5 Dangerous Dave Ramsey Tips To Reconsider

Welcome to another edition of We're Talking Money. Today we're going to talk about someone that you've probably heard of. Maybe you subscribed to his work.

Live from the headquarters of Ramsey Solutions, it's the Ramsey Show.

Dave Ramsey's advice, it's been around a long time, and some of it may be really good. In fact, I think it has its place, but that doesn't mean it's right for everyone. I actually think it could be detrimental for some. You have to understand that his advice shouldn't be taken as a blanket for all things financial. It's time that we dig a little bit, look under the surface, and recognize that no one has a monopoly on great ideas.

One of Dave Ramsey's most popular systems is what he calls the cash envelope system, and basically what he's saying is for each part of your budget, you have an envelope and you put cash in it to cover that part of the budget.

So the way the envelope system works is you have an envelope that is marked for a category that has money in it that is in that category from your budget. You put $400 or whatever the number is in cash in an envelope, and when you go to the grocery store, you use the cash out of the envelope to do the purchase, not your debit card.

This is probably how our grandmothers or maybe even our great grandmothers did it, but it is one of the most simple things that he recommends. And yes, it can work, but what are the problems with it? You're dealing with cash, and in today's world I don't know that that's the smartest play. One, it makes you a little bit more vulnerable to theft. Two, you could lose the money. And three, if it burns, you probably don't have any insurance to replace it. Go for something a little more modern, like a bank account or financial technology that can help you allocate using budget software, and you can apply cash to that, but inside of a safe place.

Next, I want to talk about Dave Ramsey's idea of debt-free living.

Stop your 401k, shut down your stupid investment plan with your stock, you're going to lose your butt on that, and pay off your car today. Stop doing a bunch of crap and pay off the debt.

Don't get me wrong, I agree with Dave Ramsey that debt-free living, that's a great goal, but it's not always practical. Most people will have to carry debt for a good portion of their life. When you start prioritizing debt over investing, you could be missing out on great opportunities, including the most powerful thing out there, and that's compounding interest. And who knows, the debt that you're paying off so quickly, it might be debt that isn't harming you because the interest rate is so low.

You need to know what debt to pay off, when to pay it off, and you need to know when to invest ahead of paying down debt. Those are things that Ramsey doesn't talk about. Those are things you should be talking about.

Another one of Dave Ramsey's principles, it's credit cards, or I should say the lack of credit cards.

It's the biggest scam in freaking history. It's the credit, it's the cigarette of the financial world. It used to be cool, and people are going to acknowledge that it kills you, they're going to quit doing it.

Credit cards are not the bad thing. It's how you use them that can make them seem bad. You might be earning some points for some great trips, maybe an airline ticket. Ramsey says that's no good either. Those things can actually work to your benefit, because guess what, you can get the points even though you pay off the card at the end of each month before you accrue interest.

Ramsey says also that you don't need to worry about a FICO score, and that's because he says we're not going to live with any debt throughout our life. We're probably going to have some debt, and if we have debt, we want a good FICO score, and these two go hand in hand. The better your FICO score, the lower your interest rate will be whenever you take out a loan. That's important because if you have high interest rates, guess what, you're stealing from yourself. You're making yourself pay a lot more than you needed to because Ramsey told you don't worry about a credit score. Do worry about your credit score. It's important, and it'll help you save money in the long run.

As we come towards the end of the show, we're going to talk about Dave's theory on investing. Now, he believes in mutual funds and index investing.

Is that I personally buy, and that's also what I recommend: good growth stock mutual funds. I don't invest in single stocks. The number of single stocks that I own is zero.

I think that that is reasonable advice to some extent, but as your wealth grows, let's talk about why that may not make sense. If you want to limit certain things in your portfolio, maybe you have socially responsible stocks that you'd prefer to hold, and maybe you avoid some that you consider not to be socially responsible. With a mutual fund or an ETF, you get whatever the mutual fund manager is putting in their mutual fund.

You also don't get to decide how to use loss harvesting. The mutual fund manager decides that for you, or they may not decide it at all. And if you want to use things like covered calls, for example, to drive in more income, think again. You're going to need individual securities for that. And frankly, individual securities come at a lower cost, and they give you greater flexibility with all of the things that I've mentioned.

All right, let's wrap up the show with Dave Ramsey's recommendation of his approved advisors. What is that really mean?

So your financial advisor is a failure and didn't need to be fired. Yeah, I want you to go to RamseySolutions.com and click on SmartVestor. That's a group of financial advisers that don't work for me but that have agreed to do things the way I teach.

When it comes to insurance and investment products, Dave Ramsey has a stable of what he calls approved providers. Dave Ramsey says that they vet these people. Well, what does that mean? If he's vetting them, it means he's vetting them based on his beliefs, not on independent thinking. And we all agree, no one has a monopoly on great ideas. When we talk about vetting, it really should be done independent, not based on what Dave Ramsey says. His way might work for some, but if it doesn't, you don't want to be the one to figure that out when it's too late.

Go out and read. Do some research using the internet. There's so much information available. Go get a consultation with someone who you know, like and trust. Ask a friend who they use. See what other opinions are out there, and use your brain. You decide which one makes the most sense for you, and I bet you'll end up making better decisions.

So as we close, let's remember a couple of things. When it comes to financial advice, one size rarely fits all. Take the time to go get the knowledge, the information that you need, so you can make decisions that are best for your circumstances.

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