It seems I write a post about Dave Ramsey every couple of years. They're popular posts, both for regular readers and for people later finding the site on the internet. Dave and his teachings can be a bit of a lightning rod, where people either become unabashed disciples or spew venom upon hearing the mere mention of his name. Despite Dave blocking me on Twitter (for criticizing his PSLF related advice I think), I like his show and for the most part his advice. I even make my kids listen to it. Plus, he is a very talented radio host I can't help but admire for his entrepreneurial success. The dude can market like a boss.
At any rate, let's take a quick look at what he gets both right and wrong.
14 Things Dave Ramsey Gets Right
# 1 Personal Finance is Mostly About Behavior
One of Dave's biggest contributions to the personal finance space is his relentless focus on behavior. He is absolutely right that getting into debt is caused by bad behavior and so getting out of debt cannot be accomplished until the behavior changes. Behavior also makes a significant contribution to investing. It turns out the investor matters a lot more than the investment. The math matters too, but only once you get the behavior right.
# 2 When Debt Is the Problem, Paying Off Debt Is the Solution
Dave's 7 Baby Steps put a heavy focus on paying off all of your debt except a reasonable mortgage. In fact, the only thing he wants you to do before beginning the debt pay-off is to save up a $1,000 “baby emergency fund”. He doesn't even care if you don't get a match and miss out on all the tax deductions available in retirement accounts. For someone with a serious debt problem, like many of his callers, readers, and show attendees, that is exactly the right approach. Their financial problem is debt, and when debt is the problem, paying it off is the solution.
# 3 Focus Matters
Dave not only focuses on debt, but he focuses on one debt (the smallest debt) at a time. The power of focus is very real. If you try to spread yourself out over multiple financial goals, especially in the beginning of your financial journey when your personal finance “muscles” are weak, you are likely to not accomplish any of them.
# 4 Momentum Matters
Likewise, momentum matters. Dave recommends a “snowball” approach to paying off debt. So instead of paying off the highest interest rate debt first, you pay off the smallest debt. This allows you to feel early success and that you have momentum and have accomplished something. Mathematically, that's not the correct thing to do. But math didn't get you into debt and it is unlikely to get you out. If math ruled your world, you wouldn't be in debt in the first place. The snowball works because behavior matters more than math in personal finance.
# 5 Most People Would Benefit from Financial Advice
Lots of do-it-yourselfers just can't figure out why anyone would need financial advice. After you interact with many of your peers, you will understand. There is a huge percentage of the population, even otherwise intelligent and hardworking people, who should not, can not, and will not function as their own financial planner or asset manager. The best thing that can be done for them is to get them to someone who offers good advice at a fair price. So I don't object to Dave sending people who need help investing to a recommended and vetted financial advisor. I have a serious issue with his vetting process, which I'll get to later, but not with the fact that he is sending people to financial advisors.
# 6 Enabling Others Is Not Helping
Some of Dave's best calls are those where there is an interaction between family members. He is quite talented at helping them to see the root problem behind the financial issue. He is excellent at pointing out and discouraging enabling behavior. An important lesson to learn is that while enabling someone feels like you are helping them, you really aren't. This is an important lesson for doctors, who spent their life trying to help people to learn. I'm not talking about paying your 93-year-old grandma's rent. I'm talking about funding your brother-in-law's fourth doomed start-up. I'm talking about the economic outpatient care for your children. I'm talking about letting your non-disabled sister live in your house while you go to work to buy her food for years on end.
# 7 You Can Probably Spend More Than 4%
Dave isn't afraid to recommend absurdly high withdrawal rates from your investments. But his overall message—that you can probably spend more than the 2-4% that hyper-conservative people recommend as a safe withdrawal rate, especially with a very aggressive portfolio like Dave recommends—is correct. In the past, on average after 30 years if you follow a “standard” 4% withdrawal rate with increases each year with inflation, you will have 2.9 times what you retired with. What that means is that if you don't hit some terrible market conditions in your first years of retirement, you can spend MORE than 4% without running out of money. Even Dave's 8% rate when combined with a 100% stock portfolio and a 30-year period works 44% of the time.
# 8 People Need to Take Significant Risk with Their Investments
Dave's recommended portfolio looks like this:
- 25% Growth and Income Funds (Large Cap Stock Funds)
- 25% Growth Funds (Mid Cap Stock Funds)
- 25% Aggressive Growth Funds (Small Cap Stock Funds)
- 25% International Funds
- +/- Some paid off income properties
With no bonds, cash, CDs, or whole life insurance, that's a pretty aggressive portfolio with a sizeable small tilt. Obviously, it can always be more aggressive, but what Dave gets right is that people need to take some significant risk in their portfolios. Without a ridiculously high savings rate and a long career, we simply cannot save our way to a comfy retirement.
# 9 Celebrate the Milestones
Since personal finance is 90% personal (i.e. behavior) and 10% finance (i.e. math), it is important you do all you can to reinforce the behavioral aspects. As Jonathan Clements has said, “If financial education was all that was needed to improve behavior, we’d be a nation of avid savers, hardcore indexers and early retirees.” Celebrating the milestones, especially if the celebration is planned ahead, paid for ahead, and anticipated, will make it easier to reach your larger goals. This is something I wish we had done more as we progressed toward financial independence. The first $10K, the first $100K, and the first million are the hardest. Celebrate your first $10K in your portfolio. Celebrate each $100K in student loans you pay off. Celebrate getting back to a net worth of zero. Celebrate every net worth milestone. Celebrate your financial independence. Thanks to the success WCI, LLC has seen financially, we blew past a bunch of milestones without even noticing or recognizing them. It made me wish we'd celebrated the earlier ones (that we really had to work hard and sacrifice for) better.
# 10 People Spend More When Using Credit Cards
The studies are very clear that when you use a credit card to spend you spend more. Cash hurts the most, then debit cards and checks, and finally credit cards, especially if they are not paid off each month. If you don't have a 20%+ savings rate, or if you've ever carried a balance on a credit card, credit cards aren't for you.
# 11 Anyone Can Pay for College Without Debt
Dave is also a big fan of working your way through undergraduate. Having worked my way through undergraduate, I agree. There are four pillars of paying for your child's undergraduate education, and none of the pillars has “Debt” written on it.
- School Selection
- Child's Contribution (Scholarships, summer work, in-school work)
- Savings (529 etc.)
