Why Dave Ramsey’s Ideas on Credit Are Crazy

By: Josh Rodriguez

April 28, 2014

Why Dave Ramsey’s Ideas on Credit Are Crazy

Have you heard of Dave Ramsey? Of course you have. He’s a well known personal finance expert with a following that I could only dream of. However, I’d also like to point out that the man is absolutely crazy. OK, so maybe I’m being a little harsh, but I think it’s justified. So, today is going to be the start of a series all about Dave Ramsey. However, I’m not going to praise him as the credit God his followers do, instead, I’m going to tell you the truth. I’m going to explain why his advice just doesn’t work most of the time. Today, I’m going to start with one of his main principles.

Credit Cards Are Horrible!!! Well, Not Really Dave!

In just about everything he does, Dave makes some kind of mention that you should avoid having credit card accounts at all costs. Sorry Dave, but I’ve got beef with that statement. Why? Because you’re wrong and I don’t agree with you at all!

Dave Ramsey’s Crazy Approach Can Cause More Harm than Good

You know, there is one thing I can say that’s good about Ramsey. That is that even though most of what he does proves that he’s completely out of his mind, it can work for a small group of people. That group is the group that is so severely struggling financially that they really shouldn’t have credit cards or build anymore loans and debt. So, now we get to why his approach is fundamentally broken. Dave Ramsey generalizes personal finance. Because people are unique, naturally, their finances will be as well. So, giving a very general approach to a broad audience really is a horrible thing to do.

On Modest Money, when we give advice, we tell you the exact group of people that advice is aimed toward. Why? Because we know that one plan couldn’t possibly be the perfect plan for everyone out there. However, under Dave Ramsey’s twisted point of view, everyone should follow one plan no matter how unique your needs may be.

Let’s Talk A Little About Why His Views on Credit Cards In General Are Twisted

Dave Ramsey gives you the impression that no matter how good you are with your money, you should avoid credit cards at all costs. That is absolutely nuts and here’s why…

Credit Cards Are An Important Tool For Building Credit Scores – No matter who you are, when you go to buy a car or buy a house, you’ll learn that your credit score is one of the most important 3 digit numbers you’ll ever come across. The reality is credit cards, more importantly; secured credit cards are an amazing tool when it comes to establishing or repairing credit scores. So, if you’re trying to improve your credit, don’t listen to Dave, a credit card will most likely be worth a gem to you and your goals.

Credit Cards Provide A Form Of Financial Security – No matter how much money you’ve got in the bank, at some point in time, you may come across hard times financially. Although, it’s not wise to rack up debts you can’t pay back, it is wise to have a credit card that acts as an emergency fund. That way, when it rains, you’ve got a rain coat!

Credit Cards Help Build Businesses – Businesses like import export companies rely heavily on credit. Without credit, many of them wouldn’t have the capital to import; therefore they’d have no product to export. Many businesses work on credit as capital. Without credit cards, these businesses wouldn’t exist. Who knows, one day a credit card may help you build your own company!

Buyer’s Protection – Even if you’ve got the cash for online purchases, service purchases, or even large purchases, it’s usually best to use your credit card. Why? Credit cards come with buyer’s protection. If you use your checking account you have a better chance of losing your money should something go wrong. However, you can always dispute a purchase on a credit card!

Credit Cards Offer Rewards – There are tons of people, including me who use credit cards to earn rewards. We charge up, pay off the balance before we’re charged interest, and make out like bandits. I earn free airfare, cash back, and more just by using my card. If you’re capable of maintaining debts, there’s no reason you shouldn’t be earning rewards too.

Final Thoughts

Credit cards are good for some people and bad for others. The reality is, there is no one financial plan that will fit everyone out there. That is the basis by which I stand and which leads me to say that Dave Ramsey is a nut job if he really thinks he’s helping everyone that buys into his plans! What are your thoughts and comments about Dave Ramsey’s philosophy?

