Yo, Dave Ramsey, I respect you, and Imma let you finish, but what about Opportunity Cost?

Let me start by saying that I am a huge Dave Ramsey fan. When I completed residency and began my current position, The Total Money Makeover was the first personal finance book I read, and pardon the cliché, but it changed my life.  It instilled in me a strong foundation in money management and offered me a road map to handle the situation I was in: hundreds of thousands of dollars in student loan debt, starting my first real job at age 31, thinking about buying a home with a wife, three kids, and no significant assets. 

My first instinct was to, “put a little toward student loans, put a little toward a down payment, and put a little toward investments.”  Dave Ramsey convinced me that this was not a good idea just starting out and I agreed. 

I used Ramsey’s “debt snowball” plan to get control over the many different types of student loans I had including some from my undergraduate days.  After quickly taking care of some of the low-balance loans, I was able to put more toward the larger balances as each smaller one was paid off.  Is wasn’t long before my initial debt was cut in half.  This is where I strayed from the Dave Ramsey path.  

Earmuffs Dave: Invest While Still in Debt?

Once my student loan debt was manageable to me, meaning I felt my income was high enough and consistent enough that I could easily pay off my loans in less than five years, I started to put a little more money(I was already maxing out my 401k) toward investments and a little less toward my loans.  These investments were in the form of a defined benefit plan, three 529 plans and a taxable investment account. 

The reason I decided to take this route was my loan interest rates were 3-4%, but over the previous 3 years I was averaging >10% in returns from investments.  So naturally these numbers led me to explore this other option, because 10 is more than 4, just ask my friend Shel Silverstein. Is this always the right move?  No, there aren’t guarantees with investing.  Should you at least consider another option?  Absolutely!

Opportunity Cost

This is about opportunity cost, the cost of choosing one route versus an alternative.  If you are putting all of your time, energy and money into paying off your student loans and mortgage, that leaves very little if anything to invest.  You’ll have given away precious years of compound interest growth at an average rate around double the rate of the loans you are paying off. 

Side note: this does not apply to high interest debt like credit card balances, that debt needs to be paid off ASAP, Dave Ramsey style.

Other side note: I also respectfully disagree with Ramsey that credit cards are bad, I contend they are excellent for rewards as long as you pay off the balance each month.  But that’s another topic for another day.

I’m definitely not presenting the right way to do things or suggesting that you shouldn’t put 100% of extra money toward debt payoff.  Each situation is different-loan size, term, interest rate, income, investment risk comfort, age, job security.

I am merely offering another view, another opinion, or even another second opinion.  Did you see what I did there? Because of the name of this site…Another Sec..whatever, let’s get going:

Three Young Doctors

Let’s say there are three young doctors, fresh out of training with $100,000 in student loan debt.  To pay the student loans off in 10 years, the minimum monthly payment is $1,012.45.  Let’s now pretend that each young doctor has an additional $1987.55 to either put toward loans or invest ($1,012.45 + $1,987.55 = $3,000).  Once their loans are paid off, each will put the all of the money toward investing, $3,000/month.  Finally, let’s pretend that we follow their journey for 10 years.  

Before we get started though, we need to make some assumptions:

 -$100,000 student loan with a 4% fixed interest rate

 -No tax deduction for the student loan interest because their income is too high

 -Stable income so they don’t need to deviate from the plan

 -8% annual market gains

 -Investments aren’t sold during the 10 years so no capital gains tax

 -Negligible inflation

 -Dividend tax is also negligible (either small dividends or tax sheltered account)

Young Doctor #1

Just read The Total Money Makeover coming out of residency and wants to stick with the plan.  She will put all of the $3,000 toward student loan payoff each month.  Her loan will be paid off in about 3 years, after which she will invest all of the $3,000 each month.  

After 10 years, she will be debt free and have an investment account worth: $334,976.84

Young Doctor #2

Just read Rich Dad, Poor Dad and is determined to build assets which will lead to passive income.  He wants to just pay the minimum toward student loans and invest the remainder, $1,987.55.  By just paying the minimum, it will take him the entire 10 years to pay off his loan.

After 10 years, he will be debt free and have an investment account worth: $360,309.42 

Young Doctor #3

Just read both books and decided to hedge her bets a little by paying more than the minimum on her student loans, but also investing at the same time.  Of the $1,987.55 left over after the minimum payment, she splits it in half and directs $993.78 toward student loan payoff and $993.78 toward investments each month.  Her loan will be paid off in 4.5 years, after which she will invest all of the $3,000 each month. 

After 10 years, she will be debt free and have an investment account worth: $345,529.58

Conservative vs Aggressive vs Moderate

These three young doctors will all be debt free in 10 years, but will have different amounts in their investment account because of their difference in risk tolerance. 

