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Why I Disagree with Dave Ramsey

The other day, I was driving a lot and happened to catch a couple hours of Dave Ramsey's show. I think I've got a bit better read on him, and I know now that I disagree with him on a super-fundamental point.

Some chick called in from Houston talking about how she had been in a lot of credit card debt, but she pulled herself out of it and was now using them responsibly, turning the tables on the credit card companies by putting them to use instead of the other way around (as I advocate). Well, Dave Ramsey would have none of it. He gave the oft-cited statistic that people spend 15% more when they have a credit card than they do when they pay cash. He cited a study by McDonald's that said that people spend more with credit cards than with cash.

(Brief aside: I couldn't find anything specific about the way these studies were conducted, but really quickly I can come up with a way that they might be flawed: Cash is obviously limited. People who carry both cash and credit cards might try to pay with cash but be forced to pay with the credit card when the transaction size gets too large. Also, I think that many people (like myself) are reluctant to use the credit card when it's just a small transaction amount. So you have to turn the question around: what if, instead of credit cards "making" people have larger transactions, having larger transactions "makes" people use credit cards? This is an easy way to get the same result. As everybody learns in Statistics 101, Correlation Does Not Imply Causation. And even if it does, the direction of the causation is often up in the air. If anybody's got a link or further info on any of these studies, please let me know! There's got to be a journal article somewhere.)

Dave said that he had an "emotional attachment to cash" (and implied that everyone else in the world does too). He said something to the effect of "when you pull out old Uncle Benjamin and lay him down on the table to pay for a meal, you have a little heart-to-heart." This is absolutely false for me. I have never been too good at holding on to cash. To me, cash is meant to be spent. If I didn't want to spend it, it wouldn't be in my wallet, or even in the form of cash at all. It'd be in the bank. Some people talk about credit cards as a contrast to "money in the bank" (e.g., when distinguishing between credit and debit cards and why they prefer the latter). In my case, cash is "money already out of the bank."

When I lay down the credit card, I know that I'm still going to have to pay for it when the statement comes. Using a credit card obliges me to carry out a future action. This adds certain weight on the mind. Cash has no such consequence, and carries no such weight. In fact, when I use cash, I get the opposite emotional effect from what Dave describes. I feel carefree. Sometimes (if the amount is large) I even feel powerful. Spending cash gives me a high, even if it's just $5 at the sandwich shop. Spending on credit gives me the opposite effect. It is literally a burden, and it is felt as such. This is one thing that helps me keep from over-spending on my credit cards.


J.D. said...

This is the problem with dogmatism of any sort. What works for one person may not work for another. There are often multiple paths to the same destination, and when a person insists that his path is the only way, he does a disservice to those for whom the path is actually more difficult.

This is true not only in personal finance but all walks of life.

plonkee said...

I absolutely agree with j.d. There are many ways that work and what works for one person won't for someone else.

I'm also with you on the spending of cash. I operate on a fixed amount of cash that I withdraw every week for small purchases. It has to be fixed because once its in my grubby hands its as good as gone. I cannot keep it in my wallet, yet am curiously reluctant to overspend on credit.

Siggy said...

Cash is self-limiting (assuming that you are loath to carry thousands of bucks around with you) and so can restrain the temptation to spend too extravagantly on items that can be purchased with either cash or credit (such as restaurant meals).

However, many purchases are fundamentally oriented towards a specific payment method. I generally buy burgers with cash while I generally buy computers with credit.

In my experience, blurring the lines between the two forms of payment is where the danger lies (and why banks push debit cards so strongly). If you are buying a meal with a card, you may as well go to Mortons as McDonalds.

I try to limit myself to using plastic only for 'items' and to preferring to buy such items online. That reduces the 'instant gratification' effect and makes it less likely that I will buy something that I do not really need.

Chris Thomas said...

If you have the self-discipline to use the cards and pay them off each and every month, that's great, but statistics say that it's a drastically different story for the vast majority of Americans using credit cards. You can say "spending cash doesn't affect me" and "I don't pay a dime of interest" all day long, but at the end of the day the data is there for a reason. I'll never use cards and I firmly believe it's the best way, but dude, people can have different opinions. It's what makes the world go 'round.

Living Almost Large said...

One thing I don't like about DR is that he never shows the study he cites that people spend more with CC. I've looked and posted about it and asked numerous supporters to find "the study"

I think it doesn't exist. If it did DR would be brandishing it about everywhere. And someone with his money could find it. So I'm guessing he just says it exists because he heard it somewhere, not because there is scientific data to back me up.

And any DR followers prove me wrong and I'll love it. I'd love to read the study. Post it. I'm throwing down the gauntlet.

Morgan said...

Game --

No big deal to have disagreements on this stuff, the financial world is both complex and intensely personal.