- Cash Flow
If the child's contribution, previously saved money, and the parent's cash flow is not enough to pay for the school, choose a less expensive school. They are out there. Value and your financial status simply have to be considered when choosing a school. In fact, there are schools so inexpensive that they can be cash flowed by the student herself. Better to have more than one pillar under your house, but it can be done.
# 12 No Sense in Carrying Debt and a Big Emergency Fund
Dave's Baby Steps, as noted above, instruct you to only carry a $1,000 emergency fund while you are paying off all of your debts but your mortgage. I'm amazed how many people owe $100K or more in student loans charging 7% interest while leaving $30K sitting in a savings account earning 0.1%. That's not a winning formula. One purpose of an emergency fund is to keep you out of debt. If you're already in debt, YOU ALREADY HAD THE EMERGENCY. Take that cash and pay down the debt. Does that make you feel uncomfortable? Good. You should be uncomfortable. But not because you no longer have $30K in the bank. Because you owe $70K at 7%!
# 13 Fixed His PSLF Advice
At one point, Dave didn't seem to understand the Public Service Loan Forgiveness (PSLF) program. Several times I heard him recommend to someone to leave the PSLF program even though the person could not possibly pay off the debt prior to the time they would receive forgiveness. I even sent him an unanswered letter about it. I don't know if he read it, but he eventually started giving the correct advice, which is to enroll in PSLF and comply with it, but save up the “regular payments” in an investment account on the side in case the program or your career plans change.
# 14 Debt Doesn't Make Rich People Rich
Dave is very adamant that wealthy people didn't get that way by borrowing their way to wealth. He correctly points out that the way to get out of debt is to pay off debt, not play with it by refinancing or moving it from one card to another. He even has millionaire theme hours where he trots out “Millionaire Next Door” types and asks them how much of an effect borrowing had on their wealth accumulation. They almost always say there was no or little effect. It isn't that Dave or these rich folks don't understand that borrowing at 1% and earning at 8% is a mathematically winning strategy. It's that they got the behavior right.
Those who are likely to save enough to build wealth are also likely to pay off their debt to build wealth. The problem is that most of us simply don't invest the difference. We spend it. On stuff like wakeboats and heli-skiing. Sure, paying off my mortgage only gives me a return about the same as inflation. But that's still a better financial return than I got on all that helicopter gas and better than what my Ally Bank savings account is paying me. Medical and dental students in particular are almost all entirely too comfortable with debt. Borrowing all that monopoly money in school makes us numb to it, and the numbness lasts a lot longer than bupivacaine. If you're not careful, it can last your entire career and keep you from ever building wealth.
8 Things Dave Ramsey Gets Wrong
#1 You Won't Get 12% Returns
# 2 You Can't Spend 8% a Year
I'm a big fan of adjusting as you go as far as your retirement withdrawal rate. But Ramsey's 8% number is probably way too far on the high side, especially if it is the figure you start with and especially if you are not very aggressive with your portfolio in retirement. Historically, 8% only lasts 15 years 71% of the time with a 50/50 portfolio. It only lasts 30 years 9% of the time. I'm fairly comfortable with many types of risk, but I wouldn't be with that one.
# 3 Picking Actively Managed Mutual Funds Is a Losing Strategy
Dave is a big advocate of actively managed mutual funds. He is so adamant about this it is embarrassing. The data in favor of an index approach is overwhelming. The best actively managed funds are the ones that are most index-like (low costs, low turnover, stable strategy). Why not just buy the real thing?
# 4 Past Performance Does Not Predict Future Performance
The worst part about Dave's advocacy for actively managed mutual funds is that he doesn't tell you how to pick a good actively managed fund. He just tells you to look for the one with the best past performance. There is a reason that the prospectus is required by law to tell you that “Past Performance Does Not Predict Future Performance”. That's because it is true.
# 5 A Commissioned Salesman Is Not a Real Financial Advisor
A cynic would argue that points 3, 4, and 5 are all connected. Dave recommends you invest with a “Smartvestor Pro”. These are reportedly vetted financial advisors with “the heart of a teacher”. The problem is that even someone with “the heart of a teacher” cannot overcome the poor incentive structure they all face. They only get paid (and can thus feed their own children) if you buy an investment with a commission. The worst investments pay the highest commissions. Therefore their incentive is to sell you the worst investments and have you trade them as often as possible. That's not the incentive structure you want for your financial advisor.
If you're going to use an advisor, you want a fee-only advisor. Now don't get me wrong. There are some conflicts of interest there too. For example, an advisor paid an Asset Under Management (AUM) fee is incentivized to recommend against paying off your student loans, paying off your mortgage, or buying the rental house down the street. An hourly rate financial advisor is incentivized to work slowly and bring you back often. A flat-fee (annual retainer) advisor is incentivized to do as little for you as possible and put you into a “cookie-cutter” portfolio. But those mal incentives pale in comparison to that which a commissioned salesman masquerading as an advisor faces. To make matters worse, in my experience someone paid on a commission basis has a far greater ratio of sales knowledge to financial knowledge than a fee-only advisor. Less real experience. Less real education. It's just a bad idea to hire a “financial advisor” paid on commission.
Why does Dave send people there? A few reasons probably.
Second, his typical listener is investing a four or five-figure amount (or less). That person can't afford a flat annual retainer. Nobody charging a straight AUM fee is going to take him as a client for decades. There aren't enough hourly advisors out there to service all those who need advice, and even those guys charge $100-500 an hour, which is dramatically more than you might pay in loads even on a $10K investment. The reason roboadvisors have done so well is simply that financial advice is expensive stuff and lots of people simply choose not to pay for it, for better or for worse. Maybe a lot of those people will be better off with a commissioned salesman with the heart of a teacher than nobody. At least they'll be investing. But I wish he'd at least point out the issues.
# 6 You Can't Pay for Medical School Without Debt
Dave's advice for undergrads is reasonable. However, he never seems to distinguish between an undergraduate education and a professional education. Nobody is going to work their way through medical or dental school or law school. It's not going to happen. If you're lucky, your parents can help out. If you're not, then it's loans for you. For most physicians, some dentists, and attorneys who can get a good job afterward, it's still a good investment even when paid for with borrowed money at 6-8%, as long as you get that debt paid off within just a few years afterward. I'd like to see some more subtlety in Dave's discussions with these folks.
