If you\u2019ve ever heard of Dave Ramsey, you probably know his Baby Steps plan for financial security (1). The formula is famous for a reason: It\u2019s clean, simple and, for many Americans, it\u2019s been transformative.<\/p>\n
But fellow financial educator Tori Dunlap, founder of Her First $100K, argues Ramsey is setting people up for failure, calling him out for \u201cone of the most problematic pieces of advice that makes me so \u2026 angry.\u201d<\/p>\n
What is it? Ramsey\u2019s baby step No. 2 urges Americans to pay off all debt except the house. Investing waits until step No. 4.<\/p>\n
\u201cI have so many women who come to me who are 40s, 50s, and they go, \u2018I thought I was supposed to be paying off my debt this whole time. And now I\u2019m scrambling to try to protect my retirement with only like 10 years left.\u2019 Don\u2019t be that person,\u201d Dunlap warns her followers (2).<\/p>\n
Here\u2019s why sticking to a debt-first rule could mean leaving serious money on the table.<\/p>\n
Ramsey\u2019s program is appealing to many because of its simplicity and step-by-step structure:<\/p>\n
Save up a $1,000 emergency fund<\/p>\n<\/li>\n
Pay off all non-mortgage debt (using the \u201cdebt snowball\u201d method)<\/p>\n<\/li>\n
Expand your emergency fund to cover three to six months of expenses<\/p>\n<\/li>\n
Invest 15% of your income for retirement<\/p>\n<\/li>\n
Save for your kids\u2019 college fund<\/p>\n<\/li>\n
Pay off the house early<\/p>\n<\/li>\n
Build wealth and give<\/p>\n<\/li>\n<\/ol>\n
The Federal Reserve reports that many Americans would struggle to cover an unexpected $400 expense without borrowing or selling something (3). That reality supports Ramsey\u2019s early emphasis on emergency savings and debt elimination.<\/p>\n
Credit cards in particular have steep interest rates. The average credit card interest rate currently hovers above 23% (4). Paying off a card charging 23% interest is effectively earning a guaranteed 23% return, which is something the stock market simply can\u2019t promise.<\/p>\n
Having a clear-cut plan like the Baby Steps can help people build momentum, and for households buried in high-interest credit card balances, that can be life-changing.<\/p>\n
Dunlap doesn\u2019t dispute the importance of paying off credit cards but argues on her podcast that, despite what Ramsey implies, not all debt is bad debt (2).<\/p>\n
\u201cCalling anything bad puts morality on it immediately so that if you have that kind of debt, you feel like a bad person,\u201d she says in an episode titled, \u201cWhy I Hate Dave Ramsey.\u201d<\/p>\n
Story Continues <\/p>\n
Read More: 8 essential money moves to make once you\u2019ve saved $10,000<\/a><\/strong><\/p>\n Read More: You can now invest in this $1B private real estate fund starting at just $10<\/a><\/strong><\/p>\n Federal student loan rates, for example, have hovered between 6% and 9% in recent years, according to the U.S. Department of Education (5). Meanwhile, the S&P 500 has returned an average of 10.4% annually over the past 30 years (6).<\/p>\n That makes the decision of whether to pay down debt or invest more nuanced \u2014 especially if your employer offers to match some of your money invested in a 401(k) plan. About 88% of large plans have such an offer, according to the Investment Company Institute (7).<\/p>\n Dunlap says being laser-focused on paying off low-interest debt and skipping your employer match means leaving free money, and years of compounding, on the table. The smarter move is weighing when to pay off debt and when to invest.<\/p>\n Imagine someone invests $5,000 per year for five years, earning an average 8% annual return. By the end of year five, they\u2019d have contributed $25,000, but the account would be worth $29,333 thanks to growth. That\u2019s $4,333 added to your net worth, without even taking an employer match into account.<\/p>\n Now imagine that same person delays investing while focusing entirely on paying off a student loan with a 6% interest rate that does not compound. They still have $5,000 per year to spend on this effort. After five years, they\u2019ve avoided only $3,000 in interest charges.<\/p>\n Stretch that difference across 10 or 20 or 30 years, include a 401(k) price match, and the gap can widen dramatically \u2014 especially for Dunlap\u2019s audience, largely composed of women in their 20s and 30s (8).<\/p>\n \u201cNot all debt is created equal. And this is actually some of the most harmful advice because if you view all of your debt as the same, you\u2019re going to lose tens of thousands if not hundreds of thousands of dollars,\u201d she says.<\/p>\n Ramsey is right that high-interest debt is a must-answer problem. But many borrowers carry a blend, with a credit card here, a student loan there, maybe a car payment at a relatively modest rate. Making the most of your money becomes a matter of prioritization.<\/p>\n The \u201csnowball\u201d method Ramsey recommends focuses on paying off the smallest balances first, regardless of how high the interest rate is. That costs you more money in the end \u2014 but visible wins like paying off your car can help build confidence and determination.<\/p>\n Ramsey wants to ensure you stay committed to working on your finances, because giving up is the most expensive mistake you can make.<\/p>\n Dunlap argues that once you have stability, you should maximize whatever saves you the most money or generates the most wealth as soon as possible. You need to look at the numbers involved, and your individual circumstances, because oversimplified \u201cbaby steps\u201d come with a serious cost.<\/p>\n \u201cThe rigidity is not helpful. Personal finance is personal,\u201d she says.<\/p>\n \u201cIf you\u2019re trying to sell something, if you\u2019re trying to build a business \u2014 which he and I are both doing \u2014 it is a lot easier to sell these rigid rules \u2026 As soon as we bring nuance into it, the whole house of cards starts crumbling.\u201d<\/p>\n Join 250,000+ readers and get Moneywise\u2019s best stories and exclusive interviews first \u2014 clear insights curated and delivered weekly. Subscribe now.<\/a><\/strong><\/p>\n We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines<\/a>.<\/p>\n Ramsey Solutions (1<\/a>); Her First 100k (2<\/a>); Federal Reserve (3<\/a>); Lendingtree (4<\/a>); Federal Student Aid (5<\/a>); Fidelity (6<\/a>); Investment Company Institute (7<\/a>); New York Times (8<\/a>)<\/p>\n This article provides information only and should not be construed as advice. It is provided without warranty of any kind.<\/p>\n","protected":false},"excerpt":{"rendered":"If you\u2019ve ever heard of Dave Ramsey, you probably know his Baby Steps plan for financial security (1).…\n","protected":false},"author":3,"featured_media":657020,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[64,7780,278420,30355,1597,278421,255,278419,67,132,68],"class_list":{"0":"post-657019","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-personal-finance","8":"tag-business","9":"tag-dave-ramsey","10":"tag-debt-snowball","11":"tag-emergency-fund","12":"tag-federal-reserve","13":"tag-paying-off-credit-cards","14":"tag-personal-finance","15":"tag-tori-dunlap","16":"tag-united-states","17":"tag-unitedstates","18":"tag-us"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@us\/116232318202033350","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/657019","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/comments?post=657019"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/657019\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media\/657020"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media?parent=657019"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/categories?post=657019"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/tags?post=657019"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}