  • Physician #1 (loan payoff priority):   $334,976.84
  • Physician #2 (invest first priority):    $360,309.42
  • Physician #3 (contribute to both):    $345,529.58

If you want to be as conservative as possible, then you’ll make it your primary goal to eliminate debt. 

If you are a risk taker, you’ll accept being in debt longer with the tradeoff of probably having more money when it’s all said and done. 

If you’re like me, you’ll probably try to find a good middle ground: more aggressive than conservative, but more conservative than aggressive, or conservatively aggressive??  Some may also call this being a moderate risk taker.  Of course, this is a spectrum and you can adjust your risk however you’d like. 

So let’s pretend I did just grab the microphone from Dave Ramsey at a personal finance video awards and gave my spiel.  After I dropped the mic(camera cut to Beyonce giving a standing ovation), I would pick it up, hand it back to him and chances are, he’d say something like this:

“We buy things we don’t need with money we don’t have to impress people we don’t like.”  -Dave Ramsey

Chances are he’d also slap me.  

Sorry, Dave. 

Track all of your INVESTMENTS at once!


Another Second Opinion
  1. I’m still torn on this. The only debt we will have is a mortgage, 30 years that’s starting in about a month. I want to destroy it, but also know that time is on my side while I’m young as well. Do I split the difference, or just go full-investment route?

    I think we’ve settled on splitting the difference; a plan to invest and pay off the mortgage over 20 years. That should allow us the flexibility to FIRE once the mortgage is paid off, if all goes to plan. Worst case is we can’t, but we still have a paid off house.

    I think in general I like Ramsey’s advice, but I always take everything with a grain of salt. Personal finance is very personal, and blanket advice rarely applies 100% to a particular situation.

    • I totally agree with you, each situation is different. Only having mortgage debt isn’t a bad situation to be in, good for you and congrats on the new house! Plus it sounds like you’ve got a solid plan so I’m sure you’ll do just fine.

      I’m not overly aggressive so I’m a big fan of splitting the difference in a lot of occasions. That is the reason I hold a small amount in bonds despite being on the younger side.

  2. Great post! Just saw this title in the Rockstar Finance email as “best title of the day”. You got my attention haha. In my opinion, Dave has some good advice, and he has some bad advice. I personally think it’s crazy to pay off debt with interest rates at 5% or less over investing. I agree with your points about each person has a unique situation as well. Glad you dropped that mic!

    • Hey Robbie,

      Thanks for the message! I had no idea it was mentioned in the Rockstar Finance email (I love that site), I guess I forgot to subscribe to their list…oops…I’ll do it now.

      This was an idea I struggled with over a few years, which was fine because it allowed me to pay down a decent amount of debt while I mapped out my longer term goals. I will admit though, it’s easy to say these things in a bull market, but again, if you’re thinking long term it should still be advantageous to invest early.

  3. Hey,
    Good article and your numbers are spot-on and I love numbers! But, that’s also the problem, it’s not about the numbers, it’s about peoples behavior. Just speaking from experience, I was a complete idiot with tons of debt and lived paycheck to paycheck because the numbers were all I thought about. Like you, Dave’s teaching changed our lives. But after 1 year of ‘gazelle intensity’, my wife and I had changed our behavior and we then shifted to a more balanced approached to debt payoff, investing and “smarter spending” (there’s a blog post for ya). I’m not critical of your post, I loved it! But I try to remember that 95% of the population just buy things because it makes them “feel good” for a short period, then they buy some more to get another shot of dopamine and the result is some bad behaviors with no consideration of the numbers. Keep up the good work! We can change people’s lives for the better with your message!

    • Thanks for your comments Bruce!

      I agree that it is more than black & white with investing vs debt payoff. I’m a big numbers fan also, but you’re right, the human component is huge and the “Keeping up with the Joneses” mentality is real. I’ll admit that we are not the most frugal people in the world, but we do consider the financial impact of nearly every purchase and try to make sure we are getting the best price and maximizing rewards cash-back at the same time.

      I just listened to a podcast in which the presenter stated he was saving ~$24,000/year just by making better financial choices: no cable, cheap cell phone plans, smart grocery shopping, etc. Imagine if we all had an extra $12,000 for debt payoff and $12,000 for investing each year, that’d be huge!

