3 reasons not to listen to Dave Ramsey

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Dave Ramsey is a well-known financial guru who has built his career helping people get out of debt and improve their financial situation. There is no doubt that he had a great impact on people and helped them get out of debt. If you don’t know how to manage your money and seem to be constantly in debt, these methods might be right for you. But some of his advice can be quite extreme and impractical. Here are some reasons why you should rethink some recommendations given by Ramsey:

Ramsey’s investment philosophy

Ramsey’s primary investment recommendations are to invest in four equally-divided mutual fund categories:

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  • Growth
  • Growth and income
  • Aggressive growth
  • International

Ramsey does not recommend investing in bonds, CDs, real estate investment trusts or cash. Even if you are about to retire, he recommends that your retirement funds be invested in all stocks. Investing involves a lot of risk. The closer you get to retirement, the less risk you want to take. If you were to retire in 2009 with 100% of your retirement in stocks, your portfolio would have dropped by about 40%.

To avoid market volatility, it is important to diversify your investments with bonds. Bonds are an important part of any investment portfolio. They provide stability and security and can help offset some of the volatility associated with stocks. Ramsey is right that bonds won’t give you the historic 12% return of stocks. But in exchange for a lower return, you take on less risk. This is called the risk-reward trade-off. This principle states that the more risk you take, the greater the potential reward and vice versa.

If you’re nearing retirement and don’t have time to wait for your investment portfolio to recover, it’s important to allocate your investments to more conservative investments like bonds. If you had allocated your portfolio to 60% bonds and 40% stocks in 2009, your portfolio would have fallen 10%, compared to 40% if you were all in stocks, as Ramsey recommends.

Ramsey’s philosophy on mortgages

Ramsey says if you can’t afford a 15-year mortgage, you can’t afford a house at all. Ideally, he recommends that you save longer so that you can buy your house with cash. The median income is nearly $55,000 per year and the an average house costs around $500,000. It would take over 55 years to save for a house if you cashed out 15% of your income. It is not practical for the vast majority of people to pay for their house in cash.

It also states that if you have a mortgage, you should pay it off as soon as possible. He recommends that you focus on paying off your mortgage rather than investing. There are several reasons why this may not be the best advice. If you were lucky enough to buy a house or refinance Over the past two years, you’ve probably received a rate as low as 2.68% for a 30-year mortgage. If your interest rates are this low, it may be a good idea to invest the extra money you have, especially if you have a 401(k) with matching funds. If you prioritized paying off your mortgage over investing, you would be leaving free money on the table.

Plus, Ramsey says you can get 12% annual returns in the stock market. By investing in the stock market, you make the difference between the 12% and 3% mortgage you have. That compound 9% can add up, and under new tax laws, the mortgage deduction is one of the few deductions you can take. If you have a high interest rate on your mortgage, yes, paying it off makes sense. But if you have a rate as low as 3% to 4%, you might want to reconsider, especially if your employer matches your 401(k) contributions.

Ramsey’s philosophy on credit cards

Ramsey says no to credit card. He recommends people cut up their credit cards and live on cash only. This is good advice if you are undisciplined and have difficulty managing your credit card debt. However, this may not be possible or practical for everyone. The problem is that a credit card is one of the main ways to get a credit score. And your credit score is one of the most important financial numbers.

If you are able to pay off your credit cards each month, you can increase your credit score and earn great rewards along the way. If you have the money to buy a house, your credit score won’t matter. But for the vast majority of people, the difference between good and bad credit can be tens of thousands of dollars over your lifetime. For me personally, I’ve earned enough credit card rewards to travel around the world multiple times.

David Ramsey has good advice. It’s not wise to live a lifestyle you can’t afford. You need to take responsibility for your finances and be disciplined. Ramsey is also right about giving back to the community and living a life of contentment and gratitude. That said, like all advice, it may not be practical for everyone. Your personal financial situation is unique. Ramsey’s advice is for people in debt who need to get their finances in order.

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