The good and the bad of Dave Ramsey’s financial plan

In case you don’t know who Dave is, he’s a heavyweight financial influencer from Tennessee. He is best known for his 7 baby steps – a plan which is focused on getting people into a position of financial stability. The author of this article has used Dave Ramsey’s methodology to pay off debt at the start of her personal finance adventure and she is in position to both talk about his baby steps and their application in real life, as well as the advantages and disadvantages of the plan.

Introducing Dave

Dave Ramsey is a radio host from Tennessee with his own programme, The Dave Ramsey Show. He is a self-styled, successful personal finance host running a network including a group of auxiliary ‘Ramsey Personalities’ specialising in different areas of the financial sphere such as small business, career advice and family finances. The principles of finance he promotes are based on the Bible (he happens to be a devout Christian) and while a lot of his advice is sound, if you are not religious, you’ll want to put the religious comments to one side on focus on the core plan. In addition to being a successful businessman, he is also known for arguing down criticism, especially recently, and being mildly misogynistic in his views of married women, possibly in relation to being white Christian from the South, in his late 50s.

The plan

Dave Ramsey’s plan, also called The 7 Baby Steps is, at a glance really simple and easy to remember and follow. It goes like this:

  1. Save USD1000 for your ‘starter’ emergency fund (or USD500 if you’re a young singleton). Adjust the figure to buying power of your own currency where you live.
  2. Pay off your debt (excluding mortgage) using the snowball method i.e. from smallest to largest.
  3. Save up three to six months of expenses as your fully funded emergency fund
  4. Invest 15% of your income into retirement
  5. Save for your kids college fund
  6. Pay off your mortgage
  7. Build wealth

In order to follow these steps you’ll want to create a budget and cut your expenses, often to bare bones. In my case I used the plan when I was REALLY broke and if you think that this plan seems to be perfect for people with limited financial knowledge and a lot of financial trouble, you’re spot on.

While the plan itself is set in stone, there are variations in how people need to approach it, starting with the way you budget (he suggests zero-based budgeting with slightly different approaches for employed and self-employed) and ending on retirement planning which should be prioritised if you’re older and have no retirement savings.

Why the plan works

This plan is a common-sense plan for just about anyone who is not interested in the financial market outside of the basics of consumer finance. It’s perfect for people who either have no interest or no head for money (which is a LOT of people) and it really works for people who want something regimented and easy to stick to, like myself. It also tackles bad habits, the concept of accountability and income issues head on.

In my eyes the key reasons why this plan is so popular and largely successful is that it is simple and the first two steps are really motivating. It’s relatively easy to pull together $1000 if you don’t currently have it, and the chase can be fun – sell something, work extra few hours in a new side job and see the money appear in your account within days. And the best thing? You keep it there. It’s also rewarding to see your debts melt away and with the snowball method some people reach a really good momentum. While by step 3 people often feel a little burnt out, it’s also a doable one after you get into the habit of stashing away large sums of money. The reward in that step is that usually you get to give yourself some spending money, so that you don’t lose your mind eating rice & beans.

Steps 4, 5 & 6 can be done in parallel unless you have an urgent need to prioritise one over the others and they are somewhat automatic. Having to go through steps 1-3 first is also an interesting lesson about scaling down your lifestyle which makes these next 3 steps possibly go faster than you might think is possible while you’re up to your ears in debt at the start.

You are right in thinking a home purchase seems missing in this plan. There is a hidden step – 3b which relates to saving up for a property downpayment. The recommendation for a property purchase is that you put down at least 20% and get a 15-year fixed mortgage. Separately, he recommends spending no more than 25% of your income on housing. This, for an expensive city dweller means one of two things – you either live in a shoe box or you figure out how to raise your income to force your budget into recommended spending bracket. Looking through social media, most people manage the latter which really is great.

This plan really works for most people and if you are struggling, it likely is a really good place to start.

Why the plan doesn’t always work

Disclaimer – what I am about to talk about should not put you off from paying off your debt and sorting out your financial situation by any means necessary, including following Dave Ramsey’s plan. In fact if you’re feeling like you’ve hit a wall, this plan might be a good place to start.

Now, here are my gripes with The 7 Baby Steps plan and advice that sits alongside it.

  1. The $1000 mini emergency fund is very tight. Too tight. I get why this amount is good – having a grand to fall back on if you’ve never had a grand spare feels incredible, but especially if you have a family, consider whether this is enough in case the boiler blows, the younger kid kicks a ball through the window and the older one keys the rude neighbour’s car, all in a single afternoon. If you are in a country without universal healthcare, also consider copay for likely medical expenses for yourself and your family which might result from a broken bone, asthma attack, ER visit or whetever other likely plight that might come your way.
  2. Debt snowball method mathematically does not always make sense. While from emotional perspective this method is fantastic and one which has helped many people, if you are paying off large debts with ridiculous interest, you should really do the maths before you decide which debt you’re tackling first.
  3. Retirement planning is poorly explained AND too late in the plan. One of the biggest issues with the plan in my eyes is the lack of encouragement to plan retirement early, even if it is tax free, as is the case with workplace pensions. In my personal scenario I use my pension contributions to reduce the amount of income tax I pay on my salary in addition to building up my future pension. Financial optimisation is not really something that Dave will tech you about which is a shame.
  4. For people carrying large debt the plan might not make sense both financially and lifestyle-wise. As example where investing is concerned, if you end up having to pay off debts over, say, the next 6-7 years and you are advised to not invest during that time. You will miss out on the growth of the investments and any compounding interest. If you are in your 40s or 50s, this might put a strain on your retirement and result in you needing to work longer than you might wish to. Be sure to run the numbers for your individual case before making big financial commitments. Secondary issue is the one of a lifestyle. Where you end up working aggressively to repay a large debt, your lifestyle will suffer over the period of repayment. It’s cool to do nothing exciting with your life for a year, but a decade is a different kind of a game.

I am not a financial advisor and therefore my advice is limited to my personal experiences. My personal experience with this plan is that I learned how to budget properly, paid off just over £12k of debt on a low salary in an expensive city within a year. After ‘Baby step 2’ I moved on to growing my net worth from £0 to £170k in the span of 5 years while having a pretty fun life. This plan was the start of it and although I no longer follow it to the tee, it pushed me to learn and grow like no other financial plan had in the past.

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