# 7 You Don't Need a Big Emergency Fund Before Investing
Dave's Baby Step 3 is way too rigid. He advocates you save up an entire 3 months of expenses before investing anything. The problem with that is it requires you to leave some money on the table. That might be the match from your employer. It might be the tax-deduction from contributing to your 401(k). It might be tax-free space in a Roth IRA that you can never get back. I think it is probably okay to make some compromises in this department. I think having a 3-month emergency fund is a good idea. But there's no reason it can't sit in a conservative investment in a Roth IRA, from which it can be withdrawn tax and penalty-free at any time. If a $1,000 emergency fund was good enough to pay off a 3% debt, it surely ought to be good enough to get your match. I understand the benefits of keeping the baby steps simple, but I think they're a little too rigid. Maybe it's just a behavior vs math thing and I'll change my mind in a few years, but I think it's at least worth pointing out the issues.
# 8 All Debt Does Not Have to Be Eliminated Before Investing
While we're on the subject of rigid baby steps, I disagree that you have to get rid of all non-mortgage debt before investing. As Dr. Cory S. Fawcett has said regarding paying debt versus investing:
It depends on how the debt compares to the present and the future. If you are drowning in debt and struggling each month to get by, then the first step must be to restore a reasonable balance…If, on the other hand, debt is not overwhelming your finances, then you can take a more balanced approach. You may be able to pay down debt ahead of schedule and at the same time make this year's maximum retirement plan contribution. Most doctors are in a position to do both, if their lifestyle spending (present) is also in balance.
I agree.
There you go. Dave Ramsey's show is great, and he gets most stuff right. If you follow his advice, you'll do well. Tweak it just a little, however, and you'll do even better.
What do you think? What parts of Dave Ramsey's philosophy and advice do you agree or disagree with? Comment below!
Another way to get through medical or law school without debt is with a ROTC scholarship. Going into the military after attaining the degree and utilizing the Army or Navy military loan repayment program will pay off $65,000 of loans.
Seems silly to do ROTC for $65K when you could do HPSP and get $400K worth of tuition and stipends.
Dave Ramsey treats finances as if it was a matter of morality, that if you’re struggling financially you must be doing something wrong. Nonsense! I did everything right, went to college, landed a great career, snowballed debt payment more than Ramsey recommended, and made so many financial cuts I’m running out of options. I can barely afford health insurance . Don’t tell me the lottery is a bad idea when you get calls every day from people with 6-7 figures worth of debt who are so deep in the hole, they’ll never retire unless they win the lottery. Hard work is no guarantee of future success, and I have been hit with an ocean of bad luck due to circumstances beyond my control.
I’m sorry to hear about it. I hope your luck turns soon.
Of course, just because you cannot control everything doesn’t mean you shouldn’t control what you can to maximize your chances of success.
Keep your head up, the night is always darkest before the dawn.
I have a question. Why would anyone consider using some schmuck on the radio as their financial adviser? Or you could take his advice and he could refer you to one of his elp fionancial advisers who advise you to pay ridiculous loads to purchase overpriced, mediocre mutual funds. dave never reveals his extreme conflict of interset with each of these elps’s that pay him for referrals. This is unethical and puts him in the same class as alex trebek pushing whole life insurance. I am a multimillionaire and accomplished by following absolutely zero of dave’s recommendations except not to take on debt. I have always used credit cards,have never had a budget,never invest in load mutual funds, never save a specified %, have borrowed money for business in the past, have had student loans, use credit card rewards, pay them off in full every month, and still ended up a multimillionaire. Not only that, but everyone I know has done very similar things and they are millionaires also. So I am not sure who is target audience is, but I can assyre you that his “one size fits all” approach is nonsense
I agree with much of what you said, Tom, but strictly speaking, Dave doesn’t have a conflict of interest with his ELPs. He fully discloses that they pay a fee for referrals—that isn’t a conflict. You can debate whether his advisors are any good or not, but all he represents is that they: a) have the heart of a teacher and b) follow his principles.
Great point re the credit card. I’ve also used one for years, racked up a gazillion miles and never paid a dime of interest (or, contrary to Dave’s fear, overspent because the card didn’t seem as real/painful as parting with cash). In the main, Dave feels that the credit card would be too great a temptation for abuse, since that’s what got many of his listeners in trouble in the first place. But for the rest of us—disciplined people who spend within our means—having a credit card is perfectly fine. As for his remaining logic (“I’ve never spoken to anyone who got to be a millionaire from frequent-flyer miles”) his point is without merit. You don’t have to become a millionaire from a credit card to justify its use; you simply have to make sure you pay it in full every month and enjoy the free perks that come with it.
One final sidebar on the credit card. Dave presents, with great fanfare, that the only way to have a high credit score is to have paid tens of thousands of dollars in interest. He is flat out wrong. I obviously don’t know what algorithms are used by the credit bureaus to compute my credit score, but I do categorically know my own financial situation. I have not paid a single dollar in interest in nearly 20 years (my life since paying off my mortgage). My credit score is 825, presumably because I do have a credit card, which I use nearly everyday, but as noted above, pay off without fail every month.
dear csi,
Another thing I previously omitted is that I have been investing individual stocks for the last 20 years and have done slightly better than the S&P 500. Dave says there is no way you should invest in individual stocks–too risky? Anyway, the thing that irritates the most is his endorsement of multilevel marketing. Ihave listened to him several times when he says that he knows several people who make 7 figures in mlm, such as Amway, nuskin,etc. These mlm shemes are invariably pyramid schemes and should condemned in no uncertain terms. It is sad that he endorses these ripoffs. That will not get anyone out of debt. i don’t know what his financial relationship he has with these companies, but it does make me wonder. By the way, I have listened to his radio show for a long time and I have never herd him mention on air that his elps pay him to refer customers to them
Look, I’m not a big fan of Dave Ramsey, either. But he doesn’t endorse MLMs. Yes, he does say that he knows a couple of people who’ve earned seven figures doing it, but he goes on to say that: the vast majority don’t, you’re constantly recruiting and training sales people because of all the churn, etc. Stating the facts is not an endorsement per se.
As for the ELPs, I’m afraid you’ve missing those segments. I’ve heard him say, multiple times, that they pay a fee to be listed on his referral site. Listen long enough and you’ll hear it. But perhaps you have an implied point, which is that he should mention it much more frequently.