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About the Author:

Joshua Rodriguez is the owner and founder of CNA Finance and Alpha Stock News. His experience in market analysis is vast, earning him positions as a contributor to top websites like Equities.com, Benzinga, and several others. When he's not working, Josh enjoys time with his wife, 3 year old daughter, 8 year old son, and five large-breed dogs who tend to keep his schedule booked. To get in touch with Joshua, contact him on Twitter or email him at [email protected]

28 thoughts on “Why Dave Ramsey’s Ideas on Credit Are Crazy”

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    I agree with you 100% Thank you for posting this article and taking a stand against “Credit Cards are Evil” Kool-Aid drinkers.

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    I both agree and disagree.

    I agree that Dave Ramsey’s methods are crazy, but that’s only to the trained personal finance-savvy eye.

    There is an unfortunate “elephant in the room” that we try to tip-toe around -as personal finance bloggers- and that is the fact that a major portion of the population has no clue what they’re doing with money. They get paid on Friday, and they’re happy if they’ve still got money in their account the Thursday before their next paycheck. As a society, we don’t save enough nor do we invest enough, and we are addicted to the instant gratification that loans and credit cards and provide us.

    BUT, there is a small but growing segment of the population (people who frequent a great PF website like ModestMoney.com being part of that segment) who take the initiative to understand their personal finances. For those people, Ramsey’s ideology on many things is harmful. I get paid more than $500 each year in credit card rewards. Raise your hand if you don’t want an extra $500 for free… :::crickets:::

    For a lot of people, though, they are better-served to just avoid credit altogether. If you’re deep in credit card debt, student loan debt, auto loan debt (etc) as many people are, follow Dave Ramsey. If you’ve even remotely got your financial act together, though, there’s no need for his extreme measures.

    I respect and admire the man for all he has helped, but as you’ve pointed out in your article, his advice is not a one-size-fits-all solution.

    Great write-up! I look forward to reading more in this series!

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    Nichole @Budget Loving Military Wife

    I couldn’t disagree more with your statements, but I have and will continue to drink the Kool-Aid.
    His plan is not for only those who are “severely struggling” and it works for anyone who is willing to do the hard work and put the common sense strategies into place.
    Three years ago, my husband and I were making a six figure combined income. I put all expenses on a credit card and paid it off each month. I would typically get $200-$300 cash back in a year. We had two small auto loans, a student loan, and a mortgage.
    Today, we have more than doubled our net worth and only have $70K left on our mortgage.
    Studies show that consumers spend ~16% less when they use cash over plastic, which is much more than the 1-5% cash back rewards.
    Debit cards, swiped as credit cards have the exact same protection as a credit card.

    Credit cards shouldn’t be used as “emergency funding”… that is why you have an emergency fund/savings.

    Credit scores are also improved by paying down your debt and paying on-time. Opening a credit card can actually hurt your credit score by increasing your debt to income ratio.

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      “Studies show that consumers spend ~16% less when they use cash over plastic” – I’ve read this many times and have yet to see a real study. The studies showing this result are always a contrived experiment, a $20 gift card vs $20 cash given to students. This doesn’t extrapolate to a $5000/mo budget. Such assertions contradict the value of good budgeting.
      Say I had an annual budget of $60K and for the fact that I get 2% ($1200) in rewards, I run it all through my card. I end the year having spent $59,000, my daughter didn’t outgrow her clothes as fat as I expected. Are you suggesting, budget aside, I still overspent by 16%? My 2% drops right into a 529 College savings account. It’s just over $21,000, and will likely be over $40K by college time.
      I will concede, for those who maintain a balance month to month, cards are bad, and should be avoided. Pay the debt off, period. When used as a tool along with a proper budget, they are a positive aspect of one’s finances.
      I welcome a reference to a study that properly separates the ‘pay in full’ user from the ‘balance floater.’

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      Whatever those studies say, they don’t speak to me. Cash spends much faster than plastic. If cash is in my pocket, it is as good as spent – and on needless, non budget tracked items. With plastic, I track everything to the cent. To the cent. I use a budget tracking tool that is linked to my bank account and reconcile my receipts every week.

