Dave Ramsey Baby Steps ChooseFI

005 | Why Everyone Needs Dave Ramsey and Why You Should Ignore Him

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In Today’s Podcast we cover:

  • Dave Ramsey and Jonathan’s history following him
  • Dave’s unyielding stance on debt: don’t do it
  • Review and evaluate Dave’s teaching philosophies
  • Baby Step 1: Get an emergency fund of $1,000
  • Baby Step 2: Pay off all your debt except for your mortgage
  • Explanation of the Debt Snowball
  • Our hybrid approach to the Debt Snowball vs. Debt Avalanche
  • Advice isn’t “one size fits all.”  You need to figure out what works for you!
  • The 4% rule explained and the impact on financial independence
  • Dave Ramsey says to not take advantage of 401k match if you’re paying off debt
  • The math of personal finance vs. the psychology of personal finance
  • Baby Step 3: Get 3-6 months of expenses in savings
  • Our personal emergency fund strategies
  • Baby Step 4: Invest 15% of household income into Roth IRAs and pre-tax retirement funds
  • Baby Step 5: College funding for children
  • Baby Step 6: Pay off your home mortgage early
  • Baby Step 7: Build wealth and give
  • Please leave us a written review on Itunes to help the podcast grow

Corrections from the show

Roth’s do not require any seasoning period. You can withdraw your initial contributions tax free at any time for any reason. It does not have to season for five years. Practically this makes the Roth even more powerful as a possible savings vehicle during your teens and college years when your tax rate is very low

Links from the show:

Books Mentioned in the Show:

25 thoughts on “005 | Why Everyone Needs Dave Ramsey and Why You Should Ignore Him

  1. I have a lot of thoughts from this episode. Providing feedback is what you guys are asking so here is mine. The main battle is I am hearing is between our psychology and the hard math. The math with the debt repayment topic is clear and it is the psychology that is actually holding many people back rather than helping them. Sometimes our psychology can hold us back and other times it is helpful such as by slowing us down and making us pause before making a sudden financial decision that we grow to regret. Ramsey must have overlooked the percentage gain from taking the match on a company retirement plan, and he must have only been looking at the potential stock market yearly percentage gain versus the interest percentage. I can go on and on about my various thoughts but I can always post on other episodes.
    Final thought: I continually hear all estimates of placing money in the stock market based on only positive percentages, say 6-10%. It only takes a few bad years to stifle compound interest growth which can set people back some time. I’ve seen data that the recession of 2008 was fully recovered in only 3 years and 2 weeks which really isn’t too bad; however, one of those kinds of downturns per decade could easily add up to an additional 10 years of work to reach a preset retirement goal.

    Thanks.

  2. I loved your description of Dave Ramsey as “personal finance kindergarten”. It perfectly describes how my own perspective on him and personal finance has evolved since starting to work on this area of my life last June. I’ve had a credit card for ten years now and I’ve never carried a balance or paid any interest. When he advocates using a ten year track record to evaluate mutual funds but all credit cards are just too risky well… I’m sensing some bias there.

    He’s definitely one-size-fits-all and I’ve decided I’m a special snowflake so I’ll just keep picking and choosing what works for me.

    • hahah, that’s great, Yeah I love Dave and think he does wonderful job helping millions of people get a grip on the basics of personal finance. But PF can be so much more than getting to debt free. And Dave’s advice definitely feels one size fits all

      Anyways, welcome and I hope you continue to find the content valuable

  3. Jonathan, you made a mistake with respect to Roth IRAs. You can withdraw your initial contributions tax free at any time for any reason. It does not have to season for five years.

    The following blog post walks through the relevant IRS publications which shows that you can do this without penalty, even though it is actually an unqualified distribution (and that’s what is confusing).
    http://www.mymoneyblog.com/can-i-really-withdraw-my-roth-ira-contributions-at-any-time-without-tax-or-penalty.html

    • SeonWoo, thanks for stopping by. Great point. It has been brought to my attention that you are absolutely right. and I’m glad you brought it up. It actually makes the Roth even more attractive to me as an emergency fund especially if it gets built while you are in your teenage years – I plan on talking about this further with Brad on a Friday round up. Let me know if you catch any other inaccuracies

  4. My wife and I are Dave Ramsey graduates. We were able to take his baby steps and walk ourselves out of debt. After being so focused on getting out of debt for two year I felt there was a little emptiness after it was done. I was searching for the next thing and that is when I found the world of FI. The majority of what Dave Ramsey says I agree with, but I have lightened my stance on no credit cards. I did hear you say that Dave suggests you can get an 18% return in the market, but I know he has never said that. He did say that you can get 18% if you stop using credit cards that have a balance, and the APR is 18%. Now I don’t exactly agree with Dave’s assumption on 12%, but J.L. Collins does say in his book The Simple Path to Wealth that from 1975 to 2015 the market average return was 11.9%. J.L. Collins does say that he is not suggesting that you can get that, but he also uses 11.9% in his assumptions. I think Dave knows that that is a big number to hit, but he uses that number as a learning tool, and it has some facts to support the number.

