smart either. A used Honda Civic or Honda Accord should get you well over 250,000 miles without too many problems, which is at least 10-15 or more years of reliable transportation for most people. That’s a lot of value for a small auto loan.

It’s Okay To Have A Credit Card

Credit cards got me in a lot of trouble once (they contributed to me going bankrupt in my mid 20’s). So I’ve developed a certain allergy to them. They can be very dangerous, and I totally get why Dave Ramsey discourages having one altogether. It’s not bad advice. However, there are times when it’s actually wise to have a credit card.

Despite what Dave Ramsey says, your debit card does not offer the same financial protection that a credit card does. If some identity thieves hack your debit card or checking account, that money is gone until the bank gets around to replacing it. And, as someone who has had this happen to them, banks don’t replace missing funds from your account overnight. In which time you won’t have all the money you thought you had, and accessing what funds you do have can become difficult if the bank has to freeze your account and cancel your debit card. As such, it’s prudent to carry a credit card and use it, especially if you do any online shopping. That way if anything nefarious happens to your checking account, you still have a means of paying for things.

Additionally, if you are smart, you’ll use a credit card to pay for all your normal monthly expenses, like gas, groceries, and utility bills. Just make sure you never carry a balance, and make sure your credit card offers cash back. Personally speaking, I do this, and as a result I get about $50-$60 a month cash back. That’s up to $720 a year in free money. I’m not sure about you, but to me $720 is real money. And that will easily cover a month or two of utility bills or groceries, or paying off extra debt (if you have it). If you are leaving free money on the table like this, I believe you are missing out on a significant financial opportunity. So unless you have some uncontrollable spending habit associated with a credit card, paying for things strictly in cash is just “dumb.”

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