Re your point about individual stocks…again, you’ve slightly mischaracterized his point. He has said that, if you insist on investing in individual stocks, that you have no more than 5% of your equity position in any single stock—that is too risky. With 20 stocks, and the huge caveat that you’ve picked stocks that give you broad diversification, what you’re doing isn’t awful. But most investment people would say that you’re better off doing what I do: buy the Total Stock Market Index and the Total International Stock Market Index at Vanguard. You can’t beat the low-cost, tax efficiency and diversification. In general, even the pros who pick stocks for actively managed funds get beaten by indices that track the broad market—and they’re doing it for a living. For the rest of us, stick with mutual funds such as the ones I’v listed (and not the loaded funds that Ramsey goes with).
You should call the show and do a debt free scream.
dear csi
I really appreciate your responses to my comments. I do have a clarification of Dave Ramsey’s comments abou MLM. He says that these things are not pyramid schemes but also says your entire success in these schemes is based on recruiting,recruiting,recruiting. Your entire business model is based on recruiting instead of selling a legitimate product. I am not sure how you can seriously differentiate this from a pyramid scheme. He says there is an extremely high dropout rate. This is another hallmark of a pyramid scheme. 99% of the people lose money in mlm and that’s why they drop out. They also entice friends and family into thes e schemes and in many cases lose thes friends and estrange their family. My whole point is DR presents MLM with all the hallmarks of a pyramid and he calls it something else and says that there is nothing wrong with MLM. If it looks like a duck, walks like a duck, and quacks like a duck it’s probably a pyramid
I think that’s half the truth. It’s based on recruiting AND your ability to sell. Some MLMs are more recruiting than sales and vice versa. But a lot of people think it’s a get rich quick thing and discover that it’s a sales job at best. And if you’re going in to sales, are you really selling the best product with the best commission structure? That would keep me out of most of them.
Direct Sales and MLM jobs get a bad rap, often because of the “recruiting” piece and the perception that one is making money off the backs of others. But, I have a brother-in-law who is a rep for a nation-wide manufacturing firm. He has sales associates working under him, and his bonus each year (as well as the potential for raises) is tied to how well his “team” performs. I have a neighbor who is a recruiter for a nation-wide firm specializing in accounting. He has associates working under him and, again, his bonus each year (and potential for raises) is tied to how well his “team” performs. I don’t see a significant difference between their payment structures and those of a Direct Sales or MLM worker. Yet, you don’t see people pointing fingers and dismissing the sales rep or recruiter as evil schemes. (And, you can offer the goal of repeat sales, and residual income, as a difference…but don’t both the manufacturing rep and recruiter hope their “customer” will come back for more at some point?) Obviosuly, as in ANY sector of business, some companies are better than others. But, to dismiss Direct Sales and/or MLM companies entirely ignores the chancing face of retail sales. Good or bad, brick-and-morter stores are failing as the consumers shift to online shopping. Direct Sales and MLM companies offer a more personalized experience in the rather unpersonalized world of the Internet.
*changing
*mortar
#shouldnottypebeforecoffee
I agree that there are “similar” type businesses that depend on “structure”. Like I said, you could compare all kinds of businesses to mlm’s. The problem is that these businesses don’t lure people in under false pretenses and cause other people(usually family and friends) to get involved in something that there is no hope of making a profit. As I said, 99% of the people who get involved in these schemes must lose money because this is the approximate dropout rate. your comparisons do not sound like MLM. as a matter of fact, your narrative of your relatives or friends do not sound like MLM to me. I guess we can disagree on the definition MLM. Also, we can disagree on investing in individual stocks. There is some wisdom in diversification, but I have beat the S&P 500 in the last 20 years and I can name one of my stocks that is diversification personified(Berkshire Hathaway). There are other individual stocks that I have owned for many years(Philip Morris,Altria, Apple,Amazon,Walmart,Berkshire Hathaway,McDonalds). As you can see, I do not have an extreme “diversified” portfolio but it has beaten the S%P 500 over the last 20 years. (I have greater holdings in PM,AL,APL,and Berkshire. I also have S&P 500 Index funds. I do not agree with the nonsense that says you need at least 20 individual stocks to have diversification. If you are interested in the mean, go ahead and invest in index funds. There is definitely a place for index funds. I like index funds. However, there is definitely a place for individual investors to do their own research and invest their own money in individual stocks. I can understand that many people do not want to do their own research and do this for themselves. However, it is clear to me that since many of these so called “mutual fund managers” cannot beat index funds, you can choose to invest in an index fund or choose your own stocks. I choose to do both. I have been extremely successful at both. If I can do it, I am sure most people can do it since I have been doing it for 20 to 25 years. It is not rocket science.
If you’ve beaten the S&P 500 over 20 years straight you should probably be managing a lot more than your own money. You’ve been selling yourself short. If you actually look how unusual it is to do what you state you’ve done, you might be surprised.
I did not mean to imply thatI have beaten the S&P for 20 years straight. I only said that the individual stocks that I have picked have beaten the index slightly(possibly by 1% compounded rate of return). Some years they have not beaten the S&P and other years they have. The main advantage o individual stocks is that yu have complete control over when your stocks are bought and sold. Ina mutual fund you must depend on some manager to do that for you. When someone decides to sell their mutual fund shares, your shares are involuntarily sold and you pay taxes on that gain. Also, with individual stocks, you have the choice of buying stocks that do not pay dividends, allowing you to avoid paying annual taxes on the imputed dividends of the mutual fund each year(Berkshire Hathaway and Amazon are good examples). If you are going to own stocks with dividends, you can try to find good stocks that pay high dividends(Philip Morris and Altria are good examples). Also, you need discipline and not sell at the first downturn.. This is much more important than which stocks you choose. You should plan on holding stocks at least 10 years unless there are extremely compelling reasons to sell. If you are not willing to do this, then I would definitely advise you to own an S&P index fund. As a matter of fact about half of my holdings are in the Vanguard Index 500 and I am very pleased with the returns. Even with this fund you have the problem of investors panicking and selling at the first downturn. As a result, I sincerely believe that attitude toward risk is much more important than any stock picking ability. I don”t particularly believe in stock picking expertise. I believe anyone can be successful in the stock market if they just pick an index fund and stay the course. I also believe if you do your homework and stay the course, there are some advantages in buying individual stocks
Why would you buy 500 Index Fund when you can beat the market picking stocks? Are you worried maybe you just got lucky?