  4. We started with Dave Ramsey. I jumped head first into reading with my husband and then I joined a bunch of groups. I, initially, had drunk the Koolaid. We made our little baby emergency fund the last year we were in college. I ignored our student loans for the remainder of college and took out a car loan for a new to us car that was safe for cross country traveling. I knew we were moving far from home due to my husband’s career choices…I just didn’t anticipate being sent to a rock in the middle of the Pacific. Once we got settled we started to Snowball our debt…but that didn’t make much math sense to me…so we mostly do an avalanche. We had a windfall due to two family members passing away that let us put a significant chunk in our debt repayment. Our student loans will be paid by the end of this academic year (I’m a teacher…I view the year differently). We will still have a car loan… I think. I don’t really know my login information for that account and I don’t get any statements in the mail…so I will make time to call them over a holiday break.

    During this period we did choose to not open a 403B for me. We are putting a small amount (5%) into my husbands TSP retirement account. I am required to put 8% into a pension that when we move I can roll over into an IRA without any of the interest gained. After our debt is payed I want to ramp out contributions up to 15%.

    Dave Ramsey Advice we don’t follow. We use a credit card for everything and pay it off every month. I have missed one full payment in two or three years. I paid my stupid tax and felt stupid. I also don’t love his investment advice. I despise how his followers on social media seem to believe that one size fits all…and it just doesn’t. We use DR baby steps 1-3. Then we want to save for a home. We use some guy that had a TV show for a season (Debt or die…I think? maybe life…) that suggested a 30/30/30/10 budget. 30% Housing, 30% expenses, 30% savings/debt and 10% for yourself. It made me more proactive about how I was budgeting money which was good.

    Anyways. You are right. We need to analyze our own unique situations and go from there. One size fits all rarely works.

    • Thanks Mrs. Wanderlust!

      First off, sorry to hear about your family member’s passing. But that’s great that you’ll be done paying off student loans this year, good for you guys! Being debt free in Hawaii (I assume?) isn’t too shabby of a life. My wife is also a teacher so I definitely am in tune with the academic year, thanks for your service in education by the way.

      I think some people are too overwhelmed with finances that they need a simple plan laid out for them and Dave Ramsey does just that. But he also gives you some building blocks to allow you to make choices for yourself and deviate from the plan.

      I’m with you on the credit card thing. If you ever accidentally miss a payment, you can always call and have them waive the % charges and fee if you have a history of paying the balance in full every month. These companies want you as a customer so you can always give them a call and escalate up to management if need be.

  5. Thank you for this post – this is just what I’ve been struggling with lately. I’m a risk-averse singleton, and my only debt is my new 30-year mortgage. Even though I know that it makes more financial sense to invest more and pay the minimum on a low-interest loan (3.625%), I was raised on Dave Ramsey (have so much to thank that guy for!), and debt just rankles – I find myself almost unconsciously throwing extra payments at my mortgage.

    My primary struggle is the lack of diversification – most of my investments are in index funds through my 401K and IRAs, but it’s still all in the stock market, which makes me feel like all of my eggs are in one basket. I wish that there were more alternate investment options for the little guy – I would be more comfortable paying the minimum on my mortgage then. I’m thinking of trying my hand at P2P lending (like Lending Club) or an eREIT. Penny for your thoughts?

    • Hi Kandice,

      Thanks for your comments! I think you’re in a solid situation in only having a mortgage as far as debt goes with a pretty good interest rate. It sounds like you’re already investing so throwing a little extra toward mortgage is not the worst thing in the world, especially while you research some of these other options you mention.

      I do believe P2P lending and eREITs are riskier investments compared to the stock market. I would argue that the stock market has many opportunities to diversify your portfolio: international stock, REITs, tax-efficient bonds, etc. You could always set up a free taxable investment account with Vanguard and diversify this way if your retirement plans don’t give you many options.

      If you’re risk-adverse then these other options may not be your thing. They will probably offer more of a potential reward so I would suggest that if you do diversify with that route, just get your toes wet and start with the minimum and see how you like the risk.

      Please keep me updated if you give these other investment options a try, I’d like to follow your journey.

  6. This is an interesting article and I enjoy seeing the calcuations. If you strictly go by the numbers then yes, it makes more sense to wait to pay off your loans assuming they are that low. We paid off $107K of debt and our loans ranged from 4.75% – 7.75% so it is easy to see how varying interest rates can affect this approach which you did speak about. Also, some of my loans were on a 25 year track. I was not interested in paying into my early 50’s and in this scenario you would still have 15 years to go.

    The hangup I have with this approach though is that it completely ignores human behavior. I’m not being accusatory just pointing that out. When paying off debt, you find extra motivation and incentive to get out of it. The reason I think there are limitations to these numbers is that if paying off debt caused you to dig deeper each month than if you were investing then the numbers would be a lot closer. For us, cash flow is a big deal. By keeping debt around you are keeping your overhead high. If you lost a job and you still had debt that is extra burden. Also, it might be the difference between 2 people working or only 1 person in order to pay for that overhead. It certainly was for us.