    When we were getting out of debt we did stop all retirement contributions, but I don’t have a 401k, so I didn’t have to worry about getting that free money. After listening to your podcast I tried to breakdown the numbers for myself if I did have a 401k, and it would be a tough decision if I would have contributed to it. I think knowing what I know now I would have stop all contributions. It just feels great to not be a slave to my debt, and after two years of fighting no amount of money would be worth staying a slave for anymore amount of time.

    I think that leads into paying off my home. I know a lot of people go with the math on this one, but I’ll ask you what Dave asks his callers,”If you had a paid for home would you go out and borrow money at three percent to invest?”, because it is the same thing as having a mortgage and not paying it off, so you can invest. For me the answer is no, so I would pay off my house.

    You guys are doing a great job. I love being focused on FI, and I love being part of the conversation.

    • Great Comments, love your feedback and I totally agree with your decision tree- Im going to ask/challenge brad with the comment about the paid off home I know he is struggling with that decision right now. Welcome to the conversation

    • I know this is an old comment, but I would absolutely borrow money at 3% to invest if my mortgage was paid off. I’d use it to invest in more real estate.

  5. Great work guys, thanks. As I listened I nodded my head most of the time. Most :). There are two points I think will be helpful:
    -529 plans are like sneaky Roths – they’re basically taxed the same when used for college. Your concern of your kid not needing the money is valid but here’s the upside to that: A)It can be transferred to another family member, and b)If you pull the money out for non-qualifying purposes only the growth is penalized (while enjoying tax deferral).

    -18% projected returns is insane, and I don’t remember Dave (or any sane person) saying that. 12%, however, isn’t crazy. I always use 8% as a long-term assumption, but there ARE funds that have returned 12%+ over long periods of time. Of course, they’re all actively managed and the FI community thinks all active funds are the devil, but it’s true: There are dozens of actively managed funds that have consistently beaten the market after ALL expenses, often with less volatility/risk. The 83 year return for the very conservative Investment Company of America (American Funds, AIVSX) is about 12%. 83 years! The market did about 10.8% during that time. 1.2% more (with less volatility/risk) over 83 years is HUGE! Funds like the Growth Fund of America (AGTHX) perform even better, but with “only” similar volatility/risk as the index. (After looking very long and very hard, I find few mutual fund families quite like American Funds.)

    I’m happy to talk more publicly here or privately about this. If there’s any way I can help out the FI community, I’m all in. I’m 40 years old and semi-retired, and I always find the topic of financial empowerment quite exciting!

    -Ron

    • Great Comments Ron, Definitely value added. I have a copy of the Financial peace university videos and I’m going to dig through it and find the clip 🙂 and I laughed out loud when I read your comment about Actively managed being the devil. because you are so right … I probably could be lumped in with them opinion wise on that- I’m super skeptical of fees. Welcome to our community and we look forward to more awesome feedback as we go on this FI Journey

  6. Love this podcast! I was afraid you might be Dave Ramsey disciples. But we think very much alike! He’s done some really great work but a lot of the simple steps are just too trivial for us in the FI crowd or just plain wrong. Forego the 401k matching to pay down debt? Maybe for a payday loan with 200%+ interest, but there isn’t a credit card in the world that has an APR high enough to forego my 401k match and the instantaneous 100% return. This anti-debt dogma is quite troubling.
    I would go so far and still max out the 401k (post-match) and not accelerate paying down a hypothetical 6% loan (to address one the question from your podcast). True, I would prefer a 6% safe return from paying down debt over an uncertain 7-8% equity return. But in the 401k you get the tax arbitrage: lower marginal rate in retirement and potentially zero tax rate due to Roth conversions. That alone is worth maxing out the 401k.
    Also: I’m with Jonathan on the emergency fund issue. I don’t have one. My entire portfolio is my emergency fund. Is there a risk that I might have to liquidate equity funds during a recession? Yes, but the opportunity cost from the emergency fund is even worse.
    For most financially uneducated people Ramsey’s advice is still better than the status quo, but the FI crowd is better served with some more specialized, personalized and, above all, optimized advice. Just like what you guys do here on the podcast! Looking forward to working with you guys!!!
    Big ERN