Actually, I had always been in index funds(100 %) and I made the mistake of panicking and selling during a feared down turn 22 years ago. I soon realized the mistake I made and wanted to get back into the index funds, However, vanguard had a “frequent trading” policy in place which prevented me from re entering these funds for 60 days. As a result I started buying individual stocks and just held onto them. As soon as the 60 days expired I bought back into the index funds so I have a comparison going back that far. So it was a complete accident that I started buying individual stocks. I just did not want to wait the 60 days, but I did learned the pros and cons of individual stocks. If I had avoided the mistake of panicking and selling, I never would have started buying individual stocks in the beginning because I always believed they were too risky. Anyway, that’s how I accidentally got started buying these stocks and I added to the holdings as well a index funds. But I highly recommend index funds.
That is a crazy story! I’m surprised that was your solution instead of using a different fund though. Seems to have worked out well though.
I appreciate your answering my comments. I want to share my thoughts about these issues but,as you can imagine, it is not the kind of subject that you can share with close friends at cocktail parties. I just feel so relieved to share this info with someone who might have the kind of perspective that I respect. Thanks for listening and commenting.
It’s nice to have someplace to discuss having first world problems, isn’t it?
a couple of months ago I posted a comment regarding my opinion that Dave Ramsey had a severe conflict of interest regarding his promotion of ELPS, various insurance products, and other “sponsors” that he refers his listeners on his show. Y ou responded that he did not have any conflict since he reveals his relationship on his show. I did not respond because, though I had been listening to his show for 20 years and had never heard him mention his relationship to these ELPS,etc. However, I decided to listen to his show every day for the next 2 1/2 months and I must say that I have still not heard him mention any such disclosure. If you could refer me to a specific show or time when he has disclosed such crucial information, I would greatly appreciate it. Thank you in advance
I’ll try to remember your request the next time I hear it and post an episode number here. But in the meantime, I would think about it this way:
What resources do you suppose it takes to do any sort of vetting and maintain a list of people to refer folks to, not to mention doing the actual referring? It’s a significant expense of time and money. But if it is something your listeners/readers need, then it’s probably worth doing. But not for free when you’re running a for-profit business. So OF COURSE agents/advisors are going to have to pay to be listed. I don’t have a beef with Dave doing that. My beef is that he refers people to commissioned salesmen masquerading as agents. I have a problem with the conflicts from that model, but not from Dave getting paid to do the referring. Why would he do it for free? I wouldn’t (and don’t.)
Sorry, I don’t have an episode date or number to send to you. He mentions it infrequently, which is probably why you haven’t heard it. But he has definitely said that they pay a fee to be listed as one of his ELPs. As I’ve said before, I’m no big fan of his, but that doesn’t mean that when he doesn’t something properly (such as this disclosure) that I won’t acknowledge it. If you list long enough, you’ll eventually hear it. Or better yet, just call into the show and ask him directly.
the problem is that since I am a regular listener and I haven’t heard it in 20 years of listening it stands to reason that there are many listeners like me who have not heard any disclosure. Some people actually take his show seriously and actually follow his advice and do business with his insurance referrals and other ELPS. I don’t care personally because I don’t take him seriously. If he was really interested in his listeners he ould have, at a bare minimum, a disclosure on EVERY Show.. If he did this I would have no problem with him. I go to professional seminars frequently and the speakers reveal any conflicts of interest they have with any supplier that they even mention in their presentation. I think this is very professional and necessary. It is even more necessary when we have a so called “investment expert” on the airwaves who claims to have the best interest of his listeners at heart and refers his listeners to ELPS who have “the heart of a teacher” when the only real qualification that they have is that they paid DR a referral fee. Many of the listeners to his show believe what he says and actually follow his advice even though they have not been given full disclosure. In other words, if I have never heard it, how many other listeners who put their trust in DR have also never heard it?
That is correct. They absolutely do pay to be an ELP and Dave does disclose that from time to time.
Thanks, Jim, for backing me up on this.
Finally! At 3:32 p.m. today on Ramsey‘s show, he mentioned that the ELPs pay a fee ( The caller was almost out of debt and was asking about how to interview a potential investment advisor). The show repeats about every two hours, so if you start listening at around 5:30 or 7:30 tonight, you’ll be able to hear for yourself that he does indeed disclose the fees. .
I neglected to put the time zone in my previous post. I meant 3:32 p.m. Eastern. So that would mean a repeat around 5:30 p.m. or 7:30 p.m. Eastern tonight to hear him disclose that ELPs pay a fee.
I suppose we’ll have to agree to disagree on DR disclosure of any conflicts of interest on his referrals. I don’t think it is a coincidence that he refers people to “advisers” that “sell” only front loaded mutual funds and disparages index funds but at times discloses that he has a Vanguard 500 Index fund. This is somewhat confusing but his advice on “working your way through school without incurring student loans is completely nonsensical. Supposedly, you are supposed to work your way through professional school( state school for Dentistry $50000 per year) making $10 an hour. I supposed you could do this if you worked 100 hours a week and they didn’t withhold taxes from your pay.
The alternative is to take out a student loan and pay 6% on your $200000 loan and have it paid off in 8 years max.
Of course, DR recommends that you work at $10 an hour and save up the $200000 before you even start Dental school.
If you saved “every penny” you made and did not spend 1 cent(40 hours a week) you would need 10 years of work. Of course expenses at school would more than double during this period so you would have to save another 10 years. The cycle continues. Believe me, I am a dentist and there are no “cheap” dental schools. DR philosophy is so ridiculous that it is a cruelty joke.
I’m not quite sure you’re representing the discussions about dental school that I’ve heard from Ramsey correctly. I think he would advocate something like HPSP. When I’ve heard the work yourself through school thing, it has usually been about undergraduate school, where I think working your way through (combined with appropriate school choice) is completely reasonable.
I have also heard people call in talking about medical school, law school, and various other graduate programs and his advice is the same. Under no circumstances will he recommend borrowing money through student loans to attend any kind of school or training. So you either have to save, get a scholarship, (possibly if you go in the military but not practical for most), get someone else to pay(not possible for many), work your way through medical or dental school (good luck with that). This leaves student loans and this is the only logical choice for many students and it is a good choice. The loan should be paid off relatively shortly and the future will be bright. I never heard of anyone working their way through Dental school and I’ve talked to thousands of Dentists.
