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Dave Ramsey's Financial Peace: Is It Right for You?

Dave Ramsey's Financial Peace has helped numerous people reach financial freedom, but is it right for you?

Justin Cupler

Contributing Writer at Tally

September 7, 2021

Bestselling author of the book "The Total Money Makeover" and podcast host Dave Ramsey has become a staple in the personal finance world — a "guru" of sorts. Using his Financial Peace methods, he’s helped countless people in their financial lives by paying off debt and saving for retirement.

What's really behind Ramsey's Financial Peace, and is it the right process for everyone? We take a deep dive into Ramsey's methods and Financial Peace University to see where you may be better off straying from the path he's laid out. 

The basics of Dave Ramsey's Financial Peace

Dave Ramsey's Financial Peace process has two main components: Baby Steps and EveryDollar budgeting.

Financial Peace University

Dave Ramsey's Financial Peace University (FPU) lays out a rigid seven-step process to help you manage your finances, get out of debt and grow wealth. Ramsey calls these the 7 Baby Steps. 

The 7 Baby Steps include:

  1. Building a $1,000 starter emergency fund

  2. Paying off all non-mortgage debt with the debt snowball method

  3. Funding a full emergency fund

  4. Investing 15% of your income in retirement accounts

  5. Saving for college

  6. Paying off your mortgage

  7. Building wealth and giving

On top of these steps, FPU also gives you access to a wide range of recorded courses and live meetings — in-person or virtual. These courses help users with various personal finance topics, such as how zero-based budgeting works, how to teach your kids about money and wealth and more.

EveryDollar Budgeting

Another part of Dave Ramsey's Financial Peace process is the EveryDollar budgeting app, which is essentially a digitized zero-based budgeting app. You simply enter your projected income and expenses each month, then connect your credit card and bank accounts and the app tracks your progress. 

Much of the tracking process is automated, but you will need to categorize each expense as it appears. 

Like any zero-based budgeting system, the EveryDollar process wants you to give every dollar a purpose within your budget, whether that's going toward paying bills, paying off your debt or saving for retirement. 

Why FPU isn't for everyone

Any financial plan is better than no plan, but some are better than others for certain people. The same rings true for Ramsey's FPU. Yes, its framework is strong, and it's a proven plan. However, some budgeters, particularly Millennials, may find it too rigid. Others may find it simply doesn't match up with their financial situation or goals.  

No room for fun

The first key issue is FPU's lack of wiggle room for fun. Ramsey employs a zero-based-budgeting method and nowhere in the Baby Steps does it open the door for using money to have fun. Ramsey recommends living as tight as possible, bypassing vacations, eating simple meals, avoiding nights out on the town and more. 

Many personal finance experts agree that any budget must include some room for fun. Without this, money management can become more of a burden, leaving you loathing it instead of leaning into it. 

Being out of debt in your 40s and 50s is great, but it doesn’t have to come at the expense of enjoying your 20s and 30s.

While FPU doesn't mention fun money, EveryDollar does include it as a category. Find a dollar amount or percentage of your income that works within your budget and earmark that for fun. 

Missing out on valuable rewards 

Dave Ramsey’s process is anti-credit-card to the fullest. He never mentions how to use rewards credit cards to your advantage.

Instead of avoiding credit cards, as Ramsey recommends, you can use them for your monthly expenses and pay them off by the due date. Since you’ll pay the balance in full within the interest grace period, you’ll earn all the rewards points and cash back but pay no interest. 

Paying more in interest

The FPU method leans heavily on the debt snowball repayment method to become debt-free. As before, any plan is better than no plan, but the debt snowball has one flaw: interest. 

In debt snowball, you focus all your extra money on the debts with the lowest balance while making the minimum payments on all your other debts. This is great because you get a few quick wins that can help fuel you through the process, but it can also cost you. 

Because you're making only the minimum payments on your higher-balance debts, you're also incurring large interest charges. Over time, these can add to significant costs you could have avoided with the debt avalanche method. 

In the debt avalanche method, you focus your extra money on your highest-interest debts while making minimum payments on the rest. So you're saving money on interest fees while paying off debt. But, that does mean waiting longer for a financial win, which is why some swear by debt snowball.   

Combine steps to be more effective

As its name implies, FPU's 7 Baby Steps are to be taken one at a time. However, some people may find it more efficient to combine steps. 

For example, you can always split your extra money and put part of it toward building your emergency fund and the other part toward paying off debts. This would combine steps 1, 2 and 3 into one larger step. 

Plus, by moving the fully-funded emergency fund up a step, you may be able to manage a large expense earlier in the process without going into further debt and setting yourself back. 

You don't have to pay off your mortgage

Step 7 of Ramsey's Baby Steps instructs you to pay off your mortgage. On the surface, this seems like common sense and sound financial advice because your mortgage is usually your largest monthly expense and can put a big strain on your retirement income. 

However, the numbers may not add up once you look deeper at the math, especially with today's super-low mortgage interest rates. 

As of August 27, 2021, the average interest rate on a 30-year mortgage is 3.04%. If you have a 15-year mortgage, it's even lower at 2.31%. 

The rule of thumb for returns on long-term stock market investments is 10%. Simple math shows you're more effectively building wealth by investing the extra cash and earning 10% than using it to pay off a 3.04% interest mortgage. 

Plus, it's relatively easy to liquidate stocks for cash if financial problems strike down the line. If you sink all that extra cash into paying down your mortgage, you can’t get it back.

Let’s look at some numbers: 

Imagine you just got into a 30-year mortgage for $300,000 at 3% interest, and you decided you wanted to pay it off within 15 years. Your base mortgage payment would be $1,264.81, and you'd have to pay an extra $810 per month to pay it off in half the time. Over that 15 years, you'd save a respectable $82,563 in interest. 

However, if you were to take that same $810, put it into the stock market monthly for the full 30-year term of your mortgage and earn the 10% average return, you'd have $1.83 million in savings. 

Based on calculations, you’d pay only $155,332.36 in interest during the entire 30-year mortgage. That’s a net gain of about $1.675 million from investing that $810 for 30 years. 

Let's say you decided to pay off your mortgage in 15 years. Then you invest that remaining $2,074.81 a month for the next 15 years. At a 10% return, you'd have a nest egg worth $859,947. Add that to the $82,563 interest you saved by paying off the mortgage early, and you have a net gain of $942,510. 

That is still well short of the over $1.8 million you'd potentially earn by investing the $810 per month for 30 years.

Ramsey's advice of not having a mortgage looming over your head in retirement is solid, but that's easy to take care of with this investment strategy. If you get to the point where you're ready to retire and don't want to make a mortgage payment in retirement, you can always liquidate a portion of your investments to pay off the remaining mortgage balance.

Alternatively, you can sell that real estate, downsize to a smaller home in retirement and invest any proceeds.

For some, it may make sense to pay off a mortgage first, but others may not see the numbers that way. Remember, before making any investment decisions, consult with an investment professional to determine the best strategy for you.  

Dave Ramsey's Financial Peace: Solid guidance with small tweaks

Dave Ramsey's Financial Peace method has many great pieces of advice. However, like all financial advice, it's not going to be the right fit for everyone. If you go into Ramsey’s FPU expecting to make mild modifications to fit your financial needs and goals, you can turn his plan into a good fit for you. 

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