Dave Ramsey has become famous for giving financial advice to those who seek him out and ask for it. And he has become wealthy doing so, which I applaud. Making money legitimately in America is always admirable, not to mention, often copied. Others have followed Ramsey's path to wealth by merely telling others how to get there. It seems knowledge is power in the financial world.
I agree mostly with Ramsey's advice, but I differ on a few things he pushes: Number one, get rid of all your credit cards and only use a debit card; and number two, pay off your smallest debts first and then move on to the larger debts no matter what the interest rates are. These fly in the face of logic, but Ramsey excuses that by saying the emotional high you get off paying off your first debt is what keeps you motivated to keep going. He may be right with certain groups of people, but he is also wrong with another group that rises above emotion. No matter how it is presented to him, he'll tell you about studies that back him up. Well, one size has never fit all and it never will; there are simply too many variables to conclude one system will work for everybody. Even Henry Ford changed his mind with his famous statement You can have any color you like as long as it's black.
Let's talk about credit cards first and why, if you are going to use plastic to buy anything you should choose a credit card over a debit card. First and foremost, a credit card has a layer of buyer security built into it a debit card doesn't. If you buy a product and it has problems, say, it is broken, misrepresented or even never shows up at your door, you can call your credit card company and get your money back. Debit cards lack this ability - the moment you use it, the money is subtracted from your account and there is no way to recover it without lawyers and considerable expense.
Next, most credit cards have rewards programs. The rewards programs vary, some are airline miles and if you fly often, these are equivalent to cash in the bank. Some cards give a percent or two back in cash; some cards build a fund to use if you buy a new car and so on. Are the reward programs worth it? Ab-so-lute-ly. The last 4 GM vehicles I bought have all had substantial money applied to them after dealing for the best price. The last statement I read was nice enough to tell me I had redeemed over $12,000 in GM rewards to date. I was going to buy the vehicles regardless and it was nice to know my bank accounts are $12k better off than GM's bank accounts would have been had I not used my credit card for everyday purchases that I would have made anyway. Dave, Dave, Dave ... you can't have your daughter Rachel putting out Youtube videos on how to save 26 cents on a can of soup at Aldi and then tell us to walk by an easy $25 or so every month in cash-back rewards. If we're going to build wealth, every avenue is fair game and getting cash back on stuff you have to buy regularly simply makes sense. Obvious sense.
Of course, using credit cards for rewards only works if you pay the card off in full every month like clockwork. This requires discipline and if you have it, then the credit card can't be beat - and to top it off, it's convenient. Gas pumps, grocery checkouts and such are far quicker with cards than they are with cash.
When these statements of logic are put to Dave Ramsey, he counters by saying studies show people that use credit cards tend to buy more than they planned. I say ... so what? Denying yourself some of the small pleasures and superfluities of life when you have all the means necessary to pay for them is stupid. Self-denial is great when you're tight on your budget, but Dave - It's a YOLO planet, and if I want the expensive deli meat or a bag of Oreos, I don't care if it was an impulse buy. A few bucks spent in the grand scheme of things matters not.
Oh yeah, try renting a car or getting a hotel room without a credit card. Seriously, the credit card is the standard item needed to do so, Dave... Not to mention, I think it's awfully nice of a bank in Delaware to loan me money interest-free for 40 days. I know they'd prefer it if I only made minimum payments, but somehow I manage to pay them off in full every month and I do enjoy the cash-back rewards.
And lastly, although Dave Ramsey says your credit score doesn't matter ... it does. And you don't build a good credit score with a debit card; you build it with a credit card. Dave goes as far as to say you don't need a credit score, but for the vast majority of Americans ...he's wrong. You -do- need it. His claims that "manual underwriting" is somehow better than the report the bank pulled when you applied for a mortgage are pretty hinky.
Next, let's talk about paying off debts in the order he prefers: Smallest to largest, no matter what the interest rate is on them. If you are paying off your credit card every month, you already have the discipline to look at your other debts and figure out which ones have high interest - and should be paid off sooner, not later. Allegedly, it was Einstein that said the most powerful force in the universe was compound interest .... and that should be your rule and guide for which debts to get rid of first. Dave claims to be good at math, but on this subject, he shelves the logic of math for the endorphins of emotion, and it's a bad trade.
Finally, Dave thinks that the stock market is the place to beat inflation. Well, he's right and he's wrong, depending on how old you are when the big monkeys shake the little monkeys out of the branches on a schedule nobody can predict. If your timing is bad, you're screwed - figure on being a Wal-Mart greeter in your retirement years because you were born under an unlucky stock-market era.. And his claims that the market returns an average of 12% are awfully rosy numbers; in fact, since it's inception the market has returned an average of 7.75% ... which is good, again, if your timing is good. But if you're at the end of your earning years and the stock market tanks, count on un-retiring because somebody's advice was wrong.
Now let me close with some obvious truths: If you are not disciplined with money, if you regularly spend more than you make, follow Ramsey's advice: Cut up your credit cards, work 2 or 3 jobs, pay off your credit card debt and you will slowly but surely climb out of the hole. Sadly, this advice applies to the majority of people with credit cards. For those buried in credit card debt, I sincerely hope you get out of it and ... I also recognize that if the banks didn't make money on credit cards that they would cease to exist. That said, the claims that those that pay off their credit cards do so on the backs of those that don't misses one big point, and that is human nature: There will always be a group of people that won't or can't pay off their debts timely, and this is the basis of the banking system in America.
But if you are disciplined with money, ignore most of Ramsey's advice with a smile on your face. If you don't need Dave Ramsey's advice, stick to the plan that has obviously worked for you for a long time - and that is maximizing your purchasing power every way you can, with credit card rewards ... and even that unplanned purchase that somehow didn't drive you into the poorhouse.
Want to be wealthy? Here's Don's advice: Spend less than you make and build savings with the difference. It adds up faster than you realize.