I couldn't find the Dun and Bradstreet study offhand, although it is widely quoted
I sent them an email and hopefully they will be getting back to me.

Regardless, my guess would be that D&B would have sued the pants off of Dave Ramsey if he was using their name without their consent. D&B does a lot of credit-related products and services, I seriously doubt they are short of lawyers.

However, I was able to find this study that showed that the average purchase at a vending machine was 50% higher when using a credit card. Also, the Wall Street Journal printed an article that mentions this phenomenon in 2004

This jibes with my personal experiences in switching from credit cards to cash. I spend about 50% less than I used to for business lunches, simply because I feel the pain now. I use coupons and don't order drinks with meals because I want to keep the greenbacks in my pocket.

The simple fact is that the institutions that are in the credit card business are there to make money, plain and simple. They have the NYC skyscrapers and we have the three bedroom houses in the suburbs.

The best analogy I can make is to card counting at Las Vegas. The casinos there make far more from people who think they know how to count cards than they lose to people who actually can count cards.

Ed Stash said...

That study that showed that credit card purchases at vending machines are 50% higher...couldn't that be explained by people who want to purchase a higher-value vending item, find they don't have the cash or change to buy it, and then use their credit card to purchase it?

I want to see that DR study also...I hear him mention it all the time against people who don't like to use cash. However, did the study separate out people who pay off their balances at the end of each month vs. people who carry a balance? Because he doesn't differentiate between the two he is wrong to use the study to criticize those who use CC's insead of cash. A person who pays of their balance every month is less likely to spend more than a person who doesn't pay off their balance and rationalizes that this one additional purchase is not going to increase their overall monthly payment.

Dave Ramsey, let's see the study and its methodology. I'm earning 2% back on every purchase, 5% back on gas, and have never had a problem with overspending. If you're going to quote the study, be prepared to explain the methodology when people ask or be accused of playing fast and loose with the data.

fiscaldude said...

Ya'll are killing me here......You guys truly don't understand.....2% back huh? Wow you should go buy a car.....oh but you gotta pay your annual fee im sorry.....5% on gas..oh my god lets go out and buy a game on our card........You all seriously have to be broke....Do you not know how much more your spending on crap when you use credit? Does that not register in your little minds?...and don't say oh well its 12 months same as cash...So thats ok....No its not cause its not CASH....STUPID.........i want you guys to explain to me whats gonna happen if you get injured, sick or you get fired and you can't work anymore cause of that disability...Whos gonna pay the amount due when your not getting any money? oh and the basic bills too, (power, gas, rent, water)??!!!...its pretty odvious that people do spend more with cc because the average home is 8G's in debt........

You ever heard of if you don't have the money dont't buy it? its such an amazing concept (but most people have lost it)...

So whats it like paying for lunch you ate 10 weeks ago?

There are different ways to get to one place?..So paying cc companies will make you more money?

Yea know just because you have 5000 in positive credit don't mean you have 5000 dollars...Go out and spend that 5000 in credit...lets see how that will turn out for yea..


Anonymous said...

I don't need any "studies" to prove that DR is correct when he says people spend more when using credit cards, all I need is LOGIC:

Cash is a limited resource (in your wallet). You cannot spend cash that you do not have, therefore you can only buy stuff that you have the cash to cover (at the time of purchase) -- NO DEBT.

Credit, on the other hand, is a near limitless resource (*1). A Credit Card allows me to buy things that I do not have the cash to buy.

LOGIC: Given that households, with at least one credit card, have a median balance of $1,900 (*2) on those cards -- and the average balance on Cash-based households has a ZERO dollar balance (by definition) -- it is proven that people with Credit Cards spend more (than they can afford) than the people who use Cash only.

Why would anyone need a "study" to back this claim up? It is impossible for someone to overspend when making ALL purchases with Cash.

(*1): I know credit cards have MAX limits, but they are rarely enforced. The "overcharge" transactions usually go through, so the CC companies can charge higher fees.


Anonymous said...

Another comment you often here is that I can afford the payments.

No you can't. If you cannot afford to pay cash, yo cannot afford what you are about to purchase.

Pyroguy said...

The study that DR is talking about was done by Dunn & Bradstreet - freely available to members of D&B. Have I seen it? yes. I belong to D&B. Can I share it publicly? I don't think's copyrighted.

I would suggest joining D&B and doing a search.

Anonymous said...

I agree with some of you that say what is good for one shouldn't be good for all. But it goes with out saying that there is a tremendous amount of credit card debt in America, i don't think we need extensive studies to understand this. The root cause is people spending money (credit) that they don't have. For years we had one credit card and paid it in full monthly with an average monthly balance of $1900, and felt like we were disciplined and managed well. Once we heard DR and stopped using it we feel we have a wind fall of money. We sopped purchasing a lot of little things that we don't need and stopped going out to dinner so much. Gosh, dinner at home as a family what a concept. Cash only may not be for everyone, because some of you feel like somebody is telling you how to live, and you can't have that. But the fact of the matter is a majority of people today need to get a grip and start living with in their means.