The interesting thing is one day this couple (who were both MD’s, came onto his show to give a debt free scream. It seems that they paid off $425000 of debt, almost all of it student loans and he celebrated with them. That’s fine, but if they had asked him 6 to 8 years earlier, he would have told them not to go to medical school until they can cash flow it through savings and working during school. IRONIC.
I’m with you on this hole in Dave’s reasoning. Other than the point that the “military isn’t practical for most.” I think most people would find it far more practical than making student loan payments for 2-3 decades.
If you can keep your student loan to future gross income ratio to 1 (2 at the most) I agree it makes sense to borrow the cost of the education.
I agree with mist of your post. However, you are wrong about having to go into debt to receive an MD. Most Med schools have MD/Ph.D. Programs available….which not only pay for tuition, but also include a stipend as well. (Warning: If you don’t finish the Ph.D. you will probably be required to pay back everything!)
Pluses and minuses to MD/PhD, military routes, and taking out loans. In some ways, you’re going to have time debt or money debt and that should probably be acknowledged. I mean, I graduated with $0 in student loans, but I also had signed a contract that obligated me to work for half of what I was worth for four years. Meanwhile, could have paid off the loans in 6 months. Sometimes student loan debt beats time debt, but as the price of tuition skyrockets, the other options are becoming more and more attractive all the time.
my only point in mentioning that the military is not “practical” for many people is that some people do not qualify for the military(do not pass physical, citizenship issues, age issues). In addition these scholarships to the military are very competitive so they might not qualify in that regard. The MD/PhD programs are also very competitive so many students would not be eligible for these or would not have the extra time to invest in this area. This leaves student loans as the only viable option for these students. DR NEVER recommends student loans for any course of study under any circumstances. This is completely absurd and puts his whole philosophy in danger of being perceived as a rigid cruelty joke.
I agree it’s wrong to say “never take out a student loan.” That said, the main problem I see isn’t that docs are too afraid of debt, it’s that they’re too numb to its effects.
Add the following to the lengthy list of things that Dave Ramsey gets wrong, or at least grossly oversimplifies:
He makes a big deal about recommending Roth IRAs, focusing on the fact that 100% of the money in those accounts comes out tax free. True, but he conveniently forgets the other part of the story:
When you have a traditional IRA, you get a deduction and save on your taxes. If you simply took the tax dollars saved, and invested them, those tax dollars would grow sufficiently over time to pay the taxes on the traditional IRA when you make the withdrawals. Said more simply, the net after-tax distributions from a Roth IRA and a traditional IRA are virtually identical, IF you reinvest the tax savings from the latter.
In the spirit of full disclosure, the above argument does not reflect two other advantages of Roth IRAs:
1. First, that they don’t have mandatory withdrawals. But the vast majority of Ramsey listeners—people with modest resources—will wind up depleting their Roth IRAs as well, so the ability to protect the Roth assets isn’t terribly relevant.
2. Second, that the Roth IRA is an enforced form of maximum savings. Meaning, you’re paying the taxes every year on the amount you put in the account, so you’re actually committing more to retirement by doing so. But again, if you take the taxes saved on the traditional IRA and are scrupulous about reinvesting those dollars, the Roth advantage goes away as noted above. I suspect that just as Ramsey considers a credit card to be plutonium in the hands of his listeners, pushing them to go Roth (and not dwell on the extra taxes they’ll owe) forces them to commit more to retirement, rather than trusting them to take the tax savings from traditional IRAs and investing those funds.
One other point before closing…you will owe taxes on any income generated by the money invested each year from the tax savings generated by the traditional IRA investments, but this is a pretty modest drag on your lifetime returns. If you’re invested in well-diversified index funds such as the Total Stock Market, they have about a 2% dividend yield a year, so paying taxes on that 2% may cut your net return just a bit. I say “may,” because remember this: Your taxes on this separate account will be at long-term capital gains rates when you cash in the funds to pay the taxes on the IRA withdrawals—usually a rate way less than the ordinary tax rates owed on the traditional IRA withdrawals. This partially (or more than ) offsets the drag on returns caused by paying taxes each year on the dividends. But Ramsey merely hand waves and says, “If you invest $500,000 in a Roth and it grows to $2,000,000, you’ll only pay taxes on $500,000, but if you put that same $500,000 in a traditional IRA that grows to $2,000,000 you pay taxes on the entire $2,000,000.” Again, at the risk of a bit of redundancy, he doesn’t understand, or at least doesn’t want to reveal, all the math—that all the taxes saved each year on the traditional IRA, if reinvested, would be sufficient to cover the taxes on the withdrawals down the road.
It’s even worse than you write. For most people, they will use IRA withdrawals to fill the lower brackets. The less you save, the more beneficial a traditional IRA is over a Roth IRA.
Add this to the lengthy list of things Dave Ramsey gets wrong:
When speaking to, say, a parent whose child is earning money, he states (incorrectly) that the most money the child can put in a retirement account is $5,500 a year. Wrong. The child could open an individual 401(k) and put away up to $18,500 as the employee—and that doesn’t count the dollars that they could contribute as the employer (as a one-person operation, they’re effectively employing themselves).
As with so many things about Dave Ramsey, his meat-and-potatoes advice for getting out of debt is sound, but when it comes to investing, he really doesn’t know what he’s talking about. It’s not surprising that he lets his advice bleed over to the investment side, but I feel bad for anyone who listens to him for it.
Add this to the lengthening list of things that Dave Ramsey is confident, yet clueless about:
In his total rejection of bonds being a part of someone’s portfolio, the gist of what he said in his 9-6-18 broadcast was: “If you put the volatility of the stock and bond markets next to each other, they’re about the same.” He goes on to say, “So if their volatility is the same, you mights as well invest just in stocks, since their historical returns are higher.”
Completely and utterly wrong. If Ramey had done his homework, he would have seen that the standard deviation (the accepted measure of volatility/risk) for bonds vs. large cap growth stocks, for the 20 years ending 12/31/17, was 3.36 for bonds and 17.09 for stocks. Meaning, stocks are way, way more volatile than bonds.
Again, it baffles me why he doesn’t just stick to his meat and potatoes advice on getting out of debt, and stop professing to be a guru on investing.
