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Whether or not you agree with his stances, Dave Ramsey is very well known in the personal finance space. He has very outspoken opinions, some of which are controversial because he takes an extremely risk-adverse position on debt. I do consider myself relatively risk-averse, but I am okay with taking on small amounts of mitigated risk in order to grow my wealth more quickly.
Dave Ramsey is most famous for his baby steps. While I agree with many of his opinions (although not his methods of shaming others), I deliberately chose not to follow some of his recommendations. Even so, I’ve been able to grow my net worth to $85k, and I’m on track to reach $100k this year (at age 25).
Ways I Broke Dave Ramsey Rules
1. I financed a car
I generally agree that financing a car is a bad idea, because your car loses a percentage of value AND you’re paying interest on it every year. However, I decided that the best path for my situation was to take out a car loan.
While I could have purchased a cheaper car for cash, I decided that I wanted to invest a little more upfront in a car that will last me 10-20 years. If I had purchased an older, cheaper car (for less than $5k), I likely would have had to invest a larger amount in maintenance and repairs, and the car would not last me as long.
Instead, I purchased a small car that was a year old. It was still considerably cheaper than buying new, and it had less than 10k miles on it. I know that I will be able to drive it for 10-20 years.
It’s a reliable vehicle with many amenities that I enjoy, and my loan was still less than $15k.
I could still even have paid for it in cash at the time, but I decided not to. Read my next point to find out why.
2. I bought a house with other existing debt
I still choose not to pay off my car, even though I have the cash to do so. Instead, I’ve decided my cash has a higher and better use of purchasing houses. At a car loan interest rate of 5%, I’ll still pay less than $2k in interest over the 5-year life of the loan. If I chose to pay off my car, I would no longer have $15k in cash. It would take me 4 years of saving my $310 car payment to make that cash back. That means I would not have been able to purchase a house for an additional FOUR years. I would lose 4 years of building my real estate portfolio, and 4 years of debt paydown and equity growth on my houses. Even if I only bought one house in those 4 years, the debt paydown alone would be $15k. I will likely buy more than one in those 4 years, and see appreciation on each. All that lost in the name of saving $2k over 5 years.
Sorry Dave, your math doesn’t work here.
Yes, I know that decision takes on more risk than Dave’s plan, but I’m comfortable with that level of risk given my job security, emergency fund, and the amount of money I’m currently saving each month.
3. I use credit cards
According to Dave Ramsey, I should cut up my credit cards and throw them in the trash. His reasoning is that people are inclined to spend more money using credit cards instead of cash. And he thinks people aren’t going to pay it off in full each month.
I agree with Dave IF those things are true for you. If you know credit cards cause you to spend more than you make, and if you know you won’t pay it off in full each month, you absolutely should not use credit cards. No benefit that comes from using credit cards is worth going into credit card debt.
However, I have been using credit cards for almost 10 years now, and I’ve never paid a dime in credit card interest. And I don’t spend more than my budget because of the credit cards. I simply choose to pay for my budget items with a credit card, and I receive rewards for doing so.
While the rewards are a nice perk, the major reason I use credit cards is for safety. Does Dave really recommend carrying a bunch of cash around, when it could easily be lost or stolen? If my credit card is lost or stolen, I can simply notify my credit card company and I will lose nothing.
4. I’m not buying life insurance
Dave Ramsey also recommends buying term life insurance for the amount of 10 times your annual income. The purpose is to give your family support in the case of your death.
I don’t have a family to support, so there’s definitely no point for me to get life insurance now. And I imagine that my future spouse will be capable of working in the event of my death. And even if my future spouse and I died at the same time with young children, I would expect that my investments are large enough to sustain my children’s lives.
So in my case, I don’t ever plan to purchase life insurance. I think the only time it makes sense is if your children depend on your income, and you don’t have enough invested to support them in the case of your death (or if you carry debt balances that they would be responsible for).
That said, life insurance should only be about $20 per month, so it makes sense to get it if you think you may need it.
5. I plan to buy another house instead of maxing out my 401(k)
I’m pretty sure Dave would be appalled at this one. I could afford to max out my 401(k), but then I would have nothing left over at the end of each month to save. Because my long-term goals include investing in real estate, I choose to only contribute the 8% required to get my company’s full 401(k) match.