Anonymous said...

>>>>The study that DR is talking about was done by Dunn & Bradstreet - freely available to members of D&B. Have I seen it? yes. I belong to D&B. Can I share it publicly? I don't think's copyrighted.>> Dave seems to share?

Well then give us the facts of the study. What were the conditions of the study? Were credit users who paid off the card every month separated from those that do not. Was there any control over the subgroups for the effort to budget OR ANY OTHER FACTOR THAT WOULD INFLUENCE THE RESULTS???

Dan said...

Unfortunitly, we don't know how many people participated in this study but taking away people that pay their card off each month has NOTHING to do with the results. If the study was to prove whether spending on credit cards causes the person to spend more than if they use cash, the only thing they would have had to separate were people who used cash and people who used credit cards.

Another interesting point Dave Ramsey has is a study was done (not sure about where to find this study) where people were hooked up to an MRI machine and it actually registered physical pain when they spent cash instead of using credit cards.

My wife and I don't use credit cards. Not because we aren't responsible, we just figure if we have to put it on a card where we can wait to pay it off, we don't really need the item. Now it is different for each person. Here is basically what Dave says in the first two steps:
1) Build up an emergency fund. I don't think anyone is going to argue with this.
2) Pay off your debt. Again, not too much arguing here.
I think those are good steps for all people to follow.

Jenna said...


I am looking for that study by D&B....I work for a company that is the member. I called about 10 different people at the company and no one seems to know anything about this study. Could you direct me as to how you accessed it?? Thanks!

Lee-Ruth-Clark-Cal-Shanna-Haley-Elden said...

Here is that study quoted by USA Today:
Let me ask...are you a millionaire like Dave? If you are then you have all the right to have a credit card.

bryan said...

You are quite possibly spending more by paying cash than I do with CC. This is because I have money in the bank to cover it and could go get cash, but it is more convenient not to. This way I save time and gas money from a trip to the bank and just pay electronically at the end of the month, plus get cash back. As for the running out of money when you lose your job, that would be more likely if you refuse to use credit because then you have whatever wealth you accumulated as opposed to that plus credit lines available.

I like DR because he does a good job for his target audience, whom have little to no former finance knowledge nor interest in gaining it, but his math is often wrong though. Especially ridiculous is the 12% mutual fund when every other finance pro says 7-8%, and the 12% retirement is just dangerous when standard advice is 4%. I don't want seniors out on the street broke due to obscene assumptions for returns.

Bill Bennett said...

I think Dave Ramsey has some good information to impart to his fans and "clients" (The ones making him rich). I disagree with so much of his advice about credit card use, that I cannot in good faith even take the course "Financial Peace University" myself. I teach basic computers to seniors at our local Seniors Enrichment Center, and was considering proctoring this course to a group of seniors and anyone else wishing to participate. But I cannot teach something I don't professionally believe is the correct course of action for my own financial dealings.

Part of my reasoning about cash vs. credit payment is as follows. One can pay for most everything with cash, checks or debit transactions. But online, you have to use credit or debit cards (and sometimes checks). But I prefer to USE the system to your advantage, if you have credit cards with zero-interest for 12 to 21 months. I won't always have those zero-interest cards, so use them while you can.

Let me give you a couple of examples. I have 2 (two) cards with ZERO interest for 15 months. In just 8 months I have made almost $500.00 in Cash-Back funds and Cash Rewards rebates! I still have seven months to go before interest kicks in. In the meantime, I have a new 21-month interest free card that takes me all the way out to a total of 28 months before I have to even deal with interest. No one can tell me, Including DR. that's not a wise use of credit cards!

Another saving treat is being offered by Discover card. I bought a new Dell 2 in 1 notebook just before Christmas for a little over eleven-hundred dollars. Using a debit card (cash) that's what my final total would have been. Using Discover I received a TEN-PERCENT (10%) REBATE on my January statement! That's over $110.00 I would not have had by paying cash. interest on the card...yet.

Even with the use of these cards, with interest being charged, and getting between 1-5% rebates back on the next statement, makes plenty of sense to me. All you do is pay the balance in "Dave Ramsey cash(debit)" during the grace period after the billing comes out....and guess what? No interest!

We all know the above concept does not work well until you get your overloaded credit debt problems taken care of first. Even then, I would prefer to pay down the HIGHER INTEREST-LARGER DEBTS first. Once you have your debt problems solved, and credit rating back into the good-excellent range, you can do the same things I did, unless you've been convinced to never use credit again.