Or just learn the investing stuff. It isn’t that complicated. I’m not even necessarily against a 100% stock portfolio, but the argument above isn’t a reason to do that.
The amazing thing about DR is that he denigrates index funds and Bogleheads. He “prefers” front loaded funds to the tune of 5.75% load. These are”traditional”. Aside from the fact that he is getting indirect kickbacks from these funds through his ELP program, he seems to be so arrogant to imply that he is more knowledgeable about investing than John Bogle and Warren Buffet(both big proponents of index funds for the average investor).
Great post. I just wrote a post on Dave Ramsey so this article interested me. I like your take especially when you said no way to get your medical degree without going into debt. My daughter just became a nurse and there was no way she could work while studying. I imagine it’s the same way with doctors.
You and I both agree no way one is going to make 12%. There is some Ramsey gets right and a lot he gets wrong. Ha and I still enjoy listening to him. So he knows how to market. I also wrote about why Evangelicals listen to him and his effect on that segment of the population.
Right on the money. I like much about Dave, but once I learned about investing, the impact of fees, and the wonderful Jack Bogle, Dave is way off promoting some of the high fee Smartvestors who charge over 1%- most of them 1.5% or more! Many Smartvestors work for rip off firms even though they may be nice people. I guess he gets some kind of kick backs from the Smartvestors?
I don’t think most of them are AUM charging advisors. I think most are commissioned salesmen of American Funds.
Read the comments earlier in this thread. We’ve established that Ramsey charges a fee to the SmartVestors for being in the links on his website. He’s very above board on this. So, no, no kickbacks on their commissions. Regardless of his transparency, never in a million years would I pay a SmartVestor their ridiculous commissions for something I can do essentially for free at Vanguard.
Agreed
I certainly wouldn’t agree that he is upfront about his relationship with smartvestor pros. I’ve been listening to him for 20 years and I have never heard him say exactly what his remuneration is. \I only assume that they pay him some kind of referral or membership fee although I have never heard him say that. I have read some former ELPs say this. Also, the ELP gets a kickback from the 5.75% front loaded American Fund that is continually churned to increase commissions.
Look, I’m no fan of Dave Ramsey’s. But I believe you have no basis on which to say that his SmartVestors are constantly churning their accounts. I think the first 5.75% is enough to satisfy them. 🙂
I think the financial relationship is pretty obvious.
I don’t know how much churning these salesmen “with the heart of a teacher” do, but I think it’s too much to ask anyone to give unbiased advice when they are paid on commission. Here’s the application to become one: https://www.daveramsey.com/smartvestor/become
I didn’t mean to say that all the ELPS churn the accounts. However, since you have an “adviser”( which DR is so protective that he is adamantly opposed to any requirement of fiduciary responsibility, presumably to obscure the financial relationship and keep investors out of low cost index funds) that is paid only when you buy into a 5.75% front loaded fund and has no fiduciary responsibility responsibility to the client, it is obvious that the temptation and conflict of interest are there. Even though not all of them do not do this it stands to reason that such a strategy would be too much of a temptation for many of them to handle.
Dave gets life insurance wrong. More money is passed through life insurance than any other way. I’ve seen too many people out live term which is throwing money away and need life and are at that time in life uninsurable. Life is really used well in estate and trust planning. He is advising without a series 7 license and missed the mark on several things. He is common sense on getting out of debt which I totally agree!
Vehemently disagree. Whole life insurance is a lousy investment—far better off in growth mutual funds. Taking the money you save by avoiding whole life premiums and investing it will offer a much better return than the life insurance policy.
That is such a dumb argument for whole life insurance that I’m going to add it to my list of myths about insurance.
Of course more money is passed to heirs through life insurance than any other way. That’s what life insurance is for. That’s not a reason to buy WHOLE LIFE insurance though.
Very few people need whole life insurance for estate planning.
WL insurance is a total ripoff. One of the main selling points of WL insurance is the cash value build up. Of course, the return on your money is ridiculously low but the premiums are 10x that of term. Also, if you cash out in the first 10 years you get a negative return. Also, any returns you get later are taxed at regular income tax rates rather than capital gains. Then when you die there is no step up like there is on other investments so your heirs owe regular income tax on “the value” at the time of your death. But the worst part is that when you die the life insurance company “absorbs” your cash value and only pays the face value of the policy. In other words, the insurance steals your cash value and your heirs are cheated out of it. This cash value was the big selling point of the policy initially and then they steal it at the end.. And Wayne says this is a good deal. Wayne must be a WL insurance salesman.
Heirs don’t owe regular income tax on the cash value. They don’t get the cash value. They get the death benefit minus any outstanding loans on the policy, tax-free.
Taxes are due on gains at ordinary income tax rates if you surrender the policy prior to death.
WL is bad enough that we can just tell the truth about it; we don’t have to make it sound worse than it already is.
Excuse me. You are saying they don’t get the cash value. Of course they don’t pay taxes on the cash value if they don’t get the cash value. The insurance company “absorbs” the cash value. In other words, they steal the cash value that has been building up over a lifetime. Any gain over the amount paid into the policy is taxed at regular rates to the recipient.
While I agree that you don’t get a check for $1 Million for the death benefit and another $800K for the cash value, I’m not sure it’s “stealing it.” I mean, in reality, the idea behind cash value insurance is that by the time of your expected death, the cash value equals the death benefit. So you’re borrowing against the death benefit in reality, the cash value is just the maximum you can borrow at any point.
But however you want to phrase it, the key is to understand how it works BEFORE you buy it. If you thought your heirs would get the entire cash value plus the entire death benefit, you simply misunderstood how it works and I can understand how you might feel like the insurance company stole something from you. But if you actually read the contract, you would see that they held up their end of it.
I don’t doubt that this language is in the contract. That’s just one good reason not to deal with them. There are many other reasons not to get involved in WL but this is a good example. The point is that you build up cash value by paying premiums for 30 to 40 years that are 10x term premiums and when you die both term and WL pay the same death benefit. Since it is outlined in one of the pages of their complicated contracts, it may not technically be termed stealing, but in that case it is just a legal ripoff. You pay 10x as much and get the same benefit at the end. That equation is the only one that counts in this situation. Their term “absorbed” is disingenuous at best. This is why I have never dealt with any insurance company that pushes WL.