The key is that I don’t inflate my lifestyle with that extra money left in my paycheck. I move it to a savings account, in order to save up for real estate down payments. I believe I will get higher returns investing in real estate than the stock market, so for now I choose to put my money in real estate. Eventually, I will start making an income from my real estate investments, and I could increase my 401(k) at that point, while still having money to save for future real estate investments.
I do think it would be a mistake to ever miss out on the free money provided by your company’s 401(k) match. And generally, I recommend most people contribute as much as they can to their 401(k), given the tax advantages. However, like in my case, it’s possible you could have better uses for your money, such as paying off high-interest debt or investing in real estate.
Dave would be appalled here because I’m choosing to take on additional debt INSTEAD of investing more in my 401(k). I don’t see it this way, because other people will be paying that debt in the form of rent. Yes, risk is higher, but I plan to mitigate it in the form of cash reserves for each house. At the end of the day, I think everyone should do what allows them to sleep easily at night—I just happen to be less risk-averse than Dave.
6. I don’t plan to pay off my houses quickly
Finally, Dave Ramsey only supports buying rental properties in cash. His reasoning is that any debt is risky. While I agree that having mortgages increases risk, there’s really only a bad outcome if one situation occurs: if the market declines such that you owe more than you can sell your house for (though the risk of this decreases as you have larger amounts of equity in your house), AND you cannot collect rental income for some reason. The chances of both of those occurring simultaneously is relatively low, but to mitigate, I plan to keep 6 months to a year’s worth of reserves for each house.
I plan to have 30-year mortgages on each house, and I don’t plan to pay them off quicker than that. Instead, I can keep cash reserves and enjoy the tax benefits that come from having mortgages.
Dave Ramsey’s recommendation to buy houses only in cash, would be an EXTREMELY slow way to invest in real estate, and there are other effective ways to mitigate the risk instead.
Dave Ramsey Rules I Do Follow
That said, while I don’t like Dave Ramsey’s methods of shaming others for their financial choices, he does generally have sound financial principles. Here are some of his recommendations I DO follow:
1. Build an emergency fund
Everyone should always have an emergency fund. Opinions differ about how much to have in your emergency fund, and people may have different levels of risk tolerance or job stability. But everyone should have at least 3 months of expenses in an emergency fund. Six months is probably a good amount for most people, and that’s what I choose to carry.
An emergency fund will cover your expenses in the event you lose your job, or it will allow you to pay for larger unexpected expenses without going into debt.
2. Contribute at least 15% to retirement
I do agree that everyone should contribute at least 15% to retirement (I aim for much higher than this). What I don’t necessarily agree with is that you need to have 100% of your debt paid off before doing this, as discussed above.
That said, from the day you begin saving 15% of your retirement, you can generally retire in 43 years (assuming average stock market returns and a safe withdrawal rate of 4%). So for the typical person who starts saving 15% at age 22, this would allow them to retire at 65.
The more you increase your savings rate, the less time it will take before you reach financial independence. If you save 30% of your income, you could retire in 28 years from the day you start saving.
3. Create a zero-based budget
A zero-based budget is one in which your income minus expenses is zero each month. This also means you plan and budget your savings and investments.
This is the budgeting method I prefer because it ensures you are saving your desired amount each month, and it allows for flexibility in your budget. No month is the same in terms of variable expenses, and you’ll always have unexpected expenses. If I spend $50 more in groceries one month, I can spend $50 less in clothes that month and ensure I still stick to my budget and savings goals.
My course teaches this budgeting method, and the software I use for this is You Need A Budget (YNAB). I highly recommend using the YNAB software, because it automatically imports your income and expenses from checking accounts & credit cards, and it allows you to adjust your budget each month depending on that month’s expenses and goals. It’s focused on budgeting dollars you currently have, instead of tracking what you’ve already spent. It also allows multiple people to access the account in real-time, so spouses can work together on the budget and share finances.
4. I paid off my student loans before buying a house
When I graduated college, I did have a goal to pay off my $5000 in student loans before buying a house. I knew I was going to finance a car, so I did not want to have both student loans and a car loan when buying a house. Dave would be proud to see that I paid off the student loan debt before it started collecting interest.
So those are the Dave Ramsey rules I personally do and don’t follow! You won’t go wrong following all of Dave Ramsey’s advice, but I don’t follow everything because I’m willing to take on some risk for faster net worth growth. Do you agree with my choices? Are there any other Dave Ramsey rules you choose to follow or ignore? Share in the comments below!