If you’ve ever heard of Dave Ramsey, you probably know his Baby Steps plan for financial security (1). The formula is famous for a reason: It’s clean, simple and, for many Americans, it’s been transformative.
But fellow financial educator Tori Dunlap, founder of Her First $100K, argues Ramsey is setting people up for failure, calling him out for “one of the most problematic pieces of advice that makes me so … angry.”
What is it? Ramsey’s baby step No. 2 urges Americans to pay off all debt except the house. Investing waits until step No. 4.
“I have so many women who come to me who are 40s, 50s, and they go, ‘I thought I was supposed to be paying off my debt this whole time. And now I’m scrambling to try to protect my retirement with only like 10 years left.’ Don’t be that person,” Dunlap warns her followers (2).
Here’s why sticking to a debt-first rule could mean leaving serious money on the table.
Ramsey’s program is appealing to many because of its simplicity and step-by-step structure:
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Save up a $1,000 emergency fund
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Pay off all non-mortgage debt (using the “debt snowball” method)
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Expand your emergency fund to cover three to six months of expenses
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Invest 15% of your income for retirement
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Save for your kids’ college fund
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Pay off the house early
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Build wealth and give
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’s early emphasis on emergency savings and debt elimination.
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’t promise.
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.
Dunlap doesn’t 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).
“Calling anything bad puts morality on it immediately so that if you have that kind of debt, you feel like a bad person,” she says in an episode titled, “Why I Hate Dave Ramsey.”
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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).
That makes the decision of whether to pay down debt or invest more nuanced — 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).
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.
Imagine someone invests $5,000 per year for five years, earning an average 8% annual return. By the end of year five, they’d have contributed $25,000, but the account would be worth $29,333 thanks to growth. That’s $4,333 added to your net worth, without even taking an employer match into account.
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’ve avoided only $3,000 in interest charges.
Stretch that difference across 10 or 20 or 30 years, include a 401(k) price match, and the gap can widen dramatically — especially for Dunlap’s audience, largely composed of women in their 20s and 30s (8).
“Not 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’re going to lose tens of thousands if not hundreds of thousands of dollars,” she says.
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.
The “snowball” 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 — but visible wins like paying off your car can help build confidence and determination.
Ramsey wants to ensure you stay committed to working on your finances, because giving up is the most expensive mistake you can make.
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 “baby steps” come with a serious cost.
“The rigidity is not helpful. Personal finance is personal,” she says.
“If you’re trying to sell something, if you’re trying to build a business — which he and I are both doing — it is a lot easier to sell these rigid rules … As soon as we bring nuance into it, the whole house of cards starts crumbling.”
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Ramsey Solutions (1); Her First 100k (2); Federal Reserve (3); Lendingtree (4); Federal Student Aid (5); Fidelity (6); Investment Company Institute (7); New York Times (8)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