      When I use the plastic, I know those dollars spent will follow me. Additionally, my wife sees every dollar spent when I use plastic. We keep each other accountable to keeping the budget.

      I mean, every time I have cash, it.is.gone. Also, I live in a large city. If I’m every mugged or lose my wallet, I don’t want hundreds of dollars lost.

      Additionally, Dave never addresses living well below your means. My daily living is 3k+ below my monthly income. The rest is investments, savings, buffer in the checking account. If I use my credit card for only 80% of my monthly budgeted items, I am golden. I never, never buy big ticketed consumer products. I buy all big ticketed items (car, mattress..well, that’s it) on discount. Other items I buy from garage sales or second hand stores like my sofas. Again, let me add that my wife is the frugal one between the two of us. An example of this is that she said if I proposed to her with a diamond, she would turn me down. (Friends have tried to dispel this, but she grew up in a very modest situation and wants to continue living the same way. If I were to propose with a diamond she would know that 1)I didn’t value money the same way she did, and 2)I didn’t have self control.)

      So, this Dave Ramsey stuff is not a one size fits all. It works for a lot of folks. But, look around. People think they need stuff to make themselves feel better about themselves. The good thing is that Dave actually addresses that core issue.

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    I agree that one size doesn’t fit all. Usually the Dave Ramseys and Suze Ormans of the world try to appeal to the masses. Individuals seeking their guidance need to do their homework and figure out what works for them. We read several books while mired in debt and applied what worked for us. We came up some of our own ideas, too. We still have credit cards for hotel points and airline miles, but no longer carry a balance from month-to-month. Some can’t manage this, so I never recommend it as a blanket practice. Kudos for saying this, though! Hopefully people get the point.

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    While I agree with everything in this article I would argue that his advice to pay off debts in order of smallest balance to largest rather than highest interest rate to smallest is worse advice.

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    “…it is wise to have a credit card that acts as an emergency fund. That way, when it rains, you’ve got a rain coat!” What!? Terrible, terrible advice.

    An emergency fund should be a cash account that is used only in the event of an emergency, to fill critical financial gaps, or meet unexpected expenses. It is immediate access to cash that allows you to take care of unforeseen circumstances without impacting the money you have committed to saving and investing. It is not a credit card!

    I am not a fan of Dave Ramsey as his thoughts on investment returns are a little nutty and you do point out some flaws in his overall thinking with respect to credit cards.

    But a credit card as an emergency fund…I hope very few people follow your guidance. A much better approach?

    Practice some discipline (i.e. don’t eat out, cut back on expenses, reduce cable TV service, etc.) and save – even before investing if necessary – enough to cover at least three months of living expenses.

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    Debt and the Girl

    Credits cards can either be a great tool, or a ticking time-bomb, depending on who is holding it. There are a lot of pro’s to having and using a credit card, as you mentioned, but unfortunately, not everyone is responsible enough to use it properly and therefore get themselves into horrible financial situations.
    Personally. I’m a big fan of the rewards I get from using my card, but I only use it when I know I can pay off the balance at the end of the month.

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    Dee @ Color Me Frugal

    Great post. I think you hit the nail on the head when you mentioned that his advice is best for those who are really struggling financially. Maybe not as much for those of us who more or less have it together and just need to keep moving in a positive direction.

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    I fall into the Dave Ramsey disciple category and like most of his followers we have at some point had credit card debt.

    At this point the options would be don’t ever use a credit card or use the credit card so you can(build credit, extra emergency fund, build business, rewards). Dave Ramsey answers this with, you don’t need credit anymore we aren’t going to borrow, 1k emergency fund builds into 3-6 months expenses, you can bootstrap a business without credit, it’s going to much harder and slower, and rewards he answers with have you talked with a millionaire who got rich on rewards cards?