    • Great Feedback ERN, glad to have you on the team. I am super impressed by your take on the Hypothetical 6% scenario and I totally think it makes sense. I’m not sure I would do anything differently though 🙂 crazy how powerful the psychology is. To be completely done with student loans 1 to 2 years sooner, it feels like you have cut the cord from an anchor and life and cash flow gets so much easier. But If you are a hardcore math guy – I see your point and long term, your play is definitely better 🙂

  7. I have to say ya’ll were incredibly diplomatic on the topic and my new favorite early retirement blog Big ERN sent me your way to listen. I’ve got a lot of issues with Dave Ramsey because it makes things too simple and frankly assumes that we are dumb beasts who can’t control ourselves if we allow ourselves to access debt. I’m an ERN disciple when it comes to debt and emergency funds. I do believe, however, that debt is an anchor and can affect your thinking and perhaps put you in a position where you are not so clearheaded with your decision making but I think it’s good to sit down and do the math because sometimes that will make the decision more optimized. As a high earning pharmacist, you are likely paying .25-.30 of every dollar to federal and state taxes (or more) and by maxing out your 401K, you automatically save $5,400 in tax payments (assuming the .30) and so the $18,000 contribution only feels like $12,600 in your pocketbook. When you save on taxes, especially when you are a higher earner, there is a multiplier type effect, that will help you get to FI sooner. For me, maxing out my 401K the past 16-17 years, has been a key piece to the puzzle (I’m officially FI already and about to be RE on 6/30!). All that being said, it is nice to get rid of debt. I was thinking though, depending on the type of student loan you had, was the interest on said loans tax deductible? Because if that was the case, your “real” interest rate is even lower than 6%. I also don’t have issues with reasonable amounts of student loans – I got access to a high caliber liberal arts education and graduated with a $12,000 liability – and I’ve never regretted it even though I had zero tangible vocational skills. Now I’m curious to listen to some of these other podcasts. Keep spreading your message!

    • I love your feedback. I will say though, even with the math, I have 2 payments left on my student loans 🙂 I will be done by July 4th almost to the day and it feels amazing. And while in theory, I totally agree with everything your saying, (and as you will see I have a healthy respect for the power of avoiding those higher marginal tax brackets) my cashflow is so much better with the path I chose and my risk tolerance can be higher because my recurring expenses are so much less. It’s a great conversation that I could have every day because I get so much value from the discussion. Welcome WishIcouldsurf, we are glad you are here

  8. Totally. I hear you and that’s why personal finance is personal. For years, I’ve wrestled with paying my mortgage off early vs. just making the payment and I have paid about $120,000 extra to date (I live in super expensive socal) because I am so debt averse. Part of me is kicking myself for doing so because I would have more cushion in my early retirement stash especially with the stock market is incredibly high right now, but I don’t regret the decision completely and in less than 10 years my mortgage will be completely gone and I’ll have that extra cash flow available. I kind of split the difference since I couldn’t make up my mind. I shared my story recently on another blog in case you want to check it out (I don’t have anything of my own – I’ll just try to contribute to the community by being a helpful commenter): https://chiefmomofficer.org/2017/06/07/six-figure-breadwinning-millionaire-moms-wish-i-could-surf/ … hopefully you will start to max out that 401K as soon as you pay those loans off. 🙂

  9. Hey guys, really like the podcasts but was really disappointed with this one. I will admit I am a Dave Ramsey guy, but I have no issues with folks disagreeing with him. He isn’t perfect, nor what he advocates. It works for the masses and the principles are great for struggling people to attain.

    However, I was disappointed in the “preparation” done for this. If you are going to highlight someone, you probably want to dig a bit more into them and what they teach. A few examples:
    1) 12-18% return on investment. Dave ROUTINELY quotes 12% but I have never heard him say 12-18%, ever.
    2) Baby Steps 4-6 are done simultaneously, not one at a time.
    3) Baby Step 7. You guys whiffed on this one pretty bad. I believe the phrase was “anti-climatic”. This is where Dave says to start investing in Real Estate and be an EXTREMELY generous giver. He expects folks to be giving during the whole process, but this is where you take it to another level.

    While minor points (and there were more) you put a bit of spin on an individual when you don’t get into their “Why”. I was disappointed that there wasn’t more time/detail put into to researching the subject of this podcast.