    Dave Ramsey is super stubborn with his advice. It is a one size fits all plan but it is one where you will be successful overall. Because he is the biggest finance personality he has to do a one size fits all plan and I think he is OK missing out on the more analytical finance people because they are able to handle things themselves.

    The other part is that whatever number is assumed for ROI then that is an average but that is not how it actually plays out. It could be a lot more or a lot less after 10 years than what is calculated due to swings in the market. Overall though, time in the market is key which supports your argument. I appreciate the analysis and for people who really don’t let emotion get in the way of their finances and spending then this would work well for them.

    • Hi Kevin,

      Thanks for your reply! You are correct, everyone is approaching the debt payoff vs investing from a different perspective. What worked for me won’t work for someone else.

      In your scenario, having loans of 5-8% begs for a quicker debt payoff. Also, I agree that having loans for 25 years isn’t ideal either and you’re right, there is a human component to it which reaches far beyond the numbers.

      My goal isn’t to tell others what to do, I feel that’s a very personal decision that each household should make for themselves. I’m just trying to show some alternative options to the mainstream teachings.

      • Yeah, I agree with that and appreciate the math. I think a lot of people just need to be told something and then they can always optimize later. So many, incuding myself, try to optimize first and then never get off of the ground and then time passes and they lose any advantage they had with optimizing. Ramsey is not about optimization to say the least. He is like the gateway drug of personal finance.

        Most of us with blogs like to be super analytical and nuanced with our advice but that only reaches so far. Ramsey is on the opposite side of that. Some stay with him loyally and others like myself and it sounds like you branch out.

  7. I hate to speak for Dave R (he is WELL able to speak for himself). But I think what he would say is that you are ignoring risk in these calculations. And what that risk can do to your peace of mind and psychological well being. Paying off the debt first frees you of worry and concern. The stock market could tank 20%. Personally I was in a lot of stupid debt on highly leveraged real estate investments. When the market in my city tanked 60% and I was a million in negative equity with half my paycheck subsidizing the loans (full recourse in a regime with 12 year bankruptcy) I had a lot of stress and concern. This did ultimately affect my performance at work as I was distracted and focused on budgeting, debt payments etc. So I think my point is that sure the doctor paying off the loans first may be 30k better off (if interest rates don’t rise and if the stock market doesn’t crash). But that doctor will have had much more peace of mind. Which can lead to a better career, a better marriage, better relationships etc. and therefore may be better off holistically.

    My one criticism of Dave Ramsey is sending people to high fee mutual funds that his network of ELPs give him commission on when they would be much better off just going to Vanguard for a fraction of the price. But then that is his business model.

    Check out the Rockstar Finance podcast for a fun satire of the Dave Ramsey show.

    • Thanks for you comment Dave! I’m with you in trying to pay down debt quicker than you’re supposed to. I’ve always paid more than the minimum on my student loans, but decided rather than throw everything extra toward loans, to put some of the extra toward investing which has definitely paid off.

      Sorry to hear your story. I guess my thought on debt is toward mortgage and student loan debt, a common scenario for a young doctor. Leveraged real estate investments is beyond my scope of knowledge.

      I totally agree, who knows how stocks will perform in the next 10 years? But I’m looking more long term, so if stocks do go down 20% next year, great, I’ll buy more during the sale since I’m many years from touching the money. Someone closer to retirement should hopefully have less invested in stocks and be debt free at that point so wouldn’t be as hard hit by a decline near retirement.

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  10. Spot on. Way to tell DR to shove it in such a respectful way. I have such mixed feelings about his message. On one hand, he’s improved the financial lives of so many. On the other, his advice is very suboptimal and he could help people even more.

  11. You are forgetting one thing here though my friend! Risk. What happens if that 10 yr period doesn’t work out. What happens if they have kids and then the doc wants to stay home with the kiddos? The only way that works is if they are debt free.

    I don’t think it’s about the numbers as much as lifestyle here. No way is perfect for everyone.

    • Steven, I respect your comment, thanks for contributing to the discussion. I agree with you, no one way is perfect for everyone because of risk tolerance.

      I assure you that I didn’t forget about risk…if investing was risk free, this post would have been condensed to one sentence based solely on 1st grade mathematics: whichever number is greater wins.

      I’ll also propose the flip side of your argument: what happens if that 10 year period does work out? Then you’re in a much better position to consider retiring/cutting back early. If you’re debt free in 10 years with no investments, then it doesn’t really work out.

      Personally, my style is to hedge my bets and pay off debt at a decent rate while investing at the same time. But, as you said, no way is perfect for everyone.

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Another Second Opinion