    Now that I spoke for Dave, haha. My thoughts are I don’t want to use a credit card, it’s something I’d rather not worry about. I always look at buildings and usually the biggest and best buildings are banks and casinos, so they are making money off of someone, I choose for that not to be me.

    I’m probably in the minority on this one, but I feel good about myself by not using a credit card. Thanks for the article I look forward to the Dave Ramsey series.

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    You yourself are making some pretty substantial generalizations. But I can tell you are convinced that you don’t like Dave Ramsey, and by what you wrote, that you also don’t understand how his steps and safety nets are laid out and fit together; and that you do not know the average income of his listeners and followers. That’s okay, we’re all entitled to our opinion.
    It’s just this, aren’t we trying to help people financially? Then let’s attack the problem of spending, irresponsibility, lack of knowledge (or whatever you believe it is), and so on… Not attack other people who are trying to help! I now have a life insurance policy, emergency funds, two paid off cars, A growing diversified retirement fund, my wife is able to stay home if she wants to… Yes, all because of Dave Ramsey.
    Please have the honesty to say that’s a good thing? …and to see that he’s just trying to help?

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    I agree. Personal finance is personal. What works for me, might not work for you. And what works for Dave won’t work for everyone else. That is why it is important to read a lot and learn as much as you can. You’ll find ideas that work perfectly for you and they will help you reach your financial goals.

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    Some great points here. I took a really big credit hit recently and I can’t identify any reason other than paying off a significant amount of debt and keeping a $0 balance on my credit card. We can’t get around the desire to purchase a home and for that we NEED credit.

    Although, I do understand his approach as a large majority do not use credit in the right way. As long as he motivates his followers to take a closer look at their finances he’s doing okay in my book.

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    Jen @ Jen Spends

    Dave Ramsey gave me a valuable kick in the pants a few years ago, and I used his debt snowball method (I know, not unique to him) to get out of debt. The credit card thing is where we departed, though. Cash envelopes did not work for us whatsoever — it was impossible to have my husband stop off at the grocery store to get something I needed when the cash envelope was at home. Also, for some reason I find myself much more disciplined with a credit card than with cash. We pay our rewards card off every month.

    My husband and I both have credit scores near the top after a disastrous start because I didn’t have a clue how credit worked. If we need to (gasp) finance something, we can pretty much write our own ticket. I think Ramsey offers some solid advice, but nobody can provide a template that is going to fit perfectly for each and every situation. We do have a pretty good emergency fund built up, but saving up enough cash in time to buy something like a safe car to make the long commute to work was just not feasible on our current income. We tried. Thank goodness for credit.

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    While I agree that credit cards are not evil (and can be very useful, if used correctly), I have to disagree with you on one point:

    Credit Cards Provide A Form Of Financial Security – No matter how much money you’ve got in the bank, at some point in time, you may come across hard times financially. Although, it’s not wise to rack up debts you can’t pay back, it is wise to have a credit card that acts as an emergency fund. That way, when it rains, you’ve got a rain coat!

    Umm…no. When you are out of work, or sick, the last thing you need is for your groceries to cost 15% more (or whatever the interest on the credit card is).

    I don’t disagree with your other points, but please don’t lead your readers to believe that they should rely on a credit card for emergencies. Everyone should have a plain, boring, so-hard-to-accumulate cash Emergency Fund. It sounds like a stupid waste when things are going well, but oh does it ever help when things go wrong! 🙂

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    Alex @ Credit Card XPO

    I totally agree with you. Credit cards are great when used responsibly. Having a good credit history and score is very important and saves thousands of dollars when we need to finance a car or home. There are so many benefits of using credit cards like you mentioned above. Using a credit card and paying it off on time every month is the easiest way to establish credit. It’s also great for small business start ups as a source of funding. Getting cash back/miles is another benefit that cash can’t offer.

