Dave Ramsey has become a household name for many of us, and like any sensational movement, his methods can be polarizing, controversial, and toxic (much like the man himself). He was someone I knew of, but to be honest, I hadn’t paid much attention to him until this past year when a tweet of his went viral in my social media circles. The tweet reads, “If you’re working on paying off debt, the only time you should see the inside of a restaurant is if you’re working there.”
So that means that for any of you with tens of thousands in student loan debt, you’re basically effed if you want to do anything outside of work, picking up a second (or third job) or side hustle, cutting ALL unnecessary expenses like therapy, Netflix, internet, or anything over a budget cell phone plan. You know, until you’re “worthy” of being able to eat at a restaurant again because you’ve paid off your “bad” debt.
Act Your Wage. People who win with money live on less than they make. Period. Can’t pay cash, don’t buy it.
— Dave Ramsey (@DaveRamsey) July 15, 2020
Much like the diet industry, Ramsey has built his business around shame. Shaming you for not working hard enough and shaming you for not being where you want to be because you don’t work hard enough (hello, cis, white, male privilege?). Furthermore, Dave believes a credit score equates to you loving debt and believes debt is not a tool to be used, but instead a horrible transgression to be repented for and corrected as soon as possible. I could go on for hours, but instead, I’m going to pick a few key points about dear old DR, and elaborate on why they’re toxic and what alternatives you have! (Because trust me, you have them.)
Rooted in shame, guilt, and “faith,” Ramsey vilifies, debt, credit cards, mortgages, car loans, and credit utilization of any kind. What his methods don’t take into consideration is how beneficial credit cards, mortgages, and other loans requiring credit can be when you don’t have the generational cash flow to buy things outright. Take me, for example. I bought my first house the month I turned 20, with an adjustable mortgage (gasp), and I put just the bare minimum (or 3.5%) down as a down payment. My mortgage payment came out to $1,000 a month, when I had previously been paying $757 for a 1 bedroom apartment (it was 2010 people, calm down).
Debt is NOT a tool. It makes banks wealthy, not you.
— Dave Ramsey (@DaveRamsey) July 7, 2020
Had I tried to save up the $160,000 my first house cost, I would still be saving for it while I continued renting. Having available credit on my credit cards also gave me the ability to leave my first marriage when I was still a broke twentysomething. Debt can ALWAYS be paid back. Repeat after me: debt is just a tool to be used.
Even more radical, I recommend asking for a credit line increase on your credit cards once a year. Not only does this help you by showing you have more available credit and you’re using a lower percentage, but it’s there in a true emergency situation to pay for groceries, gas, insurance, and more. Expert tip: You should also ALWAYS accept a credit line increase when the credit card company offers them!
Thousand-Dollar Emergency Fund
In order to allocate as much money as possible toward paying off debt and minimizing interest payments on things like student loans, cars, credit cards, mortgages, etc, one of DR’s main tenets is to save $1,000 for an e-fund and then direct ALL other money toward debt payoff. As many of us may have recently realized when the $1,200 stimulus checks hit the bank, a $1,000 emergency fund may sound all fine and good, but when shit really hits the fan (you know, like a worldwide pandemic) $1,000 isn’t even a drop in the bucket in the bigger picture of your bills.
So what can you do instead? Assess your personal expenses and review what a realistic amount is for your emergency savings. I normally recommend at least three months of your base expenses (rent/mortgage, credit card payments, utilities, food, gas, insurance, etc). Three months may not seem like that much, but it can normally be stretched longer than that with unemployment benefits, decreased gas (if you’re not working), fewer bottles of wine, etc. The next step would be to have six months of your average income saved, which can then be stretched to 9-12 months.
Your employment industry, and whether you have multiple jobs or a side hustle, all factor in as well, because what are the actual chances of 100% of ALL income sources going *POOF*? Honestly, fairly slim. The goal is to have an emergency fund, not a long-term savings fund. So save what you feel comfortable with and then start working to pay your debt down/off.
Debt Snowball vs. Debt Avalanche
A debt snowball is where you list your debts in order of lowest total balance owed to greatest balance owed, and you start paying your debt off in that order (smallest to biggest). While this can provide a psychological win right off the bat (woohoo my $500 credit card is paid off), it’s not actually the most cost effective method, because your smallest balance doesn’t always equal your lowest interest rate.
Cue the debt avalanche method: You rank your debts from highest to lowest interest rates, and start paying off the most expensive debt first. I recommend a hybrid approach and tell clients to knock out their smallest one or two debts (if they’re less than $1k), and then roll into the avalanche method. This combines the psychological win of debt being paid off, with actually saving you the most money in the long run.
Student Loans/White Privilege
Mr. Ramsey is a BIG fan of telling students and their parents that they shouldn’t take out student loans and should only go to colleges they can pay cash for. Because you know, students looking to go to med school or law school (or obtain some other type of degree and aren’t able to bankroll it) just shouldn’t be able to get that degree then. Or *GASP* they should wait until they’ve saved up enough money to pay for it outright. Furthermore, they should do this while working other jobs to save and waste years of compounding income in their chosen profession. This doesn’t take into consideration anyone that may have a less-than-privileged upbringing. Instead, he assumes most people are being lazy instead of acknowledging the inherent assumptions of white privilege he extols as virtues.
Parents: Don’t encourage your kids to take out student loans. Encourage them to make plans to go to a school where cash can be paid for college.
Academics are important, but they do NOT cause you to be successful. We all know highly educated broke people.
— Dave Ramsey (@DaveRamsey) July 9, 2020
Student loans are serious. Yes, I don’t recommend taking them out willy nilly, using them to pay for all of your living expenses, and then not paying a damn bit of attention to how that money gets spent. Or even worse, taking out extra above and beyond what you need to pay for items that aren’t needed. However, I stand by my statement that debt can be a FANTASTIC tool when used well, but it’s up to you to learn more about your intended field for work, and confirm that the loans you’re taking are a smart investment in your future self. And guess what? If they are, then do the damn thing!
Overall, Dave Ramsey’s opinions are not the wave of the future, but a hindrance on millennial money growth. My hope is that we can learn better methods and leave the toxicity behind.
Images: Teerasak Ladnongkhun / Shutterstock; daveramsey / Twitter