3 Reasons Not to Listen to Dave Ramsey

Dave Ramsey is wrong when it comes to investing.

Dave Ramsey is a well-known financial guru who has built his career on helping people get out of debt and improve their financial situations. There is no doubt that he has had a big impact on people and helped them get out of debt. If you are terrible at managing your money and seem to be in debt all the time, then his methods may be a good fit for you. But some of his advice can be quite extreme and not practical. Here are some reasons why you should rethink certain recommendations Ramsey gives:

Ramsey's investing philosophy

Ramsey's primary investment recommendations are to invest in four categories of mutual funds split evenly:

• 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 having your retirement funds invested in all equities. Investing involves a lot of risk. The closer you are to retirement, the less risk you want to take. If you were to retire in 2009 with 100% of your retirement in equities, then your portfolio would have fallen approximately 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 12% historical return of stocks. But in exchange for less return, you get less risk. This is known as the risk-reward tradeoff. This principle states that the more risk you take, the higher the potential reward and vice versa.

If you are close to retirement and don't have the time to wait for your investment portfolio to recover, then allocating your investments toward more conservative investments such as bonds is important. 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 on stocks as Ramsey recommends.

Ramsey's philosophy on mortgages

Ramsey states that if you can't afford a 15-year mortgage, then you can't afford a home at all. Ideally, he recommends you save longer so you can buy your home with cash. The median income is close to $55,000 a year and the average home costs around $500,000. It would take over 55 years to save for a home if you socked away 15% of your income. It is not practical for the vast majority of people to pay for their home in cash.

He also states that if you have a mortgage, you should pay it down as fast as possible. He recommends that you should focus on paying your mortgage over investing. There are a couple of reasons this may not be the best piece of advice. If you were lucky enough to buy a house or refinance it in the past couple of years, you probably received a rate as low as 2.68% for a 30-year mortgage. If your interest rates are this low, then it may make sense to invest the extra money you have, especially if you have a 401(k) with matching funds. If you prioritized paying down your mortgage over investing, then you would be leaving free money on the table.

In addition, Ramsey states that you can get 12% annual returns in the stock market. By investing in the stock market, you are making the difference between the 12% and 3% mortgage you have. That 9% compounded can add up, and under the new tax laws, the mortgage deduction is one of the few deductions you can take. If you have a high interest rate for your mortgage, yes it makes sense to pay it off. But if you have a rate as low as 3% to 4%, then you may want to reconsider, especially if your employer matches your 401(k) contributions.

Ramsey's philosophy on credit cards

Ramsey says no to credit cards. He recommends that people cut up their credit cards and live on a cash-only basis. This is good advice if you have no discipline and have a tough time managing your credit card debt. This may not be possible or practical for everyone however. The problem is that a credit card is one of the key 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 every month, you can build up your credit score and earn some nice rewards along the way. If you have the cash to buy a home, then your credit score won't matter. But for the vast majority of people, the difference between a good and bad credit score can add up to tens of thousands of dollars over your lifetime. For me personally, I have earned enough credit card rewards to fly around the world multiple times.

Dave Ramsey has some good advice. It isn't 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. Having said that, like any advice, it may not be practical for everyone. Your personal financial situation is unique. Ramsey's advice is geared toward people who are in debt and need to get their finances in order.