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    One thing I have never understood is how people are supposed to buy a home on Dave’s plan without credit?
    His concepts work great for people in their thirties who already have the mortgage, two car loans, credit card debt and student loans.
    What about those like myself who need to buy the house yet? It will take a long time to save up a down payment, and that isn’t good enough if you don’t have good credit.

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    I see where you are coming from and this post is well-written, but I disagree with some parts.

    I think credit cards are a horrible way to get financial security. If you get into an emergency that you can’t afford, going into debt will only make things worse.

    As far as building credit, I agree that they play a huge role, but with Ramsey’s approach of a no-credit lifestyle, he doesn’t value credit scores.

    That being said, I love the rewards that I get fro my credit cards. I have always said that if you can use them responsibly, use them. If you can’t, never touch them.

    They can easily cause more damage than good if you can’t use them responsibly.

    Thanks for the post! I like hearing opinions on popular financial gurus.

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    WOW! I am sitting here on an overtime shift with not much to do except Google stuff. And since I am a Dave fan and am working this extra shift to pay off my HOUSE by December 2014 (my 30th birthday) I googled “Dave Ramsey nut job” to see other people’s views on this guy…Of course you will have to read this AFTER you are done at the dealership leasing your brand new Lexus you got such an awesome deal on!
    You say that Dave is only tailored towards a “small” group of people who very much struggle financially that they just should not have credit cards. HELLO! Have you done any research on what a huge mess most of the country is in financially because of impulse consumerism? These people are in such a mess BECAUSE of credit cards. PLUS your statement implies that you are somehow much better off than “we” the “regular” people are. Dave’s advice is for people making 25K to 1 million a year and he proves it every day. My household income is 118K which is more than double the average household income and in Utah where I live that money goes a long way. I was never in a financial mess I just lived like everyone else, I was “normal” kind of like you now. I borrowed money for my cars, I used credit cards for TV’s and computers and used cards to finance vacations. In other words, I was NORMAL. The fact that you think that financing cars is a normal part of life tells me that you are not well off. I used to drive a brand new BMW M3 while renting an apartment tell me how in the hell does that make sense? I still love my cars but I wait and pay cash for them. If that means that you have to wait 3-5 years to pay cash for a car then so be it, don’t buy stuff you can’t afford. Remember, broke people ask how much a month, wealthy people say how much!
    You claim that Dave puts everyone in the same group…that may be kind of right but that is because his advice can be used by anyone. His advice is common sense and it works for everyone. It’s simple, don’t spend money you don’t have, don’t spend your next 60 paychecks you didn’t get yet. Don’t use high interest credit cards (even Warren Buffet gave that same advice and he is a Billionaire!!!). Build up an emergency fund and then build up wealth and live in freedom and peace.

    You talk about Credit cards building your credit score. I used to be proud that my credit score was 776 but now I could not care less. I spoke to my local credit union manager and she said that even if my credit score was 0 (which it will be about a year after I pay of my last debt which is my house) I will still be able to get approved if I choose to go into debt again due to my liquid assets and net worth just by using good ol’fashioned underwriting so take your credit score and shove it!
    You claim that using credit cards is more secured then using a debit card. You are wrong! It is a FACT that Visa offers the same protections on its credit cards and debit cards. THE SAME PROTECTIONS, there is no difference!
    You claim that credit cards are a good emergency fund. That is so sad that I cannot even laugh at it! That statement tells me that you spend everything you make and that you are not good with money. Anyone who uses credit cards as an emergency fund is living a life on the edge….that kind of thinking is just sickening and I don’t know how you can think that it’s OK to say that.
    Finally I would like to add that I do not follow all of Dave’s advice. I do not believe in god or am religious in any way. I come from a country where people murdered each other because of religion and I choose not to be a religious person. I use my credit card one time a year. I purchase about 10K dollars worth of airline tickets every April which I buy with my credit card and the same day transfer money from my checking account to cover that expense. I get points and only use the card (only card I have) to purchase tickets once a year. I am happy using that card even though Dave would not agree with me…..I am very happy I started listening to Dave some years ago and started being smart about my money….I don’t have to agree with everything he says but I can still use him to keep me motivated and use common sense..Dave is kind of like your good friend who happens to have a few different opinions but you still get along with him.
    I understand your though process I really do. I could easily walk into a BMW dealership and “buy” (borrow money) for a 100K sports sedan and trust me I want to every day. That purchase would not change anything in my budget. My quality of life, my budget and my spending habits would not change. But without debt I am truly free and I can do anything I want. If I decide to move my family to freaking Alaska tomorrow I am free to do that because I made the right choices and I have nothing to keep me down….How far will your credit card take you??
    Once last thing before I finish this. You remind me so much of my friends who have a similar income to my wife and I. They make fun of frugality, drive two BMW’s and use credit cards like they are outgoing of style. Everyone thinks that they are wealthy because of the way the conducts themselves. Last year before our camping trip we went to Costco and when my friend found out that he had to pay 400$ of groceries with a debit card (Costco only takes debit) he asked me to pay because he did not have enough cash on his checking account. Sad stressful life, enjoy your credit cards you sad sad people. You will be slaves forever. One more note would be for you to youtube “Warren Buffet on debt” and read/listen to the book “the millionaire next door”…good luck in life and maybe when we are both in our sixties we can be neighbors living it up in Florida but the way you are going I doubt that!

