Are Dave Ramsey’s 7 Baby Steps Overrated? (Yup.)

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Sometimes, it seems Dave Ramsey is the end-all, be-all of financial advice. And since I haven’t read a basic financial book in a while, I wanted to see what all the hoopla is about—pull together a proper Dave Ramsey review for my fellow investors. I picked up The Money Answer Book and delved into it, hoping to be enlightened by some Ramsey logic.

But Dave Ramsey doesn’t say anything Suze Orman hasn’t been preaching for 15 years. In fact, most conservative financial advisors regurgitate this same basic information. No, advice doesn’t need be “new” and “edgy” to be worth entertaining—but I prefer my gurus to be unique in their guidance.

It seems odd for someone to be so boisterous about their opinions when it is the same thing a handful of other people are spouting. (Still, to be clear—I think The Richest Man in Babylon is one of the best financial books ever written.) Basics are basics, so I tried to keep an open mind.

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Dave Ramsey 101

Dave Ramsey went broke in real estate. That gave him a lot of good experience but has also made him extremely cautious—sort of like the market over-correcting. His main philosophy is that all debt is bad; you must stop borrowing ASAP and use only all cash going forward. This makes sense for “bad debt” such as credit cards, student loans, and car loans. His systems can certainly help those who struggle with these issues.

However, this approach isn’t effective for real estate investors. (Also worth noting: Dave Ramsey actually does say it is okay to use mortgage loans to buy real estate. He even does ads for a mortgage company.) Still, this particular piece of advice is geared toward buying the property as a home versus as an investment.

This is because what makes real estate so powerful is the use of leverage—or “good debt.” Done right, this can actually fast-track you to debt freedom and building wealth and passive income.

Would you rather earn appreciation and income on a single $1 million property—or $4 million worth of property in a portfolio? All-cash deals are highly risky due to exposure. That’s why sophisticated homeowners and investors typically take out mortgages, even when they don’t need them.

Who Needs Dave Ramsey?

People with little financial knowledge or discipline absolutely need to read and follow Dave Ramsey’s advice. I was a bankruptcy paralegal for many years, where I learned what debt—when used improperly—can do. Ramsey provides solid advice for increasing income, building an emergency fund, and using the snowball method to pay down debt. If you’re unfamiliar with these activities, by all means, read Dave Ramsey—or almost any other conservative financial advisor.

Consumerism controls our society. Don’t believe me? Consider Christmas. It sickens me to see people pile on debt to buy mostly useless items—or even worse, the families destroyed with guilt because they can not provide “adequately” for Christmas. If you find yourself drowning in credit card debt, Dave Ramsey is a good place to start to dig yourself out.

Nevertheless, there are several areas in which his advice is lacking.

Dave Ramsey Beliefs You Don’t Need to Follow

1. Everyone else is an idiot (or moron)

Dave Ramsey may be the smartest person in the world. However, whenever someone gives subjective guidance, I dislike when they refer to anyone who disagrees with them as an “idiot” or “moron.” He offers opinions about the best course of action—just because he wrote a few books and is generally considered an authority, doesn’t make contradicting opinions invalid.

2. There is no such thing as good debt

When referencing “good debt” and “…people believe that you receive great benefits by going into debt,” Ramsey writes, “Give me a break! These guys are idiots. What’s more, they are probably broke idiots.”

Those of us in the Rich Dad camp strongly believe in leveraging assets to buy more assets. I understand that some people want to carry no debt whatsoever. You’re welcome to take that road, especially as you near retirement. However, if you have $100,000, you could buy one house for cash and carry no debt… or you could leverage that money and buy five houses with 20% down, exponentially increasing your income.

There are investors from both sides of this argument, and it is really a matter of personal preference. However, I would not assume the guy that leverages assets is a “broke idiot.”

Some people might argue how leveraging burned a lot of people in the 2008 crash, which is true. Over-leveraging is a dangerous game, but an income-producing property is still an income-producing property, even in a crash (assuming you still have tenants)—assuming you set it up right in the beginning. Abusing HELOCs and adjustable rates might burn you when the market slides. It all comes down to structuring the deal.

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3. Credit cards are the devil

When used improperly, credit cards can wreak havoc on a person financially. I also believe the introduction of credit cards into the marketplace has been a downfall and large contributor to inflation and the current financial mess our country is in. On the other hand, credit cards are a part of our society—and more importantly, they are a huge factor in how our credit scores are calculated. You can absolutely use them responsibly and receive great benefits from doing so.

Mortgage lenders care about your credit score and your use of credit properly. I have yet to see one scoff at someone for utilizing credit cards at all—especially when it fattens a borrower’s credit file and score. More importantly, it is almost impossible to qualify for a mortgage if you have made no effort to re-establish your credit.

“Live below your means, save as much money as you can, maximize your 401(k), and carry no debt but your mortgage” is good advice for a lot of people. You should absolutely save money and have a financial cushion—but make your money work for you to achieve more than just a frugal life.

But this is just basic advice that can be customized to achieve bigger and better things. You must learn how to play the credit game, unless you plan on only surviving on cash for the rest of your life. Living on cash isn’t a bad thing, but it limits your options, especially regarding real estate investing.