Right now we are in a recession and people are losing their jobs left and right. Also people are becoming concerned with meeting all their bills as prices of food, utilities, etc have risen expoentially for the past 2 years. So why would you kick Dave Ramsey to the curb?
I believe that he’s correct in saying we should live debt free. Definitely it’s worth working towards, but I have to wonder if his plan is the best strategy to apply during this period of economic uncertainty?
His advice starts out with a setting a budget. Absoutely a must do step. Then save up a $1000 baby emergency fund. This money he says should cover most emergencies. Here’s the deal. Where I live that won’t cover 1 month of rent/mortgage and utilities. Thus if you lose your job what will you do? How will you manage? Perhaps you can set a fixed debt repayment while saving the majority of your extra income. But is any job really secure?
Then he says pay off debt in a “gazelle” fashion. Meaning get extra focused and use a snowball method, throwing all your extra income towards debt. The debt is paid off smallest to largest, instead of highest interest rate because psychologically it feels good to get rid of debts. This is mathematically a bad idea, but it’s makes sense psychologically.
After you pay off all your debt then you move to step 3, which is building a large 3-6 month emergency fund. Then onto saving for retirement, college, and your home.
So why get rid of Dave Ramsey? I have to wonder if in this economic climate perhaps the best solution is building up a 3-6 month EF, then paying off your debt? That way in case you lose your job, the damage doesn’t snowball? Also, perhaps now is the time to reconsider paying for your children’s college. The bad stock market might have hit your retirement harder than you had calculated and there is no extra for college. Remeber there are no loans for retirement, but there are always student loans.
Finally, don’t give up the company match. In this economy that’s a 3-5% raise your company is giving you when they might not give you anything else. I know it sounds great to use the money to pay off debt, but where else will you get 100% return and a “raise” in salary? Basically if you aren’t taking advantage of the match you are not maximizing your salary.
So I have to wonder, is it time to build your savings and slow down your debt repayment? To kick Dave Ramsey’s advice to the curb?
12 responses so far ↓
1 dogatemyfinances // Dec 15, 2008 at 9:21 am
Dave Ramsey is one-size-fits-all. Obviously, the $1,000 is not going to fit everyone.
I always find it really sad when people call in who have taken 3-4 months to save that $1,000. For those people, saving 7K would just be impossible so they would probably give up. I agree that many families need more savings on hand than $1,000.
That said, I do agree with his core message. Spend less than you make, and don’t borrow money. Maybe not the execution, but the idea.
2 Debtfree2009 // Dec 15, 2008 at 9:35 am
I have been struggling with this whole idea of pay off debt vs. saving. I just wrote about it this morning. I’ve decided to save and once I get enough to pay off a debt I’ll pay a lump sum.
I like Dave Ramsey but I really think the economy is so unstable we really need to be saving.
3 Grace // Dec 15, 2008 at 11:35 am
Nah! Dave’s still a good guy, he’s mostly right, and his plan can be tweaked–just don’t call him up and ask for permission. The Baby Step Emergency Fund is NOT meant to cover non-employment–it’s for the brakes that went out on the car, the washing machine that won’t spin, the window that broke in the bathroom, etc.
Du to my age and lack of retirement funds, I don’t follow his plan exactly–it is too important that I put money into my 401(k).
His snowball plan works not just due to the psychological effects of paying off smaller debts, but that method frees up more money faster to put against other debts. Right now I’m grappling with this one because my smallest debt is a very low-interest parent loan for one of my kid’s college–I’d like to be rid of the payment, but I’m wondering if I shouldn’t just move to the next highest debt which has a much larger interest rate. Dave will never know and I’ll remain one of his fans.
4 FruWiki Meg // Dec 15, 2008 at 12:07 pm
While his plan has never made mathematic sense, I give Ramsey kudos for helping some people get out of debt who may not have otherwise. However, I think he would be doing people a favor to revise his plan a bit for the time being, at least.