Oh come on. The idea with term is to ditch it at 55 or 60 when you hit FI so the cost is trivial. Whole life provides a life long death benefit. If you hold on to it until death, it WILL pay out. Obviously that’s going to cost a lot more than a policy that probably won’t pay out. So yes if you die before 55 or 60, you paid way too much for insurance. But if you die after 60, you certainly don’t get the same death benefit. Apples to oranges. I covered that one in Myth # 1 of my Myths of Whole Life Insurance series.
As I said before, whole life is bad enough that all you have to do is explain how it works and most people don’t want it. You don’t have to make up anything about it. You just have to point out that they want neither a low return investment nor a life long death benefit, the two things that whole life insurance can offer. They stop and think and say, “That’s right. I want a high return investment and a death benefit until I hit FI.” Voila! That’s term and invest the rest. Easy peasy.
Oh it’s in the contract. Just not spelled out well. Trust me. This isn’t new but the training for insurance agents pretty much starts with how EXPENSIVE term insurance is and how GREAT whole life is. Sad but true. I am an insurance agent.
Sorry, if one of the selling points of WL is that you build up cash value and, at the end after paying 10x premiums over 40 years you don’t(or your heirs) receive the cash value then the insurance is equivalent to decreasing term. You definitely should be receiving cash value and face value. That’s why you pay these outrageous premiums all these years. You stop paying term premiums at 60 to 70 because you don’t need insurance anymore. You could possibly find term insurance that would carry on even longer but the premiums would be high. Even then they probably would not reach WL premiums. On the other hand, you’ve been paying these outrageous WL premiums for the last 50 years and at the end the face value of the policy is paid just like term. But those “INVESTMENT DOLLARS” FROM WL ARE LOST FOREVER. You can’t even borrow from the policy because this reduces the death benefit by the amount of the LOAN. Also add that all proceeds are taxed at regular income tax rates with no step up and this makes for a terrible deal.
If you want to invest a product that provides BOTH the cash value AND the death benefit, imagine how high the premiums would need to be?
I do agree with you that it is a terrible deal, just for other reasons.
how about buying term and investing the difference. you pay 10% of the premiums of WL and collect the FV of the policy when you die. If you die you receive the FV . You don’t receive a MIRAGE of CASH VALUE WHICH ACTUALLY DOES NOT EXIST. AGAIN, IF THEY SELL YOU AN EXTREMELY EXPENSIVE PRODUCT BASED ON THE CASH VALUE THAT YOU HAVE BUILT UP (AND THEN YOU FIND OUT THAT THERE IS NO CASH VALUE), I have no idea why you are defending such obfuscation. But this is an extreme ripoff and is one of the major reasons that WL insurance is an extreme ripoff. If you do not understand this, then I guess we will have to agree to disagree. If you ignore everything else about WL ( among the many other ripoffs), this alone should cause me to avoid touvhing WL with a 10 foot pole. Annuities are almost as bad.
Agree 100% with everything you said. Anyone who defends whole life is either a whole-salesman, or someone who was buffaloed by a whole-life salesman.
I do understand it. I understand it very well. I’m just surprised that people ever think that is how whole life works. I’ve never read an explanation of it anywhere that said you get both the cash value and the death benefit. Can you point to one? But somehow lots of people end up thinking it works like that.
i never said that it was “said” anywhere. I don’t doubt that all this is mentioned somewhere in the contract which is very long and full of legaleze. I also believe that it is not mentioned or glossed over by the salesman. My point is that the main selling point is “cash value”. You are paying 10x more for the policy compared to term and the big selling point is cash value which explains the huge markup. All of a sudden the cash value disappears at the end as if it never existed. THIS JUST SHOWS WHAT A RIPOFF WL INSURANCE IS.
I agree the benefits are oversold.
The option is there but when you do choose it the person purchasing the policy has to pay more. Rarely is it ever chosen and some agents don’t even mention it….
Add the following to the lengthy list of what Dave Ramsey gets wrong:
He states categorically that an expensive MBA isn’t worth it—that you should get as inexpensive an MBA as possible, because “no one cares where you got your MBA.” Wrong. Here are some numbers—not opinion—to prove it:
The total all-in cost for an MBA from a top school (i.e., Wharton, Stanford, Harvard) is around $115,000/year; for one at Ramsey’s University of Tennessee—as an in-state student—about $55,000—a difference of around $60,000. Now let’s look at starting salaries: $165,000 for the top schools; $99,000 for U of T—a difference of $66,000. So even if (heaven forbid) you had loans to cover the difference in cost, the average MBA graduate from a top school could pay it off in about two years. And alums from the top schools continue to have compensation significantly above the other schools, justifying the investment in the higher cost by acknowledging the ROI. So yes, an MBA from a top-named school is worth it financially, even after taking into account the huge difference in cost. Why? Because most of the top-paying companies in the country only recruit from the top business schools.
To be charitable and even-handed, Dave does have a point when one is considering going to an expensive MBA program from a 2nd or 3rd-tier school. Those schools combine the worst of both worlds: high cost and low prestige. Given the option of choosing one of those schools or, say, U of T, Ramsey is right. But again, his complete dismissal of the worth of the elite MBA programs is flat out wrong.
Oh yeah, one admittedly picky thing while I’m at: He pronounces part of his group of in-bound telephone people “Ramsey Con-see-air,” not “Con-see-erge”—perhaps he needs a refresher on his French I class.
I am certainly not the kind of person who defends DR, I actually think he is a charlatan. However, CSI seems to imply that anyone who does not choose one of his chosen MBA programs is doomed to starvation wages forever. I simply do not buy this scenario. I would not limit it to MBA programs but I believe 10 years out of school nobody really cares where you went to school. They care about the individual and his work ethic. Nobody really cares where their doctor went to school, especially after 10 years. DITTO LAWYER after 10 years. I really detect a disturbing elitist attitude that you either go to the ivy league or you are just SOL. NONSENSE
Im afraid you’ve exaggerated my position. I’m not saying that people who don’t go to the very top business schools are doomed to a life of starvation wages. I’m simply saying that the students who attend the top schools earn more than enough money in their lives to justify the difference in cost between their schools and the inexpensive alternative – – and then some.
I think I’ve heard Ramsey say that an MBA from a really top school can open doors, but below that it doesn’t matter much, but I could be mistaken.