    I’m not trying to bag on you guys and I have thoroughly enjoyed your other podcasts and have learned so much. But this was a bit of a disappointment for me. Take it for what its worth, I’m not a pro at anything just another average Joe trying to figure things out. Keep up the hard work, I appreciate what you are doing!

  10. Hi Guys,

    I love your show and what you are doing. I have done a number of your suggestions over the years and thank god I did. I am a self-employed professional in a cyclical industry. Self employed people need your suggestions. I am going through a downturn now. I can’t even imagine my circumstances if I had not done the things you suggest, especially living beneath my means and saving like crazy. I would love to hear more about starting small businesses. Thanks for everything.

  11. Hey guys: Enjoyed the podcast, and just discovered you guys. So I’m about a 90% DR follower, but do really hate it when people just blindly follow. I need evidence.

    I think you are missing a key point, in regards to credit cards and DR’s tips on saving $. Research shows (https://www.nerdwallet.com/blog/credit-cards/credit-cards-make-you-spend-more/) that you spend more with a credit card than paying with cash. DR’s biggest savings tip, in my humble opinion, is to go to the cash envelopes. And my own personal experience is that this is 100% correct. I’ve dropped all credit cards because I found there were items that I would purchase using plastic, but something stopped me when I considered the same purchase but using cash. Also, second the comment on 18% returns. I’m an avid DR podcast listener, I teach FPU, and have NEVER heard this. Maybe these were just oversights, but I think unless you address these points it limits your credibility on this issue.

    DR contends that “your income is your biggest wealth building tool.” I agree with him on this point. Thanks for bringing this topic to the podcast and encouraging the FI lifestyle.

    • Hey SB, glad that your here . I think we were generous and fair with Dave, but to your point about the 18% claim – I went and dug up his claim from FPU. keep in mind this was published/sold distributed. So I definitely think it was fair game to mention. Here is the link if you want to check it out. Dave on making 18% To your point about spending more on a credit card. The FI community, we are a different cohort and it’s an important distinction. We are past the point of paycheck to paycheck or we are striving to be. We have identified savings rate as our biggest priority and once your goal becomes hitting a 50% savings rate and intentional living vs just buying stuff the stats about credit cards become somewhat irrelevant. Ultimately know thyself- so if credit cards are a trigger for you, then sure don’t use them – but once you start to view them as a tool ( neither inherently good or evil) but a tool to be leveraged to make your life less expensive then the stats become meaningless especially in the context of someone that has maxed out both 401K’s, has a 6 month to 2 year E-fund has a 30-50% savings rate and never carries a balance. This is why in the episode we said that Dave could be simultaneously 100% right and completely wrong at the same time depending on the audience he is speaking to. Personal Finance can be viewed as a game and it’s difficult to win, unless you know the rules

  12. A friend just recently introduced me to your podcast and I am really enjoying it. I did have one question though, in the this episode you talked about not paying off your mortgage early because the current rates are so low. But earlier in the podcast you took a stance of decreaseing your expenses as low as possible because that is basically tax free money. Why wouldn’t you apply that same concept to your mortgage?

    • hi Spencer, Thanks for stopping by 🙂 it’s a great question and one that we have spent a lot of time exploring. If you want a detailed explanation check out episode 35 and 35R which touches on sequence of return risk. But trust me when I say I totally get the appeal of no mortgage

  13. Great podcast guys. I just wanted to point out one other nice thing about 529’s. You had concerns about if your kids had earned a scholarship. The good news is if your kid gets a scholarship you are allowed to take the same amount of money out of the 529 penalty free. Only the gains would be taxed as if it was from an after tax account.

  14. Hi guys! I found you from another forum I frequent. I have done the Dave Ramsey thing and was even debt free for over two years. Now, I use his baby steps as general guidelines but give myself flexibility to do what works for me. The scenario you gave about the high income earner choosing not to pay off the student loan is my exact situation. I earn around $200K/year and max out my 401K (first for the tax break, and second because my employer matches .50 cents to the dollar up to the federal limit). I also save about 12% of my post-tax income in cash and through an ESPP. I currently have a $31K balance on my student loan at a 3.49% variable interest. My monthly payment is under $400/month. At this point I could pay it off with cash on hand, but I’ve chosen not to do so for two reasons. First one is that I am transitioning out of my company and will likely be living on savings for a while so cash in hand is king. Second reason is because MATH. While I hate the large total number the monthly payment doesn’t have a big impact on cashflow so for all intents and purposes it’s cheaper to keep her. So that’s just my perspective on the WWYD question.

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