My husband and I are in debt and we know that at whatever intensity it is going to take a while for us to climb out our hole — though we are definitely going in the right direction and picking up speed. However, for now we’ve lowered our debt payments to just over the minimums and we’re using the money we would have put towards debt to increase the size of our emergency fund. That way, if my husband loses his job, we will be able to pay our bills while he job hunts.
If my husband’s company does better than we expect, we’ll start paying down debt more but still keep a few months emergency fund. Fortunately, our interest rates are reasonable because we’ve been paying down our highest interest rate debt first, unlike what Ramsey recommends.
5 fitwallet // Dec 15, 2008 at 1:49 pm
I’m with you on this one. Also, in these bizarre economic times, Dave’s plan may not make sense for someone whose highest debt IS their mortgage! We have a second mortgage on our house (an 80/10/10 loan) and the interest rate on the smaller portion of the purchase price is 8%. That’s higher than either of our credit cards (3.99 and 4.99%) or our student loans (2.875 and 3.5%). My plan is to pay off the credit cards, then build up savings, then tackle the second mortgage. At those low interest rates, the student loans can wait.
6 debtdieter // Dec 15, 2008 at 3:44 pm
I think there’s room for a modified version of his plan, but I agree, following it slavishly may not be the smartest thing in the current environment, or a person specific situation.
You could however fix your minimum debts repayments (not reducing them as you pay off more of the debt) and save for the 3-6 month expense cushion (which would also include the minimum debt repayments in the total goal) so you’d be both saving AND eventually paying more than the minimums on your debts.
7 Fabulously Broke // Dec 15, 2008 at 4:29 pm
For me, it was always to take advantage of company match (full match), then to save up 2 months of emergency money (bare minimum for example with rent and food)
And then to put everything towards debt but to cut back.. REALLY BACK on all categories.
8 Angie // Dec 15, 2008 at 5:04 pm
I think that people who are online reading financial blogs are probably not the people who need Dave the most.
I’ve read Total Money Makeover and listened to his podcasts, and I think that he has a plan that is simple (not always easy, but certainly simple). If you are in debt up to your eyeballs and don’t see a way out, his plan is a great one to follow. It will allow you to make necessary changes without having to think too hard. If, however, you are able to sit down and look at your finances objectively, willing to take the time and energy to do research on different theories of wealth building and debt freedom, and have the fortitude to follow through, then, yes, his plan should definitely be modified to fit your personal economic situation better than his “one size fits all” method.
9 Julie // Dec 16, 2008 at 7:50 am
I think you are right to question but I also think Ramsey is right on most of this stuff. I saw a comment from fitwallet saying their highest interest rate is their house. In general, when finance gurus talk about paying off high interest rates first, they are referring to unsecure debt…credit cards, etc. I do not agree with Ramsey’s snowball method completely. I think you have it right that people should pay their highest interest rate cards down first. My thoughts? Screw the warm fuzzy feeling of paying off a card just because it is a small amount. I think people should look at all their credit card debt as a whole, then work on the high interest cards first working their way down. Isn’t it a warmer feeling to pay less in the end?
Also, when Ramsey refers to a $1000 baby fund…he is saying that to people who do not have any emergency fund and claim they cannot afford an emergency fund. I agree with you that people should work up more savings. And not worry about college savings unless they have maxed out all their retirement accounts first.
Kids can get loans for their college education, but you definitely can’t for a retirement. Agreed!
10 Barb1954 // Dec 17, 2008 at 4:59 pm
If you read DR’s books or ever listen to his radio show, he does advise that if you see storm clouds on the horizon, you should save as much and pay just the minimum on debt. If the current economic conditions are storm clouds, then I don’t know what is. I also agree that one should never pass up the opportunity to get your employer’s matching money in a 401(k).
11 LivingAlmostLarge // Dec 17, 2008 at 9:25 pm
I don’t know, do most people consider it storm clouds? Or do most following DR not consider it storm clouds until they are fired?
12 andy // Dec 21, 2008 at 12:50 am
A lot of these financial experts, including DR, need to look at some of their theories in the current context and revisit some principles like those you mention here.
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