DAVE RAMSEY BABY STEPS REVIEW

Negative Feedback on Dave Ramsey:

I was listening to a financial podcast recently (I honestly cannot remember which one, I listen to financial podcasts every day during my commute) I was struck by the negative feedback provided by a twenty year old financial advisor regarding Dave Ramsey. This advisor claimed that the advice and practice offered by the current established financial advisors such as Suzie Orman and Dave Ramsey where outdated and completely irrelevant. 


For the purposes of this article I'll focus on Dave Ramsey, as I have read his "Total Money Makeover Book," and I've listened to his radio show via YouTube. Dave Ramsey has created a very successful media and financial education business which focuses on helping people who are in serious consumer and student loan debt. One of Dave's main financial advice offerings is the Dave Ramsey Baby Steps. These ordered steps are a very simple roadmap to reducing debt and obtaining real wealth. As with any financial roadmap, there are always plenty of opposing opinions on them. 


Dave Ramsey https://www.daveramsey.com/dave-ramsey-7-baby-steps


Here is my take on the Dave Ramsey baby steps, with a few examples from my own personal experience as an informal personal financial advisor and content creator. 


Dave Ramsey Baby Steps:


1. Save $1,000 cash in a beginner emergency fund

I like this one, and I think it's absolutely necessary. Everyone from the wealthy to the poorest of the poor should have access to their own extra cash to cover an unexpected car repair bill, medical bill, or any other type of emergency requiring immediate funding. For those in significant debt the smaller $1,000 dollar amount is a great starting point, and it should be attainable in a fairly short time period. 


2. Use the debt snowball to pay off all your debt but the house

Dave's recommended debt snowball has you list your credit card or other consumer debts from smallest to largest- You then start paying down the first smallest balance card to zero, then pay down the second debt until it reaches zero. You follow this process until all of your consumer debt is completely paid off. The idea here is that the elimination of the smallest balance credit card will motivate you to continue paying down your other debts more quickly (aka snowball effect).


My only concern with baby step 2 is that higher interest debts are treated the same as lower interest debts. All debts receive the same criteria, they are ordered from smallest to largest- Period. If I was in a multiple consumer credit card debt situation I would definitely factor in the credit card interest rate as well as the credit card balance. My aversion to high interest supports the idea of paying down the higher interest rates first. However the Ramsey team states clearly that focusing on the higher interest rates is not as effective as simply paying down the consumer debt based on the balance size. 


3. Set up a fully funded emergency fund of 3 to 6 months of expenses

Another great idea. My only modification would be to push this out to 9 -12 months of savings. In my experience, having one year of expenses in an online savings account or CD simply allows you to sleep better. I understand that you are leaving potentially large sums of money in an account that only offers a 2.2% savings rate. 


So you could be losing some of the value of that money if inflation gains 3% per year. However, the piece of mind that comes with sitting on available cash overrides any potential fractional loss of value through inflation. Secondly, depending on your net worth (your assets minus your liabilities), holding one year of expenses in cash instruments may end up being only a fraction of your portfolio, and therefore shouldn't be a source of concern. 


4. Invest 15% of your household income into retirement

I agree that 15% is a great target for investing. Depending on your household income, I would use the IRS max contribution dollar amounts when considering your investment contribution amounts. Although, the IRS maximum allowance increases slowly every year or two, you should still check your investment contributions against the allowable amounts. You should be doing this check every year or preferably every quarter when do your tax planning. 


Currently IRS maximum allocations are $19,000 per year if you are under 50 years old, and once you turn 50 you can bump this up to $25,000 dollars per year. I believe everyone should aim for these maximum amounts to work towards building wealth. 


5. Start saving for college

I would start saving four your kid's college fund right when they are born. The key with any college fund account such as a 529 is the benefit of the time value of growth. Note that these accounts maintain a dual tax benefit- The money goes in post-tax, but the growth and distributions for college will all be tax free when used for education for qualified dependents. Any amount, no matter how small will show some benefit after 18 years of compounding. Then, once you start adding in funds, the process of adding greater annual contributions becomes easier when you see your 529 already in place an growing. You can read below about how I save for my kid's college:


https://financialsombrero.com/529-college-fund


6. Pay off your home early

This controversial topic brings to light the psychology and math behind paying off your primary residence. The answer to this question is partly a math formula that factors in your net worth, your savings, your loan's amortization, your loan's interest rate and other terms, your tax benefits created by your mortgage and your repayment schedule to name a few. Plugging in these variables into any calculator will tell you the benefits of paying your mortgage down early, paying it off completely, or leaving the payment schedule in place while you invest the equivalent of the mortgage payments into other investment vehicles.