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      Allen – You make a lot of assumptions here. I believe in what Josh wrote, but I don’t fit the profile you paint. Make fun of frugality? Hardly. I waste as little as possible am am frugal with both my time and my money.
      Your comment went pretty long, let me address two points. I believe (this means I am offering my opinion, not quoting any mythical studies) that card users fit into two distinct categories. The pay-in-fulls and the balance carriers. Carrying a balance, paying north of 12% interest, is awful. Using a card as a convenience, a budgeting tool, is a different story.
      I am 51 and recently ended a near 30 career. In hindsight, the fact that my wife and I saved nearly 25% of over income over the last 20 years we worked meant that, if nothing else, our use of cards wasn’t quite the killer you suggest.
      I have never seen a study that proved card users spend more. Every study I have seen has been with students using a $20 gift card or cash. This doesn’t extrapolate to a $5000/mo family budget. The card rewards I’ve gotten go to a 529 college account, now over $22K. It will pay for a semester of school for my 15 year old, if not more. Not everyone fits the stereotype of the person for whom credit was a budget killer. For us it was the opposite, we never charged what we couldn’t pay when the bill came.

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    Wise use of debt is an oxymoron: if you were wise you’d be earning interest, not paying it. Credit Cards do n’t work out for the majority of people who use them or the companies would go out if business!

    And am I surprised to see Credit Card ads running at the top of your page? No, I’m not!

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      Such platitudes are meaningless. You may as well go on to call credit cards evil.
      My retirement account rose 33% last year (2013) vs the 2.5% my mortgage cost me, as I watched it value erode by a 1.5% inflation rate. Is it wise to pay interest at 18%? No, of course not. It’s rarely wise to even pay a dime in credit card interest. But lumping all debt together as if an 18% card and 3% mortgage are equally to be avoided is nonsense.

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    I’m proud to have followed Dave Ramsey’s plan and paid off 56k in 26 months in 2011. Life without credit cards is much much easier.

    I don’t need credit as I don’t borrow money

    When I goto buy a car I write a check and can finish the transaction in minutes after a deal is made.

    For financial security I have 6 months expenses in cash for emergencies

    The import/export example for businesses using credit cards to borrow for inventory is just bizarre. No company that lasts will buy their inventory on credit cards with interest rates of 9-23%. You just killed your margin.

    Debit cards offer the same protection as credit cards. They just won’t put you in debt.

    Dave Ramsey is not wrong on this. By not using debt in the last 4 years I’ve went from a -70k net worth to 100k net worth. My income has increased by 25% over that time, I’ve paid cash for exotic vacations, and I’ve been able to give like I’ve never imagined.

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