The second part of the answer concerns your personal view on owning your house outright earlier in your life versus maintaining a balance for tax purposes. When it comes to your primary residence, paying down your home early and having it paid off completely sounds like a great strategy, as you will have more funds to invest, enjoy retirement, or in Dave's words, "be generous and giving." Some people will maintain their mortgages as long as they can, others are happier paying it off as early as they can. Again, this is more of a personal choice supported by psychology, but you can certainly build financial models and argue for one or the other. This exercise could lead to overthinking, which is sometimes a futile effort- If you can pay down your house early, then by all means move in that direction.


Rental Property:

 In Dave Ramsey's radio show he states that you should pay off your primary mortgage, then save and purchase rental properties with all cash. I wouldn't do this while you are building wealth, as there is a tremendous value to borrowing money at a low percentage rate and creating an income with rental properties. If the rental house creates a positive cash flow, the existence of a rental property loan means that you have avoided using a large amount of cash. This also means that you can buy additional rental properties with that available cash.  


Preferred BRRRR Real Estate Rental Buying Method 

One method common with real estate investors that doesn't fit into the Baby Steps method is the BRRRR process. In this process you first Buy a rental property, then Rehab or improve the property, then Rent out the property, then Refinance the property (now that the value is higher you can pull cash or create more income with a lower mortgage), and lastly Repeat the process with a second rental property, then third rental property and so forth. 


Dave Ramsey repeatedly conveys that one should never be in any type of debtor situation. However, the aggressive and risky BRRRR method has worked for many real estate investors, I recommend reading about it to make your own decision. One great resources for real estate investors is https://www.biggerpockets.com


7. Build wealth and give generously 

This is the state we all want to be in. All assets paid off, with income from those assets providing enough to cover all expenses, plus extra funds for giving, setting up your heirs, or helping organizations and people important to you. 


Final Thoughts:

Going back to the negative feedback I heard on a podcast regarding Dave Ramsey. Anyone can provide an opinion on personal finance gurus like Dave Ramsey. My view is that there are very few simple step models that guide people along the path of financial insolvency to financial freedom. 

These baby steps are simple to understand, and they have made the process of eliminating debt and building wealth less complicated than most models and explanations I have seen. I think the Dave Ramsey baby steps should be read, understood and applied to individual situations where ever possible. I've read that these steps have been created and perfected over many years. I enjoy being the recipient to all of that knowledge and experience on personal finance. 


Hardest Working Guy in Radio/YouTube:

Additionally, Dave Ramsey's YouTube channel is very entertaining. Dave is a master at giving hard to hear advice based on his multi-decade career in the personal financial community. He and his team run a radio/media company that produces daily uploads of financial planning caller conversations. 


Dave's Earlier Failures:

Dave Ramsey is known for telling his callers about his own financial failures created by his own stupidity. One of his famous quotes is "I got a PhD in D U M B." When callers tell Dave about their bad decisions regarding consumer debt, he often tells them, "Hey, I've done much dumber things." He also offers positive advice and encouragement by spelling out the steps listeners should follow, and he reminds people that bad financial decisions can be resolved, but it will take pain, hard work and a total re-thinking of one's view on money.


Lastly, given the rapid increase in consumer debt, student loan debt and other non-mortgage debt in the U.S., I believe anyone in a dire financial situation should seek out simple advice with a proven track record. Based on the reading I've done, Dave Ramsey's seven baby steps are a great and necessary place to start.


Note that I am not a financial or legal professional, nor am I licensed to sell securities, or any other financial instruments. Given this statement, I strongly recommend that you consider this blog as entertainment value. Although, I sincerely hope that I can motivate you to learn to build your own financial knowledge and wealth.



Financial Sombrero



Building Wealth Knowledge Every Day